Upgrading a legacy enterprise software system, or licensing a new one, is one of the most important strategic decisions a company can make. With various research indicating that a very large percentage of enterprise software implementations fail, getting it right is critical. Having a coherent strategy for not only negotiating with an ERP vendor, but sourcing the appropriate software is an important step in the process.
Companies that are successful at ERP implementations conduct due diligence, obtain vendor information and gain market insight, all before selecting an ERP vendor. Once they have selected potential vendors, they develop a strategy for negotiating with the enterprise software vendor that includes a cross-functional negotiating team that can address different business interests from across the organization. They manage the negotiation process by using subject matter experts when necessary and making sure that personnel are enabled to make decisions.
Below are some of our tips for negotiating enterprise software deals with large ERP vendors like SAP, Infor and Epicor. These tips are not comprehensive. For additional information, please review the information in our ERP Resource Center and our other blog posts.
When you are entering into a negotiation with an enterprise software vendor, developing a request for proposal (“RFP”) or a request for information (“RFI”) that you can submit to potential vendors is a critical step in identifying your needs and requirements for a new enterprise software system. A well-designed RFP or RFI will allow you analyze vendor responses and serve as the basis for comparing functionality, vendor implementation methodology, cost, and the applicability of the software to your industry. Vendor responses will, in turn, help you focus software demonstrations on issues or concerns you may have, functionality gaps and how the vendor will address those functionality gaps. A well designed and organized RFP/RFI process will help you focus your software vendor selection process and track and compare observations and conclusions about potential vendors.
Negotiate With Decision Makers:
Understand the makeup of the ERP vendor’s negotiation team. Often, low level sales reps and vendor contract negotiators are not empowered to accept requested concessions. You need to quickly move past these lower level employees to key members of the vendor’s legal team or executive team. Your goal should be to reduce negotiation cycles by dealing with the people on the vendor’s team that have the power to accommodate your negotiation requests.
Understand The License Grant:
The license grant is one of the most important provisions in any enterprise software license. You need to understand the number of licenses you are purchasing, and how the cost for each license is determined. Software can be licensed several different ways and different modules within an enterprise suite may be licensed differently. You need to know if certain components are licensed via a licensed user model, a site license or a CPU based metric. Keep in mind that anyone that touches the software will need a license. You need to make sure that any third-party contractors or auditors that need to access the software have licenses. The license grant should allow for the possibility that your company acquires, is acquired by, or merges with another company. You should also understand what will happen if you need additional licenses in the future.
While the software license agreement is a legal document, what you are buying needs to be described simply and in generally understood terms. If you can’t easily understand what exact product you are buying at the outset of the relationship, what it does, how much you are paying for it and how that payment is calculated, it will only get worse if you ever have to enforce the software license contract or defend yourself when audited
Do Not Focus Just On Price To the Exclusion Of The Total Cost Of Ownership
Price is a critically important aspect of any enterprise software deal. However, enterprise software vendors regularly offer large discounts off of list price. To the extent you were able to negotiate a large discount, it doesn’t mean very much and it doesn’t mean that you should ignore or pay less attention to other critical aspect of the deal.
You need to view the enterprise software license contract as a mechanism for achieving flexibility in the way that you use the software. A large discount doesn’t mean very much if you failed to expand the scope of the license grant to cover anticipated usage and you are then forced to pay unexpected license fees in the future. You want to put in place a software license agreement that allows you to grow your business without the fear of an enterprise vendor extracting additional fees for scenarios you didn’t contemplate.
By negotiating things like:
caps on maintenance fee increase;
expanded maintenance coverage;
allowing affiliates and subsidiaries to use the software without additional charge; and
future options on additional software purchases;
You reduce overall costs and minimize the risk of an inadvertent breach that the software vendor will capitalize on in an effort to secure additional fees.
Negotiate With More Than One Vendor
It is critical to narrow the choice of potential vendors down to two and then move through the negotiation process with both vendors. Different vendors will have different negotiation points and be willing to concede on different items in a contract. By having options (and making both vendors aware of your options) you increase your leverage and your ability to negotiate a favorable deal.
Do Not Ignore The Implementation
In our practice, we increasingly see ERP vendors minimizing the terms and conditions applicable to the implementation of the enterprise software product. ERP vendors will roll implementation terms and conditions into the software license agreement and jumble them with support or maintenance. ERP vendors do this to speed up negotiation time and to minimize burdensome obligations that you might otherwise put on them in connection with the implementation of the software.
If your ERP vendor encourages you to sign the agreement and worry about the specifics of the implementation later via a mutually agreed upon statement of work, be cautious. If your relationship with your ERP vendor fails, it will not usually be because of issues associated with licensing the software, instead it will be because of issues associated with implementation.
You should push for a separate contract that governs the implementation of the software. The implementation agreement should include terms and conditions specific to the implementation and should include statements of work and form change orders. Some terms and conditions to consider include the following:
A clear description of the services that will be performed;
Ability to approve consultants (e.g., based on experience or other criteria);
Ability to replace consultants (e.g., for poor performance);
Ability to prevent consultants from leaving the project (if there is a shortage of resources or the ERP vendor wants to divert consultants to higher priority project);
An obligation on the part of the ERP vendor’s consultants to comply with any workplace rules or security requirements;
A clear understanding of your payment obligations and how those payment obligations are tied to deliverables and milestones;
Ownership of work product and confidential information needs to be addressed;
Warranty obligations and remedies for any breaches of those warranty obligations; and
A mutually agreed upon description of deliverables and acceptance and rejection criteria for those deliverables.
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