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How to renegotiate your ERP contract during a pandemic
ERP consultant Marcus Harris provides advice on renegotiating ERP contracts when the scopes of ERP implementation projects change due to the COVID-19 crisis.
The COVID-19 crisis may result in organizations taking a long, hard look at their ERP contracts.
The disruption caused by the pandemic could lead to disputes between ERP vendors, customers and implementation partners or systems integrators, as projects run into problems or are stopped.
However, the crisis could also present an opportunity for customers to renegotiate their ERP contracts with vendors and partners, and fix issues that may result in project failure or get better terms as they navigate an uncertain future.
In a session at Digital Stratosphere 2020, a virtual conference sponsored by Third Stage Consulting Group, attorney Marcus Harris of the Chicago law firm Taft Stettinius & Hollister LLP provided advice on how customers can work with vendors on ERP contracts. By being proactive, customers can save money on projects and avoid disputes or potential litigation if the project runs into trouble, Harris said.
Harris focuses on drafting and negotiating ERP licenses and SaaS agreements, and has litigated cases stemming from ERP implementation failures. He has also served as in-house counsel for SAP and Infor as well as other ERP vendors.
Start a conversation with your vendor
Marcus Harris: You should have a conversation with your vendor if they're not meeting contractual obligations or they're having problems with delivering services. Talk to the decision-makers to figure out what's going on and use their inability to perform as leverage to renegotiate onerous terms in that agreement. Don't talk to your salesperson, who is incented to sell you additional services or software products; get up to the executive level. Have a heart-to-heart conversation with an executive to discuss your options and the extent that you're being negatively impacted by your contractual provisions.
For example, you may have an enormous amount of shelfware now. Because you have furloughed half of your employees, there has to be some relief. Work with the vendor and come up with creative solutions but deal with it practically from a business perspective. Then make sure that whatever concessions you get are reviewed by your lawyer and incorporated in an amendment to that contract. If you're in the middle of purchasing additional services or software, you have a lot more leverage than you may think you have, so you can push hard for some good contractual terms. This period of uncertainty may be an opportunity [to renegotiate your ERP contract], and if you can get better terms, you should do it.
Make a statement of work
Harris: The statement of work [SOW] is the document that manages the project, and you have to put in as much detail as possible. Your goal with these contractual documents is to carefully manage your relationship with that software vendor, ideally for the lifecycle of a project, but also the lifecycle of how long you use that product. The goal is to be able to pull out a contract that's well drafted, that's thought of all these contingencies and has them in place. It should be able to say [to the vendor], 'I understand that you're disagreeing that you've got to do this, but here's what the contract says and here are three bullet point items that you're supposed to do when this happens.' If you had a reasonably competent legal counsel negotiate your contracts, many of these contingencies should be accounted for, but oftentimes, they're not. This is an excellent opportunity to come in and push the need for a change order and renegotiate because the circumstances have fundamentally changed.
Examine agreements for SaaS service delivery
Harris: There is also risk associated with delivery of cloud services. If you're not currently in a project but have a cloud agreement with a vendor, you also have to account for disruption. It's likely the service levels that you have negotiated with that vendor are not going to be met, so you want to hold the vendor's feet to the fire and examine the obligations the vendor has if it doesn't meet its service levels. Sometimes you don't have very good options, because vendors are adept at [turning] those obligations into 'nice-to-haves' rather than contractual obligations. To the extent that that's in your contract, you may be out of luck, and you've got to realize that the chances that you'll get a service level credit in this environment has gone down significantly.
Use the force majeure clause
Harris: This is an unprecedented scenario, and there's something in contracts called the force majeure clause, which allows vendors and customers to get out of contractual obligations for 'Acts of God.' It's very likely that if there's a potential breach that was caused by COVID, that breach could be excused by the force majeure clause. Whether that's a real excuse or not, it's very fact-intensive and you have to hire an attorney to go through that provision and see if it applies to that scenario.
Find issues to renegotiate
Harris: In the COVID scenario, keep in mind that there are things to renegotiate, like unused modules. If you have half of your workforce furloughed, and that software is now just sitting on the shelf, come up with a creative solution with your vendor to exchange that for something you will actually use. One of the ongoing revenue sources for most software companies, particularly SAP, is maintenance. Right now is a time -- if you're trying to reduce your cost, it's really a good time to try to renegotiate or create some sort of maintenance contract with SAP.
Harris: Make sure that the definition of software is accurate and easily understood. Software is a dynamic thing; it's kind of abstract, and it doesn't make a lot sense to people, so having a finite definition of what you're actually licensing becomes very important. It's got to be comprehensive. For example, define if you are getting updates and bug fixes. The more detail that you put into this, the better off you're going to be.
Get specific on price increases
Harris: You have to put it on the vendor to spell out exactly what kind of price increases they're going to subject you to, and you have to put some parameters around that. If you're going to reduce your user count, you want to have a provision in the contract that allows you to reduce your user count and the amount of money that you're spending on those unused users.
Know how to get out
Harris: Don't sign a contract that you can't get out of. You have to have some language in there that details how you're going to get out of the contract. If you don't have that, you're out of luck. You want to detail as exactly as possible what the contract termination fees are, the termination process, the associated risks and what the vendor can do to you if you terminate early. All of that has to be spelled out with specificity.