When selecting an ERP vendor and then negotiating contracts with that ERP vendor, clients are rightfully concerned about the cost of the software. From a legal perspective, our goal as ERP licensing and litigation attorneys is to draft contracts that: (i) protect your legal rights in the event of litigation; (ii) allow you to manage the ERP implementation process to increase the likelihood of a successful implementation and vendor relationship; and (iii) allow you as much flexibility in using the software as is reasonable so as to minimize unnecessary costs.


While attorneys don’t typically negotiate the business terms of a deal, what they can do is put language in place that helps you reduce the overall “cost of ownership” of the software. Being familiar with and understanding typical ERP licensing and pricing models is essential.


ERP pricing models and licensing metrics can be daunting. They can differ between ERP vendors and can differ between products licensed by the same ERP Vendor.  While the specifics can be complicated, ERP vendors typically have two generally accepted models for pricing and licensing their software: (i) perpetual licensing – usually associated with on premise software; and (ii) a subscription based (SaaS) model– usually associated with cloud based software.


Perpetual/On-Premise: Perpetual licensing models allow access to the software for an indefinite period of time upon payment of an upfront licensing fee. Customers typically pay annual maintenance fees to received updates and upgrades of the software. An on premise model requires a large initial cash outlay, not only for licensing, but for implementation.


While on premise software requires a large initial cash outlay, it is generally more customizable and configurable than software offered on a subscription basis. You can customize or modify the software yourself or pay the vendor to customize or modify the software to meet your business needs. For large companies with internal IT departments, software licensed on a perpetual model usually offers a lower total cost of ownership over time and additional flexibility than SaaS software.


SaaS/Subscription Based Software: SaaS products are generally licensed on a subscription basis and paid on a monthly or yearly basis. The cost of the subscription can be based on the number of users accessing the software, the volume of transactions or revenue. The advantage to cloud based software is the lower upfront cost to license the software. Some disadvantages include:


  • Inability to modify or customize the software for your needs;


  • Unanticipated usage costs associated with growth;


  • Dependency on the Internet to access the system;


  • Data security issues; and


  • Transitioning to a new SaaS provider.


For more information about the differences between SaaS and on premise software, as well as a discussion of different software licensing models, please see the videos below: