How to Negotiate an ERP Contract that Works for You
by Abhijit Verekar and Andrew Hayes
The purpose of enterprise resource planning (ERP) software might seem fairly straightforward: to create a system of integrated software applications that can manage and automate various back-office functions across the many departments of your city or county government. However, negotiating an ERP contract with a vendor can be incredibly complex, and a poorly negotiated agreement can wind up causing you headaches for years to come.
Ideally, the point of a contract is to ensure the successful implementation of ERP software, but there are several risks that need mitigation. For the best results, we recommend focusing on seven specific points when negotiating your ERP contract.
1) Avoid Being Oversold
Most ERP software is going to have a wide range of ancillary and optional features, many of which will not be relevant to your organization’s needs. Understandably, a vendor wants to encourage you to contract for as many of the features as possible, but you should only pay for what you need and what you’re actually going to use. If it doesn’t help you communicate better, share data more efficiently, or provide better services for your end-users, don’t pay for it.
Also, don’t wait until you’re in contract negotiations to figure out what features you need. Otherwise, you run the risk of being talked into things you might otherwise decline. We’re all susceptible to an effective sales pitch, so determine your business requirements and processes ahead of time, then stick to your guns.
Furthermore, always insist on a live system demonstration based on demo scripts supplied by your team, so you know for sure the software will meet your pre-determined requirements. Just because it looks good on paper doesn’t mean it has the capacity to meet your needs. You also don’t want to be shown only the “bells and whistles” of the system. Maybe you’ve heard of Nike’s infamous ERP blunder way back in 2000 when they spent $400 million on an ERP system that couldn’t handle their supply chain. As a result, they wound up spending five years and millions more just to get the software to work correctly. That’s the kind of expensive mistake you want to avoid.
2) Know Your Vendors
A reputable ERP vendor wants to provide a software solution that will meet all of their clients’ needs. They’re not just trying to “take the money and run” because they value customer satisfaction. However, we’ve heard horror stories of implementation chaos, with vendors missing essential dates, charging exorbitant fees for ERP training, or failing to seamlessly integrate the system with all of the client’s applications.
Sadly, every ERP vendor is not created equal, and numerous organizations have been the victims of shady tactics or poor service. Remember, your vendor relationship is going to continue throughout the software product lifecycle, so you need to work with someone you trust, a vendor who has your best interests in mind.
Before you sign that contract, make sure you feel entirely comfortable with both the vendor and their software. Do your research and discover what current and former clients have said about them. Also, make sure that the team presenting the system is also the team that will be conducting implementation, so you know the people you will be working with.
3) Understand Your Service-Level Agreement (SLA)
A service-level agreement (SLA) is a vital component of your ERP contract, acting as the foundation of your ongoing relationship with the vendor. The SLA describes the scope of work you can expect from the vendor, so you need a clear understanding of what it covers. It should provide an exhaustive description of all the services being offered and all events that are going to be covered. Make sure the SLA is aligned to the specific needs or objectives of your organization.
To keep your vendor accountable, the SLA should have specific penalties for system downtime, as well as clear metrics for system uptime and service or maintenance response time. If the vendor doesn’t meet their end of the bargain, is there a transparent process in place for enforcing penalties? Penalties don’t have to be severe or overly punitive—service credits are a standard option—but you do need some leverage in a worst-case scenario.
4) Payment Terms
Of course, payment terms should be a vital part of any contract negotiation, but make sure that the initial price quote from the vendor is the full retail price. Unfortunately, opaque pricing is part of the ERP software game, and some vendors use a confusing pricing structure for implementation and ongoing support services. This is especially true for on-premise installations.
After you get the full retail price, but before you sign the contract, request a “best and final offer” (BAFO). Terms may still be negotiable, and you want to get the most bang for your buck before you close the deal. With Software as a Service (SaaS), it’s often possible to get a significant discount if you sign a multi-year commitment. If you’ve done your research upfront, you should feel more comfortable about such a commitment.
Determine when you have to start paying for the licenses so you know it works with your financial cycle, and make sure to tie payment terms to concrete milestones, deliverables, or performance. This provides additional accountability and makes payments mutually beneficial.
5) Warranties
Warranties provide contractual obligations for vendors regarding software performance, clarifying which liabilities the vendor will assume if there are performance deficiencies. The last thing you want is to be stuck with a subpar ERP system and have to foot the bill to get it fixed or replaced. During negotiations, make sure to clarify exactly what will be covered by the vendor, as well as your liabilities.
Of course, many SaaS products don’t offer a separate warranty, but in those instances, you need to at least confirm that the product includes regular updates. This is an area where some SaaS vendors want to skimp, treating their software as a “finished product,” but technology changes over time, bugs and deficiencies become clear, and your ERP needs may evolve. Therefore, you want to ensure that you will benefit from regular updates and patch releases.
6) Data Security
A survey in 2019 revealed that nearly two-thirds of organizations using ERP software have experienced a major security breach within the previous twenty-four months. The information most often compromised included HR data, intellectual property, and financial data. Don’t assume it won’t happen in your organization--miscreants have a voracious appetite for data.
For this reason, protecting your data from destruction, unauthorized modification, or theft should be paramount, and since so much of your data will be stored within your ERP, you need to make sure that the data security terms of your ERP contract fully covers your systems and procedures. You also need clearly defined consequences for handling any data breaches. Specify who will assume liability for data breaches, along with the protocol for resolving them.
Vendors often want to limit their own liability for direct damage, but a data security breach can have far-reaching consequences for a public entity like a city or county government. Make sure the vendor shoulders a fair share of the financial responsibility for preventing or mitigating data security breaches.
7) Contract Review
Once negotiations are complete and you have a contract in hand, review it thoroughly to make sure it is satisfactory before signing. Since you may not be an expert in contract law, it’s a good idea to have a consultant, attorney, or subject matter expert review the document as well, so they can make sure nothing is missing, obscured by legalese, or otherwise unclear. Double-check to make sure everything you agreed to is present in the contract and nothing has been quietly left out. Most importantly, make the selected vendor’s response to your RFP a part of the binding contract to ensure long term accountability.
If anything looks fishy, seems to be missing, or doesn’t align with what you agreed to during negotiations, you will need to insist on modifications. Those modifications are going to be extremely difficult, if not impossible, after signing, so address any necessary changes now. Otherwise, you may have to live with a contract you don’t like or break it and potentially swallow the cost.
Conclusion
Implementing enterprise resource planning (ERP) software requires a massive investment of time and money for any organization, but especially a public entity, and the vendor contract is going to lay the groundwork for the success or failure of that implementation. It’s worth the extra effort to prepare for negotiations, and it’s to your benefit to play hardball on these seven points.
It’s also well worth the extra expense to hire an attorney or consultant to help you review the contract. Well-supported ERP software from a competent and supportive vendor can revolutionize your ability to integrate all of your departments, platforms, processes, and data, allowing your organization to provide better, faster, and more efficient services for employees and citizens. With the right contract, you will have the features and support you need to meet all of your organization’s objectives and deal with any unanticipated problems.