Many companies today employ contract specialists whose core job responsibility is to negotiate and maintain vendor and/or commercial contracts. Often, when an ERP project arises, the company decides to have the contract specialist negotiate the ERP software license and implementation contract. This can be a huge mistake. Having experience drafting and negotiating commercial contracts is not enough when dealing with an ERP vendor’s legal department. Unless the contract specialist is already well-versed in software licensing negotiations and ERP contracts, they will be unfamiliar with common negotiation points and will be unequipped to deal with common pitfalls contained in software licensing and implementation contracts. The following are “four sins” of software contract negotiation we often see when companies decide to go it alone without the help of legal counsel.
Sin #1 Focusing Only On Discounts: The price of the software license and the price of the implementation of the software are important factors. Unfortunately, many ERP customers believe that price is the key metric in determining whether they successfully negotiated a software licensing and implementation contract. While price is obviously an important issue, most ERP software vendors routinely provide large discounts off of list price. To the extent a large discount is negotiated, it is not necessarily a huge win. Instead of focusing on price to the exclusion of other issues in the contract, most customers will be better served by focusing on broader issues. Focusing on language that: (i) allows for flexibility in the use of the software; and (ii) manages the software vendor relationship can have the effect of reducing the cost of licensing, maintaining and implementing the software over the lifecycle of the contract. Often this results in more cost savings than a one-time discount.
Sin #2 Being Unnecessarily Adversarial: Taking an adversarial tone with the intent of getting the best deal rarely works. It should not be the goal of either party to shift all risk to the other side. Approaching a negotiation with a winner takes all attitude is likely to result in no contract getting signed. The goal of negotiating a software license and implementation contract should be to end up with a contract that is fair and balances risk in a reasonable manner. It is difficult to do this when one party is unreasonable and unwilling to concede on any issues.
Sin #3 Failing To Negotiate Adequate Protections: While negotiations should not be approached with a winner take all attitude, important contractual protections should not be ignored. Negotiate terms with an awareness that at some point in the future, you may need to leverage the contract to force the vendor’s compliance. You also need to negotiate terms with an understanding that you may need to rely on the contract in litigation. Warranty clauses, license grants and limitations of liability are all key contract terms that need to be negotiated carefully. In the event of a failed implementation or an allegation by the ERP vendor of non-compliance, you want to be able to use the contract to your advantage.
Sin #4 Not Allowing Enough Time To Negotiate: Rushing to put contracts in place without a proper review and negotiation of the contract is never advisable. We often see customers pressured by ERP vendors to sign by artificial deadlines or face the loss of pricing discounts. We also see ERP customers that do not focus on contract review or negotiation because of internal business pressures to begin an implementation quickly. This rarely works out well. Failing to properly review and negotiate ERP contracts can result in increased costs, inadvertent breaches, and little recourse in the event the implementation fails. ERP customers need to take the time to ensure that the contract properly addresses key business terms and requirements. If the contract fails to properly describe functionality, intended uses of the software or define how the software implementation will occur, the contract has little value and increases risk instead of decreases risk.
The four cardinal sins listed above are some of the key mistakes we commonly see during ERP contract negotiations. Avoiding the above will drastically improve your chances of a successful negotiation and subsequent implementation of the ERP software. For further information about software licensing or ERP system contract negotiations, please contact our office at (312) 263-0570.