ERP software can be a multi-million-dollar investment, but companies often don’t invest the same time, expertise and resources into negotiating these deals as they do negotiating other major capital outlays.
This is not to say that companies aren’t concerned about the cost of ERP software or of implementing ERP software, but they do tend to overlook certain cost variables. Companies, often, are most concerned about the obvious variables: software costs, maintenance costs, hourly rates and scope of services.
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While these are all important, they typically are not the things with the most impact on total cost of ownership. Instead, it’s the things lurking beneath the surface that make a difference.
9 Tips for ERP Negotiation
1. Understand Roles and Responsibilities
Some of our clients go into vendor negotiations ready to beat up their vendor on cost. However, negotiating a contract with your software vendor isn’t just about minimizing cost. It’s also about managing risk and clarifying roles and responsibilities.
A low-cost deal isn’t going to do you much good if the vendor has shifted all the risk to you to help get to the desired number. Fortunately, most vendors are willing to negotiate roles and responsibilities.
Here are some questions to ask yourself as you’re reviewing the vendor contract and statement of work:
- Who is responsible for training end users?
- Who is responsible for data cleansing and migration? How much historical data will be converted?
- Who will handle overall project management of internal and external resources?
- What are the assumptions surrounding changes to the configuration of the software? This is especially pertinent if you have been sold an “industry pre-configured” solution.
- How many internal resources does the vendor assume you will dedicate to the project?
- Who is responsible for system testing, business process testing and integration?
- Who will create system and security profiles in the system?
- Who will handle Sarbanes-Oxley, FDA, system validation and other regulatory compliance requirements?
2. Understand the Scope of Modules and Functionality
Constant updates to software versions, multiple variations of available modules and disconnects between the demo and proposal cycle can create ambiguities.
For example, not all ERP vendors group functionality within the same modules. While a customer relationship management (CRM) module for one system may include a robust way to convert a lead into a customer with a corresponding order, other systems may require use of an order entry module.
Companies also may experience confusion when sales teams demo one version of a product, while the proposal team assumes a different version of the software without explaining the difference.
3. Consider Annual Maintenance Costs
This is where vendors make their real profit. As such, vendors will usually hold the line on this annual fee, especially if you’ve negotiated an aggressive deal on software licenses.
At the very least, you should remember to include a maximum amount that vendors can raise their annual maintenance fee. Asking if the vendor can hold the price steady for at least three years is a good way to control costs.
4. Don’t Assume the First Offer is the Best Offer
As with any negotiation, vendors typically start by offering software at their list price and reducing from there.
Don’t be afraid to ask your vendor to reduce their software pricing, particularly as it relates to license costs. Vendors typically are flexible in their software pricing because they have several other ways to make money, whether it be through ongoing maintenance, professional services or training.
5. Review the Contract Terms and Conditions
Some common things to look for include payment terms (you don’t want to pay for everything up front), and what happens if you don’t like the vendor’s technical implementation resources.
In general, you want to look for other conditions that can be more advantageous to the vendor than to your company.
6. Don’t Buy More Software Than You Need
One common pitfall is purchasing more software than you need, whether it be in terms of unnecessary modules or too many users. For example, we recently worked with a mid-size manufacturing company that estimated it had purchased $600,000 of licenses that were not going to be used by the company anytime in the near future.
It’s always easier to add to your purchase over time, but nearly impossible to scale back on licenses you’ve already committed to. Even if your ERP vendor is offering you a “once-in-a-lifetime” deal on software licenses, you likely are going to overcompensate for the cost savings by purchasing software you don’t need.
Don’t let these “time-sensitive” discounts create a sense of urgency. Most sales reps will continue to honor discounted pricing after the discount period.
We recommend purchasing what you need when you need it and pre-negotiating the price on future purchases to avoid license cost increases. When we negotiate deals for clients, they’re able to purchase additional licenses, modules or users at pre-defined costs for three years or more.
7. Distinguish Between FUD (Fear, Uncertainty, Doubt) and Reality
One of the most common sales tactics in any industry is to create fear, uncertainty and doubt in the minds of potential buyers. Buyers of ERP solutions face similar tactics, whether it’s being told that only the vendor’s direct professional services group is able to handle the implementation, or that the maintenance contract will be void if a non-certified consultant installs and configures the software.
The key is to understand which messages are real versus FUD. This is a skill that comes with extensive knowledge and experience in the industry.
8. Benchmark Against Other Deals
Here are some questions you can ask yourself to help identify points of negotiating leverage:
- What is the vendor offering companies that are similar to yours?
- What are competing vendors offering?
- Does your incumbent vendor provide some additional leverage via upgrade or migration credits that may put cost pressure on other vendors?
We see too many companies zero in on one vendor without receiving proposals from and conducting an evaluation of other vendors. If you have competing offers, you can ask your preferred vendor to meet the pricing offered by a lower-cost vendor. You also can make concessions based on any functionality gaps or concerns.
9. Consider People and Processes
It’s amazing how often vendors’ project plans do not assign critical project activities to either the vendor or customer but completely omit them.
For example, most change management activities are not included in the project plan, aside from basic end-user training. In addition, business process management is oversimplified to entail the adoption of the software workflows out of the box with no modifications.
We recommend improving and documenting your processes before issuing a request for proposal (RFP). This ensures the vendor understands your unique processes and doesn’t assume you’ll implement everything out of the box.
While this tip may seem unrelated to traditional contract negotiations designed to pinch project costs, the long-term cost savings of realistic expectations can be just as significant as the direct cost savings you negotiate.
You don’t want to come out of negotiations thinking you’ve scored a great deal only to find you’ve merely shifted your costs to other budget categories, incurred greater costs in the future or elevated your implementation risk.
With that said, companies should not enter into fixed-cost contracts without completely understanding them . . .
The Unintended Consequences of Fixed-cost Contracts
On paper, it’s a brilliant idea: 100-percent cost predictability and shifting the risk from your own company to your ERP vendor. However, fixed-bid contracts have some potentially disastrous consequences that are even more destructive than the problems they were intended to address.
In our experience serving as software expert witnesses for many failed ERP projects, we have found that fixed-bid contracts are often the root cause of ERP failure. It’s never a good idea to enter into a fixed-cost contract without fully understanding the costs and risks.
Here are three consequences of entering into a fixed-bid contract with your ERP vendor or systems integrator:
1. Incentives are Misaligned
2. Your Company Takes no Responsibility for the Project’s Success
Executives typically don’t understand the complexity and magnitude of a successful ERP project, so they lean on their ERP vendor to guide them. However, only internal executives and management team members can provide the direction, resources, operational decisions and oversight required to make an ERP project successful.
In fact, the way the non-technical aspects are managed will ultimately determine the success of your project. These non-technical aspects include activities such as business process reengineering and organizational change management. No vendor is going to magically improve your processes and gain employee buy in without involvement from your executive team.
3. The Fixed-bid Buffer can be More Costly Than Managing Time and Materials
When we advise clients in their ERP software selection initiatives and contract negotiations, it is rare to see vendors fix-bid a proposal without including a buffer – often ranging from 30- to 40-percent. In other words, they will take their estimated time and hourly rates and add a buffer to insulate them from the risk of overruns.
In addition, as noted in point #1, they will at the same time reduce their scope, leaving more the more costly and time-consuming activities for the client to manage.
At the end of the day, this doesn’t reduce cost, it simply shifts costs from the vendor to the implementing company. To add insult to injury, most companies don’t fully understand the magnitude of the costs being shifted from one party to the other, so they end up having extremely unrealistic expectations.
Are Fixed-bid Contracts Always Bad?
You can definitely leverage the potential benefits of fixed-cost contracts without running into the challenges outlined above. Here are some tips for making the most of fixed-bid contracts:
1. Ensure You Have a Solid Contract Review and Negotiation Process
2. Invest in Project Auditing
Independent ERP consultants, like Panorama, can ensure you are tightly managing scope, milestones, budget and vendor activities. Our project auditing services will help you maintain an on-time and on-budget project.
3. Don’t Forget About the Non-technical Aspects of Your Project
This is true of any ERP project, but it is especially true for fixed-bid engagements. Make sure you’ve designated enough time and resources for business process management and organizational change management. Odds are your vendor will not include these in their scope.
Qualities to Look for in a Software Sales Rep
The overwhelming majority of ERP vendor sales reps are good people. In fact, it’s in their best interest to give you a good rate because the idea behind making a sale is to turn you into a long-term customer. Vendors want long-term revenue streams that are predictable.
How do you tell if your sales rep is one of the good ones? Look for the following signs:
- Sells you the modules you absolutely need and never encourages you to purchase everything at once
- Includes hardware costs, project resources, integration, customization and other hidden costs in the total cost of ownership
- Includes all critical project activities in proposal and contract
- Estimates a deployment time based on the scope of all critical project activities
- Knows how to differentiate between processes that add value and competitive edge to your company and those that don’t
What is Your ERP Consultant’s ERP Contract Negotiation Methodology?
During the ERP selection process, many companies struggle to understand and compare vendors’ statements of work. Some of these companies hire ERP consultants to help them navigate the cost variables and negotiate favorable terms.
However, choosing the right ERP consultant can be just as confusing as selecting an ERP system. Any ERP consultant can claim to deliver vendor negotiation services, but not all consultants have an effective methodology. When evaluating an ERP consultant’s vendor negotiation methodology, consider whether it includes these four activities and deliverables:
1. Strategy Development
An ERP consultant should collaborate with you to develop an ERP contract negotiation strategy. Ideally, they’ll ask you about your goals and priorities. For example, is it more important for you to reduce operational expenses or reduce capital expenditures?
They’ll also help you determine which contract terms are most important to you. These may include terms, such as:
- Licensing payments should be spread over deliverables.
- Organization will spend x amount per year.
- Subscription costs will not be increased for x years.
2. In-depth Price Comparisons
You may have found that vendors’ quotes are not easy to compare. As such, the most valuable deliverable an ERP consultant can provide is a negotiation workbook showing apples-to-apples comparisons of your top contenders.
This is valuable because there is no universal standard for how ERP software solutions should be priced. For example, some vendors price their software with named users, while others price with concurrent users.
Apples-to-apples comparisons are also helpful due to the fact that vendors’ statements of work make various assumptions, such as:
- You’ll use all software functionality right away
- You’ll use x amount of out-of-the-box functionality
- You’ll need x amount of customization
- You’ll take x implementation approach
- You’ll use mostly internal resources
- You’ll be responsible for all ERP data migration
A negotiation workbook helps you understand statements of work based on your unique requirements and digital strategies instead of vendors’ assumptions. Your ERP consultant should help you understand your requirements by facilitating activities, such as:
- Determining an ideal level of software customization, and ensuring you’re only customizing when absolutely necessary (i.e., to improve your competitive advantage)
- Understanding how many internal full-time resources you can reasonably dedicate to the project and how many vendor resources you’ll need
- Understanding how long it takes to automate workflows in the system and how complicated it is, as well as who will be configuring workflows
- Determining which activities should be included in each project phase
Below is a sample negotiation workbook. The spreadsheet allows “what if” scenarios (i.e., what if you get a 30% discount):
3. Total Cost of Ownership Analysis
A long-term view of cost is just as important as a short-term view. The ideal ERP consultant will provide a three-year total cost of ownership analysis – or use whatever timeframe makes sense for the length of your ERP implementation.
This analysis should be included as part of the negotiation workbook. The analysis considers factors, such as:
- Payback Period – Panorama clients typically recoup the cost of their ERP project within three years.
- Benefits Realization Timeframe – Panorama clients typically realize full ERP business benefits from out-of-the-box functionality within 9-12 months of go-live.
- Deployment Model – Most ERP vendors encourage a cloud-hosting model and a SaaS licensing model. If you’re considering SaaS licensing, you may incur escalating annual charges for additional functionality, data or transactions.
- Licensing Structure – The number of users and types of users will affect your cost if you choose a user-based pricing model. Many ERP vendors underestimate the number of users to make their system seem less expensive.
- Implementation Approach – Will you use a phased, big bang or hybrid approach? If phased, will you phase per function or per module? Make sure your ERP vendor doesn’t expect you to buy all licenses upfront.
- Software Costs vs. Service Costs – You should aim for a ratio of 2:3 for software costs to service costs.
- Software Configuration – How long will it take you to configure each of your business processes? Are there any process dependencies (processes that need to be set up before other processes)?
- Resource Rates – Panorama clients typically pay $175-225 per vendor resource. If you negotiate this too low, you may end up with rookies on your ERP project team.
4. ERP Negotiation Guidance and Coaching
Your team has made large purchases in the past, and you don’t want ERP consultants taking control. The ideal ERP consultant will take a collaborative approach and be flexible enough to respond to your unique needs: they can negotiate on your behalf, prepare you for negotiating with ERP vendors yourself or attend calls with you.
Whichever method you choose, you should aim for cost savings of 30-60%. Your savings will vary depending on your organization size and your chosen ERP vendor. Some vendors don’t go below a 20% discount. You can achieve additional cost savings overtime by ensuring maintenance costs are based on purchase price rather than list price.
Panorama clients typically go through three to four rounds of negotiation, which can last anywhere from three weeks to several months.
It’s not easy finding an ERP consultant that focuses on all four of these activities. Panorama is one of the few that does.
If you’re not convinced these activities will save you money, take a look at these case studies:
- Panorama recently negotiated more than $15 million in savings on licensing costs alone for a large, multi-national client.
- Panorama negotiated cost savings for a client that could not afford their top-choice vendor and was about to settle for their second choice.
- Panorama saved a city government more than $500,000 in negotiations. The vendor was able to provide a lower price due to well-defined ERP requirements and expectations.
Typically, Panorama clients achieve cost savings that are ten times the cost of the negotiation services. And Panorama’s performance warranty ensures every client gets a significant discount on their software purchase or they don’t pay us a dime for our time spent negotiating on their behalf.
Engaging Panorama to assist with vendor negotiations will help you lower your total cost of ownership and mitigate risk.