By the time a company reaches the ERP contract negotiations stage, its management committee will have already spent months analyzing its business requirements and managing an ERP selection project.
These phases can be grinding. They consumes key IT, operational and administrative personnel. It’s a distraction from the day-to-day business. Usually, by the time the company has narrowed the field to the top two or three contestants, frustration has set in. Management just wants to choose the system and move on to the implementation project.
Management, though, should resist its urge to rush ERP contract negotiations. The total cost of an ERP system – and its ultimate net value – depends heavily on bargaining efforts. Discounts are there to be had. They just have to be found. ERP contract concessions can add up to six even seven-figure savings. And, with the prevalence of cloud-based subscription services agreements and cyber security incidents, companies need to think long and hard about terms and conditions relating to data privacy and security, system performance, and their remedies should things go sideways.
Below are three key tactics to help you extract the most value from your ERP contract negotiations, including timing negotiations, managing vendor expectations, and getting the deal done. Read our post Four Steps to Building A Winning SaaS Contract Negotiations Strategy for tips on how to understand the ERP contracts and build a strong bargaining position.
The Setup: ERP Contract Negotiation Timing
Timing is critical. If a buyer is lucky enough to time its ERP investment with a trough in the ERP sales market, it’ll have an easier time extracting concessions. Buyers that acquire ERP during a boom period will have to work a little harder to make time work in their favor.
Opportune negotiating windows typically open up near the close of a vendor’s reporting period. Here’s why: a vendor includes a buyer’s project in particular quarterly and annual sales projections and has market pressure to make those targets. The vendor then pushes those targets onto its management and sales reps. Sales organization compensation – which is often heavily commission-based – is typically based on meeting those targets.
The key for the buyer, therefore, is to time the negotiations for the end of the reporting period. By pressuring the sales rep’s commissions, the buyer can create urgency, which can translate into favorable concessions.
Managing Vendor Sales Expectations
The buyer should actively manage the vendor’s sales expectations. Vendors use sales expectations – or Total Account Value (TAV) in vendor parlance – to set proposed pricing and sales rep commission levels. As an oversimplified rule-of-thumb: the higher the TAV, the more expensive the system.
The buyer should take it upon itself to make sure that ERP vendors assign low (but reasonable) TAVs. How? By managing the information it divulges. For one, the buyer should seldom disclose its project budget. However, since vendors know that most prospects won’t divulge budget information, they have developed proxy measures based on company size. Most commonly, ERP vendors generate TAVs based on a prospective buyer’s annual revenues and employee count. If your company is privately held, I would recommend keeping this information close to your vest. If there are compelling reasons to divulge this information, I recommend using broad ranges.
Be warned that vendors acquire TAV information from third-party research companies (among others). Here’s how these arrangements work. The research companies offer “free” ERP research to prospective buyers. The buyer fills out a contact form and gets access to the research. The research company then turns around and sells the information contained in your contact form to ERP vendors. And, as you’ve probably guessed, the information sought on the contact forms typically includes questions about company size and project timing – the key inputs for sales projections and TAV.
Getting The ERP Contract Done
If the buyer has timed the negotiations and managed its information, it has done its positioning work. The toughest part – contract negotiations – remains. One reason why getting a good deal is so difficult is because almost all ERP vendors keep their list prices a secret. This makes it almost impossible for buyers to gauge whether or not the vendor’s offer is fair value. Another reason has to do with the complexity of the various contracts that the vendors want the buyer to execute.
Oftentimes, the easiest way to cut through all of this complexity is to hire an experienced ERP negotiator. A good negotiator is one who can extract good dollar value while protecting the buyer’s rights and interests. In an ideal scenario, your negotiator should:
- be independent and impartial
- have good relationships with vendors
- have strong negotiating expertise
- have deep subject-matter expertise
- be a lawyer
Having said that, many companies will still decide to negotiate on their own. For these companies, I recommend that they do their due diligence before sitting down at the bargaining table. This means understanding the terms of the contract and researching best-practices. Talking to peers and participating in online communities are good places to start.
Once the negotiations have concluded, the buyer is ready to move onto the main project: implementation.
