With new fiscal budgets and renewed momentum in place, the early part of the year is when we see a lot of demand for our ERP negotiation services. Over the last two weeks in particular, I have been helping a number of companies negotiate contracts with their ERP vendors.
After all these years of negotiating contracts for our clients, there are a number of patterns and trends that I look for when working with a firm that is about to embark on an ERP implementation. First and foremost, companies tend to be most concerned about the obvious variables on the surface of any ERP software deal: software costs, maintenance costs, hourly rates, and scope of services. Most CIOs and CFOs go into contract negotiations expecting that their ultimate measure of success will be how much they can hold the vendor’s feet to the fire on these cost items. Indeed, these are all important and should be negotiated aggressively, but they are typically not the things that materially determine the total cost of ownership of your chosen ERP system.
Instead, it’s the things lurking beneath the surface of the deal that really make a difference. It’s those things that may not be obvious, is not on the radar of most executives during negotiations, and often doesn’t even directly relate to the software vendors. There are three things to keep in mind when negotiating with ERP vendors.
Three Key Things to Remember While Negotiating with ERP Vendors
1. Carefully consider scope, assumptions, and expectations. While it’s nearly impossible to put a price tag on this item, it is the one that arguably will most impact your total cost of ownership. A majority of contracts I review include assumptions that shift much of the workload onto the client and minimizes scope and responsibility of the vendor. Most vendors are willing to negotiate these assumptions for an added cost, or perhaps you don’t want the vendor doing more of the work, but in either case, you want to understand what the implications are, who will handle missing scope activities, and what the costs will be. For example, if a vendor assumes that you the client will handle all data migration activities, that may reduce your vendor’s costs but increase your internal costs.
2. Understand what’s not being discussed during negotiations. When looking at proposed project plans as part of a vendor proposal and contract, it is amazing how often those plans do not include critical project activities. While point #1 above addresses those things that are explicitly omitted from vendor scope or shifted on to the client’s plate, this point has more to do with key activities that should be defined somewhere by someone, but are not. For example, organizational change management is often reduced to basic end-user training. Business process definition is over-simplified to entail adoption of the software workflows out of the box with no modifications, which rarely ever really happens. The inexperienced eye will typically overlook these omissions from contracts and statements of work, which will significantly increase risk and cost for the ERP implementation.
3. Where are the buffers and internal project activities? I recently viewed a client contact for a $1B aerospace and defense company, whose ERP vendor priced their contract estimate based on a 23-month deployment. However, there was little to no buffer built into that plan for internal deliverable review, process definition, and other handoffs and reviews between the vendor and client. In this case, yes, we absolutely want to bring down that hourly rate on the services side, but what will really impact cost is the overall duration estimate. In this case and as with the above two points, expectation management and a sturdy dose of reality is just as important as the dollars and cents negotiated on the contract line items.
Many of these points may seem unrelated to traditional contract negotiations designed to pinch project costs. When completing your ERP software selection process, it’s a lot easier to say “I negotiated 70% off of the vendor’s license price” than it is to say “I identified five things that the vendor left out of scope and as a result increased the initial implementation estimate.” However, setting the right expectations and having a realistic scope and contract in place will absolutely save money, time, and risk in the short and long run.
So instead of thinking about negotiations in terms of how to squeeze the best deal out of licenses, maintenance, and hourly rates, it is more imperative to expand your discussions and planning to include those things that will ultimately affect the total cost of ownership. You don’t want to come out of negotiations thinking that you’ve scored a great deal only to find that you’ve merely shifted your costs to other budget categories, incurred greater costs in the future, or elevated overall implementation risk. Unfortunately, common negotiation tactics result in these exact problems.
We do this type of work every day with clients and vendors from around the globe. Since we’re independent and are not affiliated with any of the software vendors, we can help you identify blind spots and negotiate the deal that makes the most sense for you. Visit our service offering page to learn more about our ERP vendor negotiation services.