ERP Vendor Contract Negotiations | An Attorney's Tips for Software and Systems Integrator Contracts

Written By: Eric Kimberling
Date: June 7, 2022

Once you sign on the dotted line, you're committed. It's true with any contract, but the stakes are often higher when you're talking about investments ranging in the thousands, if not millions of dollars for new enterprise software.

If done correctly, software negotiations can help you with more than just landing favorable terms. It can actually help lay the groundwork for effective project management too. Fundamentally, you want to approach the contract negotiation process as a means of being able to manage your relationship with that vendor during and beyond the duration of the digital transformation. It's an opportunity that businesses need to take advantage of rather than walk into a deal blindly to accept whatever terms the vendor sets in front of you.

It goes beyond the legal implications of a contract. A strong contract will act as the guardrails to the ongoing relationship with the software vendor or system integrator. However, when preparing for the acquisition of new software, many clients tell us how their heads are spinning as they go through the negotiation process. Given the weight of this part of the software selection process, we thought it'd be helpful to ask a lawyer. Here's what they said.

Tips from a Lawyer on Negotiating with Software Vendors

Expand your focus in negotiations

Look beyond the pricing structure and the discounts. You want to use the contract as a tool to put into place tactics and workflows for managing your relationship with your vendor. For example, what will it look like if the vendor doesn't hold up their end of the deal? What is the process when your team is delayed in deliverables needed in order to move forward?

Having things like dispute resolution mapped out on the front end will enable a smoother vendor relationship from start to finish. Of course, things like abstract legal concepts such as infringement, service warranties with respect to performance, etc. are all key areas to negotiate, but you mustn't overlook the practical elements of the digital transformation.

Negotiating with cloud-based ERP vendors vs. On-premise ERP vendors

At the core, almost all cloud vendors have a subscription-based pricing model. Cloud vendors, essentially, are hoping to hook you onto their system and make it a challenge for you to get out. Be aware of that intention as you walk into the contract negotiation process with cloud-based vendors.

When you're entering into a subscription-based contract with a cloud vendor, try to incorporate clauses in the contract that outline termination and what it would look like if your organization chose to go a different direction within a few years of implementing the software. How you can get out of the contract?

With that said, realize that the discount you're being offered is often tied to how long you agree to leverage the technology. The goals in this situation vary depending on which side you are on: You want flexibility and a low price, and the vendor wants you to commit long term at the highest price possible. The question then becomes, how can you negotiate terms that appease both parties?

On-premise solutions are a bit different. In the scenario that you host an on-premise solution, your IT team is going to need to spearhead the functionality and security of the systems. With cloud solutions, you're leaning on the software vendor to provide security and data management. These pieces all need to be considered in the contract negotiation process as far as responsibility and ownership as well.

It's important for you to understand what you're committing to - from pricing to obligations. It's critical to negotiate proper discounts, timeline commitments, and exit clauses. The bottom line is that you want to be able to manage your organization the way you want to manage it without being tied to software vendor commitments.

Negotiating with System Integrators

When you're negotiating with a software vendor, the negotiations are fundamentally different. If you are using a system integrator (SI), there are often salespeople that minimize the problems and exaggerate the functionalities that have an allure to your organization. Many times, you will be promised the A team and left with the D team when it comes time for implementation.

Be cognizant that promises are empty until confirmed in a contract. The scenario I just mentioned above happens on a regular basis. The good news is that you can put language in the contract that keeps SIs from overpromising and underdelivering. With the right clauses, whatever the SI commits to in the sales process is what they will be obligated to fulfill. And if does happen? You have a process in place to address the issue.

By doing incorporating these elements into your negotiations, you are mitigating conflict on the backend. You'll also minimize the risk of ERP failure and the need for an expensive lawyer to help you recoup what has been lost.

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Differences in negotiations with small vs. large vendors

When dealing with a smaller firm, you want language in the contract that specifically touches on the people assigned to your project for the full duration of the project. There should also be language that helps outline the resources they will bring to the table since these resources are often more sparse than when you work with larger vendors.

When you're dealing with the Accentures of the world, or other large organizations, you have to come at it with a different perspective.m All of these large organizations are going to give you concessions, but it's typically one-sided. The reality is, these larger firms will use your project in one of two ways.

  1. They see it as a cash cow with minimal scope.
  2. They use your project for unqualified or incompetent consultants.

They'll want to pump billable hours through the project. Knowing that, you need to be sure that there are tools in place to manage the scope of work and ensure time is spent most effectively throughout the duration of the digital transformation project. It all comes back to project ownership.

As you negotiate your contract, be mindful of who truly owns the project. An assumptions section of an SOW will often say the vendor or integrator is working for you and taking direction from you. However, the lifecycle of one of these projects is 15 or so years. These vendors know the level of experience of the people on your team when it comes to implementing new software, or lack thereof, and they will capitalize on that.

It's imperative for you as the customer to bring in a third-party consultant who understands the ins and outs of a digital transformation. Getting the right kinds of consultants on board will decrease the likelihood of failure. In fact, the cost that will be spent on a third-party consultant will be minimal in comparison to bringing lawyers on to address a failed ERP implementation.

If you have questions about how to best negotiate with your software vendor or system integrator, we invite you to reach out to us directly. We are here as an informal sounding board to help you ensure you're on the right path in your digital transformation journey.

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Author:
Eric Kimberling
Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.
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