The process of choosing an ERP system isn’t over until the contract is signed, and that shouldn’t happen until you’ve negotiated the best deal you can. For most businesses, ERP is a long-term capital investment, and it’s important to get the best ROI possible. Careful negotiations will help you avoid paying too much up front as well as down the road when the nuances of the contract start to reveal themselves.
An ERP contract includes many factors, for both the software itself as well as the implementation services. In best-of-breed scenarios these factors can multiply, especially in determining which party is responsible for each aspect of the implementation. The most common areas of consideration include the number and level of user licenses required, initial configuration and customization levels, first year versus on-going maintenance and escalation clauses, as well as training. Most ERP products are designed in a modular fashion, which means you can (and should) purchase only the features your business requires. Prior to purchase, you’ll also need to decide key points, like whether to choose a cloud-based or on-premises ERP platform, as many providers are now offering both.
Negotiating an ERP contract can be a bit overwhelming, but with a little knowledge and planning, you can navigate the process successfully. Here are 5 tips to help you negotiate a killer ERP deal:
1. Create a comprehensive RFP before beginning
Before asking anyone for a quote, create a comprehensive request for proposal (RFP) that details your business requirements. Like purchasing a car, where you don’t want to walk onto the lot and ask what cars are available, you need to outline your goals and purchase criteria before requesting an ERP quote. If you are considering multiple vendors, send the RFP to your short-listed vendors to get comparable quotes. Otherwise, if you ask the vendors to quote you what THEY think you need, you will get varied functionality and will become very difficult to compare. Even if you believe you know the software you want to purchase, it is considered best-practice to obtain a couple comparable quotes to be used for negotiation leverage. If you need help in creating a solid RFP, reach out to your independent ERP consulting firm for guidance.
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2. Assume the first price quoted is only the starting point
The first price you’ll get is most likely the retail rate. If you are a larger organization you may see a percentage discount already applied, but keep in mind the goals of the software provider extend beyond simply selling you the software. A few additional points to remember as you negotiate:
Anticipate these factors, and know that negotiating the contract is an important and expected part of the process. Also, be sure to allocate sufficient time for the negotiations phase. Generally speaking, the longer you can hold off purchasing the better deal you will get. If you run into a stumbling block, you can even pause negotiations while you consider options. That can also help reinforce to the vendor that this is not a done deal and that competitors are still in the running. This works similarly to leaving a silence when interviewing – the other side will likely jump in and fill it.
3. Remember it’s not just about the software
There are many items in the contract besides the price of the software that can be negotiated. As mentioned earlier, on-going maintenance and support are a significant piece of your ERP investment. Many vendors will not be able to budge on annual maintenance percentage, but you can still negotiate for caps or delays on maintenance escalation and level of support. You’ll may also consider negotiating for discounted future license or module purchase, training, professional services, and the list goes on. There are many factors besides software license fees which all figure into your total cost of ownership (TCO). Also, don’t be swayed by free add-ons you don’t really need. Vendors may throw them in to make you think you’re getting a better deal, but meeting your core business requirements is what will ultimately bring the most value.
4. Keep shopping around
If a vendor thinks they’re the only option you’re considering, you’ll have a lot less negotiating power. Continue to evaluate your other ERP options, and make sure your first-choice vendor knows you’re still considering other solutions. Ensure your program manager maintains control over the process and internal team so that no one inadvertently leaks information about your ERP vendor preferences.
5. Put functionality before price
When negotiating an ERP contract, it’s easy to get carried away with achieving the lowest price, but that should not be the determining factor. Focus on obtaining an ERP solution that delivers the features you need first, and negotiate price second. Often there will be several solutions that have unique features beyond your critical requirements. In this case you may consider trading features for price, as long as the base requirements in your RFP are still met.
If you’re not confident about negotiating what can be a daunting process or you get stuck along the way, consider calling in help. Look for a truly independent firm that doesn’t have ties to any vendor and doesn’t specialize in a particular ERP solution. This will enable them to work with you in an unbiased manner with your best interests put first. When choosing a consulting partner, be sure to find out how long your prospect has been in the ERP consulting business. More experience will likely mean greater negotiating power on your side.
While you will have to pay a fee for these services, the value you receive by landing a better contract will more than cover the cost. ERP is an effective tool that can help your company grow and prosper, and it’s well worth the time and effort it takes to negotiate the best deal.