What are the common pitfalls when negotiating an ERP contract?

Evaluating and selecting an ERP software package can be an overwhelming task. Hopefully your organization has invested the time to define its key business processes and business requirements as part of the overall evaluation of potential vendors. Assuming you have done this and have selected an ERP vendor, here are some things to avoid during negotiations:1) Beware of under-estimated implementation costs and durations. At this point in your ERP project, the ERP vendor is still in sales mode, so it's not in their best interest to give you a good sense of what it's really going to take to implement the software effectively. Generally, vendors will omit or underestimate times and costs associated with implementation, internal costs, IT upgrade costs, etc.2) Don't assume that their first offer is their best. As with any negotiation, software vendors typically start by offering software at their list price and reducing from there. Vendors have several ways to make money on a deal, whether it be through ongoing maintenance, professional services, and training, so you should not be afraid to ask them to be more aggressive in their pricing, particularly as it relates to software license costs.3) Leverage competing offers. We see too many companies zero in on one vendor without at least receiving proposals and conducting a thorough ERP software evaluation for other potential vendors. With competing offers, you are able to ask the preferred vendor to meet pricing offered by a lower-cost vendor or to make concessions based on any functionality gaps or concerns.The ERP evaluation and selection process isn't simply about choosing software. It's also about procuring the best software at the best price possible and developing an implementation plan that will make the ERP project successful.

The goal of every ERP vendor is to sell as much product as they can as early as possible.  As a result, many companies purchase too many modules, users, or applications way before they are needed or that never get implemented.  This causes a negative counter balance to any positive concessions obtained in the negotiation process and also has a negative effect on cash flow.

Other companies fail to negotiate the software license agreement in tandem with the implementation proposal.  Many times the ERP implementation team may be a business partner of the software vendor and may not actually be selling the software. All leverage is lost by not negotiating both as a joint agreement and many times the ERP vendor will push concessions on their implementation partner to facilitate a license sale.

Companies should also not lose sight of the fact that it is a strategic long-term agreement and they should look for protections well into the future.   This would include locking in long-term pricing for additional software and users well into the future (3-5 years) as well as limiting price increases on implementation services, maintenance agreements and other key components of the contract.

It is also extremely important to triple-check the respective user counts as well as the final ERP application footprint.  You need to be assured that what you are buying was what was demonstrated, what is needed, and that there are no limitations on the type of user licenses that are being purchased in accessing this critical functionality.  ERP Vendors like to demonstrate the flashy functionality but then exclude it from the final proposal to minimize the cost.  Conversely other applications may be included that are not needed initially or altogether.

Helpful Tips for ERP Contract Negotiations

·         Timing is everything. Make sure you understand year-end and quarter-end for the final vendors.

·         Make sure you have two finalists to enhance your leverage.

·         Understand there are multiple points to discuss to negotiate in the final contracts and it would be wise to engage a trusted advisor to guide you through the maze of possibilities.

·         Understand all the costs (hardware, database and middleware software etc.) prior to making any decisions.

·         Have a final legal review prior to executing contracts.

·         Establish point a point person(s) for the contract negotiations and instruct other team members not to discuss any details with any of the vendors.