Break Free From ERP Contract Chains: Negotiating Flexibility for the Agile Business

The companies that capably navigate the choppy, unpredictable waters typically lean on their ERP systems to help them do so. In fact, improved agility is a key selling point of ERP.

SAP, for example, makes the following pitch on its website:

Address ups and downs of markets, business cycles, compliance, and talent challenges comprehensively – with SAP ERP.”

Microsoft goes a bit further. It makes the following claims:

“Microsoft Dynamics ERP solutions enable increased agility, so your organization can adapt quickly to change, connect more easily with your customers, and optimize your supply chains—now and in the future.”

Not to be outdone, Epicor claims that its ERP software not only helps its customers become more adaptable, but actually helps them create opportunities out of market swings. Here’s what it says:

“Epicor is ready to help organizations take advantage of the changing economic tide with the new release of its next-generation Enterprise Resource Planning (ERP) suite.”

Let’s put ERP software capabilities to one side, because ERP solutions oftentimes contain the tools to help companies become more adaptable. The real question is whether ERP vendors are truly committed to helping their customers become more agile. If I were to speak for most ERP vendors, I would have no choice but to answer this question with a resounding “NO!”.

If ERP vendors were truly committed to helping their customers improve business agility, they wouldn’t draft ERP contracts in ways that penalize agile activities. And I’m not talking about the right to return ERP licenses in the event of market downturns. Because, in many respects, I can understand the ERP vendors’ positions – why should they give a customer an unlimited right to return a used product? I can’t think of any successful companies that do this.

However, there are other standard ERP contract terms – at least for on-premise software – that challenge an ERP vendor’s credibility when it says it’s committed to its clients’ agility.

The most glaring example is how ERP vendors tie maintenance fee obligations to a block of initially acquired licenses. So, where a company decides to deactivate unused licenses in response to downsizing (for example), it’ll still be on-the-hook for maintenance fees on the deactivated licenses.

To me, this seems like an unfair, inequitable cash-grab. The buyer has no intention of asking the vendor to provide maintenance and support on the deactivated licenses. However, to qualify for maintenance and support on the remaining active licenses, the buyer will have to pay a penalty for a decision it made under different circumstances. And, maintenance and support costs are expensive – a company typically pays between 16% and 22% of license fees each and every year.

So, I wouldn’t blame ERP customers for feeling as though they’ve been slapped across the face by the ERP vendors. In effect, the vendors are penalizing them for having thrown more business their way – by having acquired more licenses than they now need. How does this make any sense? Particularly, since neither the customer nor the vendor has any intention of servicing the deactivated licenses.

It comes down to this: ERP vendors draft standard form ERP contracts in ways that protect their own interests, oftentimes at the expense of their customers’ interests. As a result, customers bear the burden of negotiating amendments to existing or proposed contracts, or finding alternative solutions that give them the flexibility they require.

For businesses that strive for agility across all business dimensions, here are three tips to help you achieve flexibility in your ERP contracts:

  1. Obtain scale-down rights. This is a big one. No matter how well you think you’ve mapped out your ERP requirements, your needs may change. If you’re dealing with on-premise ERP, make sure you won’t be liable for maintenance on deactivated licenses. If you’re dealing with SaaS ERP, make sure that the subscription-based pricing formula can be favorably revised if your business contracts.
  2. Consider ERP in the cloud. Some cloud ERP vendors offer scalable, per user subscription pricing. Others offer subscription pricing based on proxies of company size. Companies might want to look at cloud alternatives to see if the offered flexibility is a better fit. A brief word of caution: companies considering cloud ERP need to weigh a host of factors in addition to scalability.
  3. Consider third-party maintenance. If you’re running a stable, legacy version of SAP or Oracle ERP, your business could save up to 50% by using a third-party maintenance provider such as Rimini Street.

Jonathan Gross is Pemeco Consulting’s Vice President and Corporate Counsel. He helps clients negotiate ERP contracts that drive long-term value by reducing costs, enabling scalability, limiting liability and incentivizing vendor performance. Learn how we can help with your ERP contract negotiation and ERP selection projects. Or, contact our ERP Experts.

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