After what may have been a long evaluation process, you have finally determined which ERP and HCM systems will help you achieve your digital strategies for 2020 and beyond. This is the technology that will drive business process improvements and your operational foundation for the coming years or decades.
Now it’s time to negotiate agreements that ensure that you enter into a good financial and contractual arrangement that sets you up for success in the future. Below are some tips to get started.
The importance of ERP / HCM vendor negotiations
First, it is important to recognize the importance of the ERP and HCM vendor negotiation process. This has always been important – and it is a core competency that our team has developed over years of helping clients with the negotiation process – but it is even more important in today’s technology landscape.
In the past, negotiations typically focused primarily on the one-time capital costs associated with purchasing on-premise software. Today on the other hand, the same process is focus on recurring annual ERP subscription costs that go into perpetuity. Because these long-term operating costs are likely to eclipse the one-time costs of on-premise software licenses – even when considering ongoing annual maintenance – the stakes are even higher today.
Assuming you are among the majority of companies moving toward one of the top cloud ERP systems, then the negotiation process can have long-ranging impacts on your bottom line for years to come. In other words, the implications (and potential cost savings) are greater today than ever.
Understand what leverage you have with your ERP or HCM vendors
The first step in your process is to understand what your relative leverage and negotiations strength you have with your vendor. The more leverage you have, the harder you can push.
For example, here are just some of the variables that could increase the amount of leverage you have:
- Your company’s size and number of potential users, since this equates to greater profit for your vendor.
- The name recognition of your company, since vendors will often bend over backwards to win marquee customer names to reference to others.
- You will generally have more negotiation leverage against a smaller tier II or industry-focused ERP vendor.
- The number of ERP options in play as part of your ERP selection process, since vendors will try harder in competitive situations. For example, we see some of the greatest cost concessions in SAP vs. Oracle negotiations – simply because they both hate losing to each other.
Once you have assessed your relative negotiation strength versus your ERP / HCM vendor, you can then begin to develop a negotiation strategy that fits your situation.
Negotiating ERP / HCM software subscription fees
The low-hanging fruit and biggest opportunity for cost savings is related to ERP license or subscription fees. This is where vendors make the most money – and the cost implications can be significant for your organization.
The cost savings in this area can be great. Some of our larger clients have realized discounts of 90% or more on their annual subscription fees. Where you fall on the spectrum will depend on a number of factors.
Here are some tips and things to consider when negating your ERP / HCM software subscription fees:
- If you are purchasing a cloud ERP system, your annual costs will continue into perpetuity. It is very important to recognize the magnitude of that reality.
- Incremental costs for ERP vendors are very low, so license costs are about as close to pure profit as you will see.
- Make sure to negotiate not just your current contract, but also lock in the addition of future users or modules.
- Ensure you have a clear path to exiting the contract if you need to at any point in the future.
- Longer-term, your cloud ERP contract is likely to cost more than on-premise contracts of the past. The software industry hates when I say this, but it is true: cloud ERP is one of the biggest hoaxes the industry has ever seen.
- Be leery of one-time-only year-end, quarter-end, or even month-end discounts that will allegedly expire after a certain period of time. I don’t recall the last time a vendor pulled an offer on the table for failing to meet a period-end deadline.
- Don’t overcommit or buy more software than you need. The cost (and commonality) of unused shelfware is much greater than any cost savings that may be offered to entice you to overcommit.
It is important to take your time and strike the arrangement that makes the most sense to your organization. The key is to develop a negotiation strategy that takes the above considerations into account without creating an adversarial relationship from day 1.
Negotiating ERP implementation fees with your ERP / HCM systems integrator
In addition to negotiating with your ERP vendor, you will also want to negotiate a favorable agreement with your ERP systems integrator. Even though the recurring software subscription costs are more likely to be the bigger cost bucket in the longer-term, the associated capital implementation costs will likely dwarf that of your software licenses in the short-term.
Here are some things to keep in mind as you negotiate with your systems integrator or value-added reseller:
- Focus on hourly rates rather than total costs. Estimated total costs can be manipulated to show what you want to hear, but hourly rates are more tangible and meaningful.
- Ensure that you have the right to approve / reject / replace project resources.
- Beware of overly optimistic and rose-colored-glasses assumptions that understate your expected implementation costs.
- Make sure you understand what your internal team will be responsible for during the implementation.
- Look for critical workstreams that are commonly missing from systems integrator contracts, such as organizational change management, data management, and training. These are typically weaknesses of even the big ERP / HCM systems integrators, so look for alternative ways to fill these voids.
Watch for attempts to preempt the ERP / HCM negotiation process
ERP vendors and systems integrators would love nothing more than for you to simply sign their contract without engaging a third-party to help you negotiate. The implications on their profit and sales commissions is great, so they will go to great lengths to ensure that you don’t involve independent ERP / HCM consultants or other third-parties to help you negotiate.
Some will go so far as to offer immediate discounts to bypass a more formal negotiation process. Others will badmouth third-parties. Some will take more subtle tactics, like suggesting that we “focus on aligning our internal teams” rather than engaging outside help to negotiate.
Just remember that you are here to protect your interests and ensure that you don’t get backed into a financial or contractual corner later on. There is very little risk in engaging outside help (like our team at Third Stage), with very big upside.
Engage with specialized legal counsel who specializes in ERP contract reviews
In addition to engaging outside help that can ensure you negotiate deal that makes conceptual and financial sense, it is also helpful to leverage an attorney that specializes in ERP software and systems integrator terms and conditions.
For example, our team will benchmark client contracts to the types of deals that we have negotiated with those same vendors at other clients. But we are not attorneys, so once we feel comfortable with the overall conceptual arrangement we have helped negotiate, we typically recommend outside counsel that specializes specifically in ERP-related contracts. This ensures that the contracts and Ts and Cs reflect the intent of those negotiations from a legal perspective.
Please feel free to contact me for recommendations on legal counsel that you may want to reach out to.
Don’t shortchange the ERP / HCM vendor negotiation process
The negotiation process is a very important one. You will have to live with the results for many years to come, so be sure you take the time to get it right. A few extra weeks of negotiations may be semi-painful for sales reps driven by quarterly quotas and commissions, but from your perspective, it is a drop in the bucket in the grand scheme of things.
Please feel free to contact me if you would like to arrange a brief conversation to discuss your ERP / HCM negotiation process. I am happy to be an informal sounding board as you continue your digital transformation journey!