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Purchasing ERP software has become easier and more flexible over the last several years. The advent of public and private clouds, SaaS ERP software, on-demand offerings, and hybrid deployments all provide more options to executives looking to deploy new ERP systems in their organizations. This is good news to most CIOs and CFOs.

The bad news, however, is that comparing options and navigating through the related contract and licensing scenarios add a layer of complexity that most buyers of ERP software don’t have experience with. For example, when evaluating between a SaaS ERP system and an on-premise one, cost and contract structures are entirely different, which can be difficult for less experienced buyers to understand. This difficulty can lead to bad decisions and higher costs for organizations, which we see too often in our industry.

Here are three common “gotchas” to watch for when evaluating and purchasing ERP software licenses for your organization:

Getting Over-Licensed on Your ERP Software. One common pitfall is purchasing more software than you need, whether it be in terms of unnecessary modules, too many users, or other instances of “shelfware” which can be the equivalent of throwing away money. For example, we recently worked with a mid-size manufacturing company that estimated it had purchased $600,000 of shelfware 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 that you’ve already committed too. Even if your ERP vendor is offering you a “once-in-a-lifetime” deal on software licenses in order to meet quarter- or year-end numbers, you are more likely to more than compensate for the alleged savings by over-purchasing software that you don’t necessarily need.

Failure to Consider to Total Cost of Ownership of Your ERP Software. Licenses are typically just one aspect of the total cost of ownership (TCO) of your ERP software purchase and account for less than 25-percent of TCO according to our research of nearly 2,000 ERP implementations across the globe. Most organizations fail to consider the remaining 75-percent of total outlay, such as hardware costs, internal and external project resources, integration and customization, and other hidden costs. Executives should have a clear picture of the TCO for their purchases – not just their direct software license costs – and this understanding should be applied to negotiate contract terms accordingly. In addition, the TCO should be quantified for at least seven years, which can paint an entirely different picture than if you simply consider the first year or two (think: SaaS vs. on-premise ERP systems). For example, SaaS ERP systems often entail additional vendor costs, such as storage or transactional volume fees, in addition to other non-vendor fees associated with deploying the software.

Negotiate a Long-Term License Deal. Rather than focusing solely on the immediate purchase, it is more important to view the acquisition of ERP software as a long-term deal. Since most implementations take between one and two years (longer for larger organizations) and another one to two years to realize the benefit from these implementations, it rarely makes sense to front-load license contracts to acquire the software all at once. Instead, companies should purchase what they need when they need it and pre-negotiate the price on future purchases to avoid unanticipated license cost increases. For example, we typically negotiate deals for our clients allowing them to purchase additional licenses, modules, or users at pre-defined costs for three years or more, while at the same time minimizing their up-front capital outlays.

Negotiating ERP software licenses and contracts is part art, part science, and requires a solid understanding and breadth of experience. We have helped more than 100 organizations negotiate software license contracts of all types over the years and have amassed experience that most CIOs and CFOs simply do not have. However, with the right expertise and guidance, executives can effectively negotiate long-term deals that make sense to their organizations and consider the various complexities, nuances, and constantly changing realities of ERP software contracts.

To find out how exactly Panorama’s services can save your organization time, money and headaches, check out our ERP vendor and contract negotiation services or contact our team of independent ERP experts today.

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