The dreaded ERP contract renewal is one of the most daunting tasks a business can face post-ERP implementation. If vital steps are taken upfront during initial contract negotiations, it can ease the weight on executives' shoulders come renewal, but what should businesses ask for? What do these terms mean? And what if great terms were not originally negotiated? These problems plague many businesses unfamiliar with the complex nature of ERP contracts. On this episode of The ERP Advisor, Shawn Windle breaks down ERP contracts, enabling businesses to get the best deal on their ERP software solutions and manage the overall ERP contract renewal process.
How to Negotiate the Best Deal on Your ERP Contract Renewal
ERP contracts are complicated and packed with legal jargon and conditions meant to mitigate impacts on the software provider throughout the life of your software contract. The best time to prepare for your ERP contract renewal is actually during the initial negotiation of your contract at the end of your ERP solution selection. Well-negotiated contracts could save businesses hundreds of thousands of dollars over the life of their ERPs, and your strongest negotiation stance occurs just prior to your initial ERP purchase.
Preparing Your Initial Contract
During initial contract negotiations, before finalizing an ERP purchase, your business has the most leverage in ultimately negotiating the best deal for both your initial contract term and your first renewal term. This is the time to ask for discounts, set renewal caps, additional support, and more. These are the most important factors to consider when negotiating an ERP contract:
- Training: ensure that the training outlined in your contract is what best fits your organizational structure.
- Data Migration: understand how the vendor will help you with your data and where you will need to fill the gaps.
- Customizations: ensure that your Statement of Work matches your requirements and expectations for enhanced functionality that is not “out of the box”.
- Integrations: understand the scope, maintenance, recurring software fees, and initial implementation fees.
- Users: understand how the vendor you select will charge for users (whether per seat or transaction).
- Terms for the software: negotiate the length of the first contract, the option to renew, the renewal cap, the length of the renewal term, and payment terms.
- Discount: negotiate a discount on users, seats, and modules in Year 1 and/or successive years; negotiate the discount on additional modules and users during the life of the contract.
For an in-depth guide to negotiating an ERP deal, purchase our exclusive report.
Why Initial ERP Contract Negotiations Are Vital to Your Renewal
Negotiating the renewal during the initial ERP contract is essential to ensure you receive the best deal for years to come on your application. Most vendors offer a standard renewal period of 12 months; however, this is not ideal for most businesses, in fact, many will not even begin to use their ERP until at least a year after signing their contract due to the implementation phase. During negotiations, it is best to ask for a multi-year contract of at least three years, giving your team time to go live and actually begin using the system before needing to contemplate the first renewal.
Another important factor is negotiating a renewal cap. During each renewal period, the vendor reserves the right to increase a customer’s software cost unless the customer negotiated a renewal cap upfront. It is not unreasonable to ask for a renewal cap of 1 to 5% to control costs over an extended period of time. These simple factors can save your business hundreds of thousands of dollars over the system’s life. Without a renewal cap, your company could be subject to an excessive price escalation just to keep the same software, same users, and same functionality.
Confronting an ERP Contract Renewal
We hear from companies who are approaching their renewal dates and who are overcome with questions and concerns about getting a fair deal from their ERP renewal. Customers have very little leverage during the renewal process and often must rely on initial contract terms negotiated for go-forward pricing. Many existing ERP customers lament they could get the software more cheaply if they were new customers! While this is true, the fact is, you are not a new customer any longer and the software company no longer needs to provide pricing or other concessions to win your business. However bleak it might seem, there are still opportunities to negotiate favorable discounts or conditions at your renewal.
The best practice for the customer during a contract renewal is to approach the ERP software vendor at least 6-months prior to the renewal date. This allows sufficient time to negotiate with the proper parties. This also empowers your team to evaluate different applications if your current solution is no longer meeting your business requirements, but this is rarely the case. Preparing early positions your business to negotiate a better deal with the vendors because, to some degree, it catches them off guard while also offering the opportunity for the vendor to secure revenue prior to the original deadline. During this time, we recommend being upfront with the vendor by expressing your desire to stay on their solution and continue your partnership. While it may sound like you are putting all your cards on the table, this is a great tactic for encouraging a deal through collaboration. Many vendors will be more open to negotiating a deal when you express your desire to stay early on because they appreciate the additional time to communicate and involve necessary parties. Do not be afraid to ask for a good deal because you never know what the vendor will agree to!
Adversely, sometimes you will need to wait until the last possible day to receive the best deal because the vendor is playing a “game of chicken”. In these situations, it is vital that you understand the terms of your contract because there can be conditions built into the contract that could negatively impact your access to your data and the software. A term indicating the software will be shut down unless payment is received within 30 days is a prime example of a negotiation limitation. While vendors rarely exercise these rights, it still presents a threat to your business, so be aware of your boundaries and all potential risks.
A key point to keep in mind is that software companies preserve the “ARR” – the annual recurring revenue. What that means for you is if your business has contracted since your last contract, you may consider removing a module or reducing user counts. However, stripping software away will only lead to the vendor giving you less of a discount.
Unfortunately, at renewal, your price is going to eventually increase. When negotiating an ERP contract renewal, you can receive a great deal on your renewal simply by asking for new functionality for free, such as analytics, reporting, or other add-ons. Alternatively, offering unique deals, such as exchanging a customer success story for a better discount on your application is not unheard of. The most important thing to do is not to panic or act in desperation because it is okay to ask for things and advocate for your business. Being willing to communicate with your account management representative to express what is most important to your company or organization will help them to advocate for you. Negotiating the renewal well before the expiration date may incentivize the vendor to give a little more in exchange for the unexpected renewal completion.
Vendors truly want their customers to be happy and will work toward an outcome that ultimately benefits both parties. While the process of ERP contract renewal can be disheartening, it is not impossible. For expert guidance on your next ERP contract renewal, purchase EAG’s Complete Guide to Negotiating a Deal or contact us today!