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Also, the challenge is not just the complexity of ERP contracts. It’s also the refined negotiation skills of ERP salespeople. With proprietary knowledge to their advantage, they are trained negotiators. Unless you have access to the same proprietary knowledge to be at the same level, you can never beat them. And having this knowledge is only possible when you have someone with a similar skillset on your side. This is why ERP selection consultants and ERP sales reps make a good offense and defense combination.
Finally, most buyers are so biased in seeking discounts and the cheapest quote, with a limited attention span to identify and understand the risks buried with ERP contracts. The risks could be as severe as data loss or not understanding the ownership of components packaged with the software. The ERP contract terms outlined below will help you identify the risks buried with the ERP contracts and avoid any surprises after signing one.
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1. Editions and Modules
Understanding editions and modules and how they map to each SKU in ERP contracts is essential to avoid financial surprises post signing. Not familiar with editions and modules and how they work? Software vendors commonly price their products based on editions and modules. The main challenge with editions and modules is their overlap and configuration bundles, which means different bundling arrangements might have the exact same outcome but very different price points and risk profiles. So you need to make sure that you have the complete grasp of the fine lines around editions and modules.
To get the maximum discount, experiment with different configurations of editions and modules. But, don’t forget to understand their limitations. This requires a deep probing of how these editions and modules are structured and function, which may go beyond what the sales representatives can provide.
2. License Terms
Even the most friendly ERP OEMs who claim to be consumption-based would require you to commit to the ERP contract terms, with very little flexibility in making any changes. The variables that have an impact because of the license term would be the number of users, types of licenses, and tiers of licenses. As well as the scope and duration of the agreement.
Once the contract is signed, scaling up the number of seats or expanding the scope of your ERP system is generally straightforward as this leads to additional revenue for them. But scaling down is a revenue loss for them, so they are likely to make it as difficult as possible. In most cases, prorated adjustments to your ERP contract terms might not be possible, unless the agreement explicitly articulates this provision.
3. User Access and User Types
Each ERP system and vendor is likely to have very different user access tiers and types. Even among different versions of the same product, the user access and types might vary. The user access and types could have several variables such as limited access vs full access users. Concurrent vs named users. Devices licenses vs application users. They each have implications on what users will do with the application and might drive the total contract value substantially.
Unless you have gone through rounds of due diligence, which is rare for most companies due to the amount of effort and investment required in the selection phase. Also, the perceived limited value of the due diligence might trigger companies to short-circuit the due diligence process, and because of this architecture might not be fully developed, limiting the visibility into access types required. You might also not have complete visibility into users’ workflow and how they will be using the software.
These issues collectively might drive changes to user access and types, leading to substantial financial surprises after signing the contract, which even the initially offered discounts might not be able to make up for. Therefore, it’s essential to perform the due diligence to an extent where you have relative confidence in the total contract value. And you are not being myopic with discounts. The ERP selection consultants can help you plan the user access and types better with limited financial surprises.
4. Reseller Tiers
Generally dictated by ERP publishers, each reseller is generally at a specific tier, which drives their discount and pricing, as well as the price and discounts they can offer you. The OEM typically determines these tiers based on various factors, such as the reseller’s sales performance, expertise, and commitment to selling the OEM’s products, including ERP (Enterprise Resource Planning) software and services.
OEMs often provide more generous discounts to new resellers to their partnership program. This is a strategic move to encourage newer partners to sell the ERP software and services actively, essentially helping the OEM build their customer base and expand their market presence. But wait, this might only be applicable for the first few deals, after that they are likely to lose this privilege as they will need to match the performance with their larger peers to be able to receive the same discounts.
Understanding their tier would be especially critical while switching resellers. The discount ERP contract terms and the overall agreement may not be the same with a new reseller as with the previous one. Therefore, it’s essential to carefully analyze the implications and terms of such a change to ensure it aligns with the company’s objectives and budget.
5. Discounts
Each vendors have their own discounting strategy, some keep their list pricing higher and discount heavily. The others, on the other hand, are likely to offer much lower discounts. The discounts could be up to 50-60% off the original list price, but they might also vary per line item. This is especially true with implementation and support line items. They might not offer as deep discounts. Some discounts might be available only in certain regions or with certain types of resellers, depending upon the strategic priority of the OEM.
Some discounts could also be timely. The discounts are likely to be higher in Q4 as ERP vendors might be trying to meet their numbers for the year and might offer much heavier discount. While planning your ERP implementation around discounts is a great idea, don’t make your decisions purely based on discounts. This is especially true while signing the ERP contracts. Don’t rush to sign an ERP contract just because the discounts might expire. Generally, ERP vendors match up the offer if the decision is likely to be purely based on price especially if they might not have a true differentiator.
The discounting might vary per rep as well, just because ERP vendors carry hundreds of SKUs and several different pricing and discounting strategies. Depending upon the skillset of the rep, you might not the best discount just because they might not understand all permutations and combinations. This is where ERP selection consultants can help. They have access to thousands of their previous quotes and can compare the discount at the line level, ensuring maximum discounts, without assuming unnecessary risk that might lead to financial surprises.
6. Price Lock
The decision about how long to sign the ERP contract might be tricky. If you sign up for a longer term and if the software doesn’t work to your expectations, you might be locked in the contract even if you are not able to use the software. But the shorter the term, the lower the discount. In the case of implementation issues, most ERP vendors might offer suggestions such as changing resellers or another round of implementation methodology but if there are serious implementation challenges due to the design of the software, you may end up losing even more. This would be true even after paying for the full term of the contract, without getting any value from the software.
So depending upon the risk profile of the project, you need to assess the right length of the contract. Don’t sign for longer term contracts purely because of discounts. Make an informed decision based on the risk profile of your implementation.
7. More Users/Feature Discount Guarantee
This clause addresses the situation where an organization plans to expand its usage of the ERP system by adding more users or activating additional features beyond what was initially agreed upon in the ERP contract. In such cases, the software vendor might have mechanisms to negotiate the pricing for these additional users or features.
Instead of guaranteeing the cheapest initial quote, some ERP vendors provide a different kind of assurance – a discount guarantee for future purchases or modifications. This means that if you decide to scale up your ERP usage by adding more users or enabling new features, the vendor commits to providing you with the same discounted rate, ensuring that you don’t pay the expensive list price.
By including this clause, you ensure that the favorable pricing and discounts you negotiated during the initial contract negotiation phase will still be applicable even when you make changes to the ERP system. This can help avoid unexpected expenses, accommodating your to-be state as you learn more about your needs in the implementation phase.
8. License Price Increase
Most ERP vendors understand that customers are not likely to switch from their ERP system once they are settled on it. Also, winning an ERP deal is extremely challenging because of the same issue. For these reasons, ERP vendors offer substantial discounts in the initial years. But the increase is likely to be steep with renewal.
Sometimes the increase might be so steep that smaller companies might struggle to afford it. That’s why negotiating a license price increase is essential. Some vendors are fair and they might not increase more than 5% and will be willing to include that provision. The other vendors might be tricky to work with and might discount the pricing so much in the initial years that a 5% increase or including such provision might not be feasible. Have a clause for the license increase baked in as part of the contract, even if you sign a shorter term contract.
Also, coverage of all items as part of the license price increase clause is critical. In some cases, if several third-party add-ons are included as part of the solution, the ERP vendor might not be able to guarantee the license price increase on those line items. In fact, changes in add-ons might also drive architectural changes and as a result, licensing, which might not be covered by the license price increase clause. Perform a risk analysis of each line item and assess if there might be any charges that might not be covered by the license price increase clause.
9. License Fee Waived Off First Year
When a vendor offers to “waive off” the license fee for the first year, it means they are willing to provide the ERP software to the customer for the initial year without charging the regular annual licensing fee. This offer is often made to ensure that customers only pay when they use the software in production. During the test phase, the cost for the ERP vendor is relatively low as the test infrastructure or the cloud instance is likely to be on inferior infrastructure and some vendors are willing to do that to ensure that the customers are not paying twice as they are likely to still pay for their old software while they implement and test the new one.
However, it’s crucial to understand that while waiving the license fee for the first year can be financially beneficial in the short term, it may impact the overall cost of the ERP solution over the long term. To evaluate the true cost-effectiveness of this arrangement, it is advisable to create a comprehensive cost schedule that takes into account all costs associated with the ERP implementation over a more extended period, such as 5 to 10 years.
10. Financing Options
Many ERP vendors may collaborate with third-party financial institutions to offer this option to their clients. However, it’s crucial to understand that ERP vendors often use this financing option as a negotiation tool to gain leverage on other ERP contract terms. They might expect concessions in other areas, such as customization, support, or pricing, in exchange for offering financing. Therefore, businesses should carefully assess whether this financing option aligns with their needs and objectives.
Suppose the financing option is not directly relevant to your situation, or you have access to other external funding sources. In that case, it may be wiser to concentrate on the contractual clauses likely to impact your overall cost structure significantly. Ultimately, the decision to utilize the financing option should be based on a thorough evaluation of your financial circumstances and the specific conditions outlined in the ERP contract. By doing so, you can ensure that you make informed choices that are in the best interest of your organization’s ERP implementation project.
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11. User Limit by Version
Your current edition and version may restrict the number of users that you can have on that version. If you outgrow that, then you need to switch to the next version, which might be more expensive than the smaller version. It’s crucial to understand your current version and edition to determine how this will impact your future pricing. Additionally, ensure that the price lock remains applicable if you switch versions or editions.
12. Transaction Restrictions
Similar to user limits, your current edition may also have transaction restrictions. Upon reaching these limits, you may be required to upgrade to a higher, more costly tier. It’s worth noting that the nature of transactions can vary substantially across industries. For industries with low-value transactions, such as retail, these restrictions can be particularly important during contract negotiations. Be sure to assess the implications of transaction limits.
13. Infrastructure Price Changes
Similar to third-party add-ons, ERP vendors may have limited control over the underlying infrastructure. Furthermore, claims of unlimited users may come with unexpressed restrictions. It’s essential to comprehend any imposed limitations to enable an unlimited model fully. These limits could pertain to storage, bandwidth, speed, infrastructure, and additional charges for add-ons. In some cases, these charges might surpass the licensing costs.
14. Application User Pricing
Pricing for application users or connectors may deviate from the pricing structure for named users. Familiarize yourself with the pricing variables, such as the number of transactions, API calls, queue messages, and other factors. Typically, these users need higher technical expertise to estimate transaction volumes accurately.
15. Third-Party Products and Warranties
ERP contracts are similar to complex bills of materials involving various dependencies, white-labeled add-ons, and products owned by third parties. Scrutinize the contracts and request the vendor to clearly specify the software products where warranty coverage may depend on their relationships with the vendors. Identify all the connections between the software providers and their vendors and how these relationships are established. Assess the potential consequences of losing these relationships and understand the warranties, especially in the context of pass-through warranties.
16. Ownership of Custom Code and Intellectual Property
Resellers or Independent Software Vendors (ISVs) may customize the software for you but might not grant access to the code, limiting your ability to seek support in the future. If a reseller or ISV plans to utilize any intellectual property (IP), ensure the contract includes provisions specifying ownership.
17. Data Ownership
Each ERP vendor may have distinct policies regarding data ownership. Thoroughly review the contract provisions to understand the format in which data will be provided and the duration for data access or deletion in the event of contract termination.
Conclusion
In conclusion, ERP contracts require expertise to uncover financial risks that might not be as obvious to a layperson. By understanding these ERP contract terms, you will be empowered to negotiate and minimize financial risks. Remember, ERP selection is only the beginning; managing change and ensuring the terms of your contract align with your business goals are ongoing processes. Having a knowledgeable ally by your side, one who keeps abreast of industry developments can be invaluable. So, as you embark on your ERP journey, don’t take ERP contracts lightly as they might fire back in ways you wouldn’t expect. This list aims to offer potential options for your further evaluation with independent ERP consultants.
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