Our last article outlined ERP software contracts, defined terms, and gave some really impactful advice to ensure the contract meets your business’ requirements.
We will now focus primarily on negotiating the best deal on your software. We’ll discuss the two most important components of the negotiation: 1) The software quote; and 2) The services statement of work. Within these two sections, you will find every opportunity to maximize your investment.
Often the best deal starts with understanding what’s really going on with vendors, where you can push, versus where you can’t, and what you want in the long run. We look at a few critical items as points of leverage. Pull one down, and the others become more difficult to reduce. It is important to understand what the levers are because this will enable you to prioritize those levers appropriately before walking into the meeting.
Negotiating an ERP Software Quote
Software is an industry where margins are extremely high; the cost of goods sold is minimal. You write the software once, and then you sell it to a bunch of customers. Yes, they have to pay for hardware to run the applications, but relative to other industries, there is a lot of room for margin – and discounting.
Vendors will be willing to go up to 25% easily. When we lead these negotiations, we can earn our entire cost in pure discounts for our clients.
You can push here. But you’ll know when you push too far because the salesman will start to give you significant pushback.
Not just a comment like, “Oh, we can’t do that,” but, “Hey, I am going to lose my job if I try to do that!” When they start to say things like that, it’s time to move on.
Payment Terms Are Key to Long-Term Value
Don’t focus on getting the best discount to the exclusion of the long-term. What matters more is to lock in a good discount for a longer term: three, four, five, and some vendors will even negotiate up to ten years in advance. Extending the initial term can help make a good discount mean much more in terms of Net Present Value.
Negotiate the renewal terms, as well. Often, you can negotiate a renewal cap to lock in the value for an even longer period of time. So you can agree to a maximum 2% increase in cost after the first three-year term, for instance. Then apply a renewal term of three years to that cap.
So the final contract would provide flexibility after the first term but really lock in your initial discount — with a minor upcharge only — for six years. After the first three years, you might decide that a larger solution would be necessary, but at the very least you have already locked in a great price for the software you do have, which translates to long-term negotiation power.
How to Negotiate an ERP Software Statement of Work
Negotiating services cost is quite different than software.
If you are buying services from a large company, like an Oracle or an SAP, they have a lot of room on those deals. But if you are dealing directly with implementation partners, then there isn’t as much room. You might be talking to an entrepreneur at a smaller company worth under $25 million. If you ask for too great a discount, then you run the risk of decreasing the support you will need later.
Payment Terms: Do not pay for services upfront
Some firms may request a small deposit to help with their contractor and employee payments upfront. Up to 10% is fine. But anything beyond that becomes lost leverage.
Usually the problem isn’t poor performance; but you need that leverage to ensure they will stick to the schedule and work on the project. If you give over too much, too early, then their other clients who have that leverage will be able to command their attention. (By the way, this doesn’t happen when we manage the implementation for our clients. It is just an example of an area where you might get stuck if you haven’t done this as many times as we have.)
Payment terms are best when they are managed by milestone, or by arrears to hourly work incurred.
If you have read both articles in this series on ERP software contracts, then you have a great foundation for ensuring that the contract you sign will meet the needs of your business, and will have cornerstones for a winning negotiation strategy.
We also understand that this stuff can be fairly involved, and may have questions once you are in negotiations.
Any questions? Please let us know. We would be happy to have a free introductory call and give you direction on your own personal situation.