3 ERP Contract Pitfalls to Watch Out For

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So, you have found your enterprise software perfect match and you’re eager to get started? Great! Your enthusiasm is warranted – after all, integrating all your business tools can save you 23 percent in operational costs and 22 percent in administration costs [PDF]. But most ERP contracts are expensive, multi-year contracts, and besides the spend, the process is extremely disruptive. Your contract is the basis of your relationship with your ERP partner. It’s worth doing your homework so you understand it. 

Anapact’s sister company, Nuage, is an ERP Solution Provider. In the past 20 years, Nuage has managed several hundred NetSuite, Microsoft, Salesforce, Infor & Sage implementations, guiding their customers through contract negotiations worth many hundreds of thousands of dollars. Their leaders identified three key things to watch out for when reviewing your ERP contract.

1. Anticipate ERP Costs, Both Visible and Hidden

There’s no way around it – this SaaS is expensive. ERP tools tend to be large, complex, and impactful, which means they carry a hefty price tag. A typical mid-size enterprise ERP installation will set you back between $50,000 and $150,000 on an annual basis. That is a large range that depends on the nature of the business, its products, and the complexity of its operations. And as you probably know by now, it’s not a one-time outlay. Most tools also require an annual license renewal at 10-20 percent of the original software purchase cost. That means for the mid-size company example above, you’ll be up for an additional $15,000+ each year just to keep the wheels on. Look for the pricing breakdown, including annual re-up fees, in your contract.

The high cost of the tool is not all bad news, however. The Enterprise Resource Planning space is extremely competitive and most companies stay with their ERP partner for 5-7 years, which means you are in a position of bargaining power. Ask about discounts. Anticipate the most expensive parts of the process, and negotiate to get the best deal for your integration.

There are also significant soft costs involved in an ERP project. You need to budget for strategic leadership, training, testing, and engineering labor at least through the implementation period, which can stretch from a few months to two years. Some providers have alternatives including consulting, integration, and support – but they come at a cost. Calculate what your team is likely to need and check your contract. Soft costs are often the sting in the tail that company leaders don’t expect. They can swiftly gobble all the savings made from your new integration.

Other costs to watch out for are per-user fees (especially if you’re planning or hoping to expand your team), customization costs for non-standard integrations you might need, and the cost of support. Align your business plans across the 5-7 year lifecycle of your ERP. This will help you anticipate new tools that might need to be integrated or new processes that must be harmonized.

2. Seek Assurances of Uptime, Data Access and Ownership

One of the key elements of your ERP contract is a service-level agreement. SLAs can cover a range of operational assurances. But one important element is the promise of a certain level of uptime. It is standard to have uptime guarantees over 99 percent, which sounds good on paper, but as this chart points out, even a single percent of downtime represents 7 hours a month. What if that downtime happened on your biggest day of the year?

SLAs typically set out exceptions to their service responsibilities – such as force majeure events – as well as penalties and remedies for poor performance. They also cover backups, security, service response times, and cost structures.

Since ERPs are powered by your data, it’s important to establish good data governance in your contracts. An SLA should cover data confidentiality, ownership, and encryption. And also, what happens to your data when you part ways with your provider. It may sound strange to be planning for a breakup at the start of a partnership but it’s the best way to anticipate potentially expensive and business-thwarting offboarding processes that are written into your contract.

Enterprise software is often a game-changer for your business so it’s natural for you to be focused on what the ERP solution can do and the long and complex integration process ahead of you. However, it’s really important that you also consider and plan for the lifetime of the tool and your migration to another tool or workflow.

Some questions to get clarity on before you sign:

  • To what extent do you expect free and instant access to the data in the ERP and its systems?
  • What is the process for exporting data from the system and does it match your expectations, budget, and business processes?
  • What is the process for exporting, migrating, or harmonizing your ERPdata at the end of the partnership?

3. Plan for Unknown Technologies, Teams, and Workflows

You need to anticipate systems you know you want to add. For example, the systems used by suppliers you’re planning to partner with. You should also try to plan for systems you can’t anticipate as well, like emerging tools that leverage AI. Just like you researched multiple vendors to find your ERP match, you should also research the latest advances in relevant technology, teams, and work methodologies and measure how likely your company is to adopt them.

Scan your ERP contract for a commitment to investing in their own technological advancements, as well as any penalties or fees for iterating or implementing new tools after the initial integration. Keeping in mind the average 5-7 year lifespan of ERP partnerships, taking a long view of how your business operates will prepare you well for negotiating a contract in your company’s favor.

Remember: Everything is Negotiable

Earlier, we mentioned that the competitive nature of the enterprise software field and its high cost put you in a good bargaining position. ERP agents should be willing to negotiate on terms that matter to your company but you can only use that power if you know what your company truly needs in a partner. Here are some common Enterprise Resource Planning software contract elements companies negotiate:

  • Initiation pricing: What the tool costs out of the box. You’ll never get a discount you don’t ask for.
  • Annual subscription or licensing fees: Pay attention to your total cost of ownership and understand what escalation/caps and any user/data thresholds will do if exceeded. 
  • User fees: Many ERPs structure costs per user, or “seat.” Ask if your partner is willing to consider stepped costs for groups of 50 or 100 seats. And don’t forget to include your expansion plans in your math!
  • Customizations: Few implementations will work out of the box so you need to account for both the hard costs of customization (what the vendor charges you for adapting their tool to your needs, whether in flat fees, per-user costs, or per-hour consulting fees) and the soft costs you bear. The more you know about how your integration might work, the more you will be able to negotiate here.
  • Term: How long do you want to stay with this tool? With this company? Obviously, with each new integration comes fresh costs and disruption, but there may be circumstances when you only want the ERP for a fixed term – for example, if you’re expecting your company to be snapped up by and integrated into a larger corporation.
  • Data collection and security: Does your business deal heavily with financial, proprietary, or medical data? You will want assurances from your partner that their processes are compliant with the same rules you are. And also, that they treat your data with the same respect your customers expect.
  • Support: How much are you expecting to rely on your partner through the integration and beyond? Do you want to build support and administration skills and teams inhouse? Or do you expect your partner to provide ongoing support? Make sure your contract expresses your expectations and associated costs.
  • Values: Finally, think about your company’s values and how you want your Enterprise Resource Planning software to demonstrate commitment to the same. Do you have a sustainability policy you expect vendors to sign on to? You can negotiate that too!

The enterprise software contracting process can be long and laborious but that’s because it’s so important. An ERP rollout is expensive and disruptive, but the payoff for a good partner match is also enormous.

When you’re considering your options for Enterprise Resource Planning software, it’s worth doing your homework and negotiating what you can. When it comes time to sign, you’ll be confident your partner is on the same page. Your partner will be ready to support you on a 5-7 year journey to success!

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- About the Author

Picture of Louis Balla
Louis Balla
Louis is the Co-Founder of Anapact and partner at Nuage, a top rated ERP consulting firm based in Venice Beach, California.