The end of the year is an interesting time. Most people are preparing for the holidays, catching up on piles of work, closing the books for the year, conducting physical inventory, and hoping to build some momentum heading in to the new year. For many companies, the end of the year is also the time to negotiate the purchase of a new ERP system. This can be an ideal time to do so – companies are often workings with fresh budgets in the new year, resources can be easier to mobilize after year-end, and perhaps most importantly, ERP vendors are often willing to aggressively negotiate in the new year in order to help make or exceed their numbers for the year.
The flip side, however, is that companies often fail to recognize the blind spots that develop during an aggressively negotiated year-end deal, which can more than offset the great deal that you might not otherwise get at other points throughout the year. Here are four things to keep in mind as you negotiate that year-end deal that looks sweet on paper, but could end up costing you in other ways in the future:
- Inappropriate scope and over-licensing. When under the gun to get a deal done by a year-end deadline dictated by an ERP software vendor, CIOs and executives often overcommit to purchasing software modules they don’t yet need, agree to an inappropriate balance of heavy vs. light users, and estimate user counts that over-estimate short-term needs. Vendors are typically willing to give a steeper discount for larger purchases, so it’s important not to get too caught up in how big of a deal you were able to negotiate, especially if it limits your financial flexibility and commits your organization to needless costs going forward. Instead, look for ways to pre-negotiate future purchases of software modules and additional users.
- Under-estimated implementation scope and resources. Far too often, ERP vendor negotiations focus almost exclusively on software licenses and maintenance. However, our independent research shows that software licenses comprise of an average of just 20-25% of the total cost of ownership of a new ERP system. While negotiating software licenses is important, it is even more important not to lose sight of properly defining and negotiating implementation scope and costs, such as technical implementation costs, hardware upgrades, organizational change management, and other critical budgetary line items. Be sure to leverage experienced resources independent from your software vendor or VAR that can highlight blind spots and hidden costs associated with a proper ERP implementation.
- The real costs and risks are related to the business, not the software. While software license and maintenance costs are relatively tangible and predictable, it is the intangible and more variable implementation costs that really matter. Business process definition, ERP blueprint and design, organizational change management, and training are the areas that drive both the value and the costs associated with the ERP implementation. Just because these costs and risks are harder to define and quantify doesn’t mean the focus should be primarily on negotiating software licenses.
- Remember that chances are you can get a similar discount in January. I get strong push back from some ERP vendors and sales reps when I suggest this to our clients, but it is true. The year-end negotiating bargain has lost its appeal and effectiveness over the years and vendors are rarely going to let a proposed discount truly expire if they have a client who is ready to sign a contract at a later date. You don’t want to jerk around your software vendor, but at the same time, you don’t want to commit to a deal when you’re not quite ready just because you’re being told that it’s a now or never type of deal.
While this is indeed a good time to negotiate steep discounts, it is even more important not to get too caught up in the emotional and egotistical aspects of ERP software negotiations. I’ve seen several companies through the years take pride in the 70% or 90% discount they were able to negotiate off of software license list price, only to overcommit to other costs that more than compensated for these steep up front savings.
Remember, your executive team and steering committee won’t care how big of a discount you were able to negotiate if it comes back to bite you in other ways in the future. This is where we can help. As we are currently doing for several of our clients, our independent and broad-based expertise can help guide you through the negotiation process to ensure you’re getting a deal that makes sense to both your organization and your ERP vendor. More often then not, our negotiation results deliver savings that far exceed the cost of our consulting services. Learn more about our ERP negotiation consulting services.
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