During the ERP software selection process, many organizations struggle to understand and compare vendors’ statements of work. Some of these organizations 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.
SAP vs. Oracle Case Study
SAP and Oracle both invest heavily in cloud technology. However, our client was skeptical about cloud scalability and unsure if the products were mature and proven.
2. In-depth Price Comparisons
The most valuable deliverable an ERP consultant can provide is a negotiation workbook showing apples-to-apples comparisons of your top contenders. You may have found that vendors’ quotes are not easy to compare. 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
A negotiation workbook helps you understand statements of work based on your unique requirements 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:
Panorama clients typically recoup the cost of their ERP implementation within three years.
Benefits realization timeframe
Panorama clients typically realize full business benefits from out-of-the-box functionality within 9-12 months of go-live.
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.
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.
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)?
Panorama clients typically pay $175-225 per vendor resource. If you negotiate this too low, you may end up with rookies on your 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.
The Right ERP Consultant
It’s not easy finding an ERP consultant that focuses on all four of these activities. 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.
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.