One of the key components of our ERP software selection methodology is contract negotiation with ERP vendors. As a result of our unique blend of independence, focus on ERP consulting and extensive knowledge of the ERP software industry, we are able to provide our clients with a negotiation experience that delivers desired results, quantifiable benefits and a very strong return on investment on our consulting fees. In fact, we typically save clients hundreds of thousands of dollars in software license, maintenance and technical consulting costs – and sometimes even more for our larger clients – via our comprehensive and well-defined negotiation process.
Take a recent example: One of our clients hired us to help evaluate ERP systems and select the right option for them. This particular client is a $500 million manufacturing company with multiple sites. After completing the evaluation process, we narrowed the list and eventually recommended a Tier II ERP system. At the tail-end of the selection process, we negotiated a deal for our client that returned savings equal to five times our total selection consulting fees. The client ultimately ended up signing a contract with the ERP vendor and hired us to handle the implementation.
So what is our process for negotiating these types of deals with ERP vendors? While we can’t give away our entire “secret sauce” recipe, here are four components that we bake into our methodology:
1. Ensure You’re Not Getting Over-Licensed on Your ERP Software. One big potential area of savings is making sure you’re not getting over-licensed, whether it be in terms of unnecessary modules, too many users or other instances of “shelfware” that turn out to be the equivalent of throwing away money. For example, we recently worked with a mid-sized manufacturing company that estimated it had purchased $600,000 of shelfware licenses that were never used. It’s always easier to add to your purchase over time, but nearly impossible to scale back on licenses that you’ve already committed to. 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 likely to more than compensate for the alleged savings by over-purchasing software
2. Consider the Total Cost of Ownership of Your ERP Software. Our negotiation process considers the fact that licenses are typically just one aspect of the total cost of ownership (TCO) of your ERP software purchase. In fact, according to our research of nearly 2,000 ERP implementations across the globe, software accounts for less than 25-percent of the average TCO for most implementations. 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.
3. 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 it often takes between one and two years to implement enterprise software (longer for larger organizations) and another one to two years to realize the benefit from these implementations, it doesn’t make much 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.
4. Understand Your Points of Leverage. Now that the global economy is showing signs of life, ERP vendors are regaining some of the leverage they lost during the recession. However, you should always identify what leverage you have as an organization, and determine at which step to lean on this leverage during the negotiation process. For example, if you’re a large company, are growing quickly, or represent an industry vertical that your ERP vendor is trying to break into, this may provide leverage that will enable greater savings. Obviously, you don’t want to poison the pond by structuring a deal that causes the vendor to lose money, but experienced negotiators such as the ones on our team understand when and where to appropriately stress these points.
These are just a few lessons we’ve learned from our negotiation experience with vendors over the years. We’ve completed nearly 100 ERP selection engagements for our clients since our inception in 2005, so we’ve negotiated our share of deals with all of the major Tier I, Tier II, and even the Tier III ERP vendors. These four tips may not give you our entire methodology, but they should at least put you on the path toward saving money for your organization and ensuring a deal that aligns your interests with your chosen ERP vendor.
Learn more critical success factors of ERP software selection, purchasing and implementation in my free e-book, An Expert’s Guide to ERP Success. The introduction and first three chapters are available now and the fourth chapter, Planning for Implementation, will be posted later this week.