ERP software from any of the top ERP vendors isn’t inexpensive. It’s helpful to be aware of some “watch outs” or topics like licensing costs since more attention goes to things like software fit or deployment methods.
While few will select or deselect a software because of licensing pricing and structure, it’s a pertinent subject, specifically when you’re trying to estimate total cost of ownership or forecast ongoing costs. I can envision Salesforce CRM owners nodding their heads in agreement. For those of you not familiar with Salesforce, the pricing structure (including licensing) is the gift that just keeps on taking.
Nearly all software has licensing costs, and yes there are differences between on-premise licenses and cloud fees (software as a service) – but no need to delve into that level of detail here. Expect that when you try to understand the murky details of licensing costs it can be as cloudy as a New England-style IPA beer.
You might also be navigating multiple types of licensing costs such as user licenses, remote access licenses, integration licenses, etc. If your business is using a combination of best of breed ERP software (third party bolt-on apps are a good example) expect the cost/complexity of the licensing equation to increase. Speaking of cost – just imagine the number of unused licenses businesses are paying for during the Covid-19 pandemic (and yes you should consider having someone contact your software company for relief).
So two major takeaways from this blog: 1) be aware that licensing can be a “top five” cost component of an ERP initiative, as licensing expenses recur annually, and 2) software license pricing is typically negotiable both in cost and structure – but you have to know what and how to negotiate.
Our recent video provides an overview of how to negotiate with ERP vendors:
Background of Software Licenses
Commercially sold ERP software is not owned by the business. The business is paying for the rights to use it and associated services. The process of buying and negotiating ERP software is not straightforward, and there are several areas of a highly technical ERP software contract that can and should be negotiated, including the software licensing agreement (SLA).
Software licensing is complex and different types of licenses have different rights and restrictions attached. There’s little consistency to how different software companies structure and charge fees, further adding to the complexness. Interpreting SLA wording and watch outs can be a bear.
Each business should put thought into the number of current users/licenses needed. The creation of estimates/forecasts for new or additional future users is also an important metric. You can also expect licensing fees to correlate with the number of ERP modules purchased.
Some interesting statistics from Third Stage Consulting: 85% of companies do not deploy all modules purchased at go-live and < 50% of companies will go on to deploy all modules in the future, such as modules that they are paying for. (See our 2020 ERP and HCM Report for more useful metrics like these). Related to this, as a consultancy we offer a variety of services such as auditing. When auditing license costs/counts for clients we have found that >70% of business are overpaying. Maintaining, managing and tracking software licenses is a job that often gets overlooked or not enough attention.
Help is Available
Hiring an outside independent ERP consultant to analyze, negotiate, and review a software contract is a good investment because a consultant is incented to work on your behalf. Additional value comes from being able to accurately estimate ongoing licensing costs and other fees within certain variables.
It’s impossible to talk about a software contract without delving into licensing as one of several interdependent components. Companies want to ensure what is agreed upon is reasonable, affords flexibility and is structured in a way that benefits the business and not just the seller of the software. Fact: the pricing of ERP software is intentionally ambiguous. Call three different Oracle NetSuite resellers (or any major software brand) and I can pretty much guarantee you’ll get three different prices.
As a business do you know what software should cost or what other companies paid? Is $250 per month per user for licensing reasonable? If a software company is offering a deep discount, what is the true “real” cost of the software to begin with? If you need to increase or decrease license counts because your volume or business model changes what are the licensing fee implications?
If your business is using a combination of software (third party bolt-on apps are a good example) expect the total cost of ownership and complexity of the licensing equation to increase. As a consultancy we have an independent database of what different brands/versions of software really costs, how licenses can be negotiated, and contractual watch outs.
We’re not swayed by attractive upfront discounts but are keenly aware of hidden costs and restrictions. This proprietary knowledge and experience isn’t available in a manual, nor could it be, since our technology recommendations, strategies and negotiations are as different as the businesses we serve.
Considering most companies will retain use of software licenses (once implemented) for an average of 10+ years, it’s hopefully helpful to understand how big a part of the “cost equation” licensing fees can be. If we can help during a contract review, provide cost saving suggestions, or anything else ERP related, please contact us to have that conversation. Cheers to those hazy pale ales and IPAs.