By the time you sit down to sign an ERP software deal, you have already devoted an incredible amount of time and effort to ensure that the solution will meet your needs; it can seem as though everything should be ready for a quick signature.
However, the software deal is a great opportunity to refine your understanding, optimize, and also negotiate substantial discounts. There are also plenty of pitfalls where expectations tend to run counter to the normative software contract.
This article’s goal is to make sure you will receive the software, services, and results that you need in order to frame a successful project. We will then use this as a springboard to talk dealmaking tactics in our next article.
What follows is a high-level map of the landscape of a software agreement.
A Granular Look at ERP Software Contracts
Before we discuss the inside of an ERP software deal, it is important to know the activities that have been completed already:
- Identified true needs and unique business requirements through a Needs Analysis
- Conducted rigorousSoftware Selection Process
- Requested unique demonstration scripts to your exact requirements
- Correctly identified the number of users and modules needed
- Thoroughly vetted the implementation team
So, we are assuming you have completed the above steps, and now you’re down to the last vendor. If you are expecting to negotiate with multiple vendors simultaneously to knock down prices, then please read our next article, where we discuss the pros and cons of aggressive negotiation tactics.
ERP Software Deal Components
ERP, and any business software deal, is made of four or five potential components.
- Software Order Form, or Quote – This lays out what software you will buy and for whom.
- Services Statement of Work – These are the implementation services required to configure and implement the software.
- General Terms and Conditions – This includes warranties and other legal contracts that work to support the software.
- Support contract – Almost every vendor has some form of support that they offer, which we recommend including in your due diligence.
- Hosting fees – This might or might not be a component of your deal. Some vendors, like Infor, have a separate hosting fee agreement. For example, if you buy a software product that is offered on-premise, but you want a hosting provider as well, then you would need a hosting provider agreement.
Some vendors may have other agreement types as well, but these are the primary components, which will determine your contract, and which should be aligned with your organization’s expectations both during implementation and afterward.
Now we will take a more detailed look into each of these components and explore how these impact your final pricing.
1. ERP Software Order Form
The quote lays out what you’re going to buy on a granular level. Modules, specific software editions in your agreement, as well as what is included as part of those modules will be listed, enabling you to drill down very specifically into your purchase. We advise looking deeply at this list to confirm the agreement will meet your needs. Here are some of the things to look for:
Some vendors charge by the seat, or per user. Concurrent licensing means you can use the software up to a maximum number of users, irregardless of who they are at any one time. This model provides some room for growth and fluctuations of usage throughout your business day without needing to provide a license for every possible person who may use the system at one time.
Named or seat licenses
In named licensing, the number of users is specified exactly. Your employees might use the software or not, but you will still be charged for their seat.
Terms of the software
Your software agreement will also determine two critical aspects to the deal: length of time and renewal terms. Many of our contracts are for software applications that reside purely in the cloud. They’re called Software as a Service (SaaS) multi-tenant applications. You can normally pay on an annual basis, but you might also negotiate a 36-month term of use, or even longer.
Renewal terms are also important to consider. There are opportunities to set maximum renewal rates, so you can control costs over an extended period of time. For more information on this, read our next article in this series, which discusses how to use terms as a potential lever for significant, long-term discounts.
2. ERP Software Services Statement of Work - Don’t Overlook These
Often, companies will focus on negotiating the software contract, and then the services are accepted without too much thought or pushback. We strongly advise you take a long, deep look at the SOW and watch out for some common issues.
The services to implement the software will include five basic parts:
- Project management
- Analysis and requirements design
- Configuring the software
- Testing the software
- Go-live and post-go-live support
Most Overlooked Items in Contracts Negotiations
The above list are usually obvious to an implementation and are included in the software vendor’s methodology. However, there are several areas that are commonly neglected during final diligence and can cost you a mint if you are not prepared for them.
- Data Migration
- Hourly vs. Fixed Rate
“We will train your trainer” means they will train one person at your company only, and that one person will be expected to train, in turn, everyone else who will use the application. These agreements can be fine, but it is important to know exactly what you are buying and what you will be expected to bring to the table. Training is one area you want to understand, upfront.
Data migration can be a bear, so we advise taking the time to consider this process on a deeper level.
One common misconception is that a company can just start from scratch with the new system in order to significantly limit data migration. But what about ongoing projects?
Your firm could have tens, hundreds, or thousands of projects in-flight. All the data from those projects need to be moved over into the new solution before they could go live. And there are multiple steps to this process, any one of which can be quite involved:
- Extract data from old system
- Clean data
- Convert into the format required for the new application
- Review for inconsistencies or errors
Your company might have complex revenue recognition rules, or other quirks, which will require more time and effort during migration.
Do not take it for granted that data migration is a part of the contract. Often, a vendor will commit to “help upload data,” but while this means they will support a seamless upload process, if there is an error, they will expect you to fix it. “Help upload data” means you will take responsibility for most of this work.
So be certain of what you are buying, and what you are not buying with data migration.
If you requested a demonstration script to match your requirements, then the vendor will have a much better idea of how they will need to customize their product to fit your needs. And you can take the opportunity during that demonstration to ask how long they think it would take to customize per your requirements.
But even when you perform this due diligence, there can be a disconnect between that demo and what will be included in customization costs. Maybe they assured you it would take a few hours during the demo, but during the SOW creation process it is forgotten by you or the vendor, or just as bad, significantly underestimated in effort and cost because the requirements were not detailed enough to give a true picture of the customization.
For large items, ask the vendor to show you the assumptions that they built into their customization estimate. And when they explain, be sure to ask them about training on that customization, because it will be different than the uncustomized solution.
Customization estimates are only going to increase, but if you have customizations in scope, make sure they are going to be part of your statement of work.
During the sales process you may receive assurances that API integrations allow for data to pass back and forth between some application you already have and the one you are considering. Do not fail to scope out the cost of setting up that integration and understanding what is needed to maintain it and which company exactly can set it up - the existing software company, new software company, an internal resource or a separately-purchased software integration service/product. Some integrations are extra software you purchase and pay for annually, others are customized scripting that your vendor writes. Understanding the complexity of data that needs to be passed back and forth and the frequency of maintenance needed to keep it working is critical upfront so you will eventually get the integrated solution you were intending on.
Hourly rate versus fixed cost
We recommend an hourly rate on services because it keeps everyone honest. However, we also know some purchasers, like private equity firms, can prefer a fixed cost. Typically, what we have found is that fixed cost also limits the scope of the agreement. If you want a fixed cost, be sure you are not thinking that later, you will be able to expand the scope without paying for additional services.
Even if the project cost is fixed, request a weekly report from the implementation vendor on hours, so that you know what kind of time is going into the work. But this is also useful when you are negotiating the contract, because it then becomes easy to see how they are allotting hours and to what goals. Right there in the estimate, you can see where they are placing their resources and whether this aligns with your organization’s expectations. If you are expecting them to train your users and then see there is only five hours allotted for training, then you know there’s an issue to resolve.
3. General Terms and Conditions
These contracts contain a lot of “legalese”, and often if you can translate, the language can be particularly adept at disclaiming their ability to add value to the software, even though that is exactly what you are paying them to do.
The equivalent in a marriage contract might be something like: “Honey, I can’t warrant that I’m going to do anything well. All the reasons why you are marrying me today, I’m not going to do them, and at any given time, I might not be able to deliver what you really want. But please, go ahead and sign yourself into this relationship for life.”
As disturbing as this might sound, it’s important to know that every vendor is this way. It is equally important to remember what would happen in the event that these companies stopped delivering success for their customers. Word would spread and tarnish their corporate reputation.
The legal agreement does not keep these companies in check; the market does.
Bottom line: any attempt to change the general terms and conditions would take a lot of money, and it would in all likelihood be a waste. Although the agreement, if you look at it, will be alarming, just know that across the board, for every vendor, it is the same, but fortunately vendors still perform.
Look for the language around software uptime, and almost all will guarantee ~99.9% outside of maintenance windows. However, these windows can vary. Just make sure that maintenance will be acceptable, especially for the time zone where your operations are relying on the software.
If you change your billing terms during the negotiation, make sure that agreement is reflected in the terms and conditions.
4. Support Contract
We won’t spend a lot of time on the support contract. You do want to understand what support the vendor will offer. We have seen everything from no support to 24-7, white-glove service. But be sure to have an understanding of how you will cope with challenges.
5. Hosting Fees and Miscellaneous Technology Fees
These are also dependent on each deal, so be sure you look at the technology component of the software agreement.
ERP Software Contracts: Negotiation
Now that you understand the basic components of an ERP software contract, you are ready to dig a bit deeper into the monetary value of the contract. It is arguable as to which of these two is more important. Understanding what the contract actually promises is fundamental to negotiating, but on a more practical level, it ensures you will receive what your organization needs. This could be the highest value possible.
But the fact is that there is plenty of room to negotiate, and you can save your organization a lot of money if you understand where to push, and where not to push. For more tips on negotiating the best deal on ERP Software, read our next article.