COM R. Anderson, J. Disbrow

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1 R. Anderson, J. Disbrow Research Note 1 May 2003 Commentary SMBs: Tips for Dealing With Large ERP Vendors Enterprise resource planning vendors are beginning to look at small and midsize businesses for new sources of revenue. However, many SMBs are not prepared to deal with these large vendors. Large enterprise resource planning (ERP) vendors, in search of new opportunities, have begun targeting small and midsize businesses (SMBs) with solutions tailored specifically to meet their requirements: lower pricing, fast deployment and easier maintenance. However, SMBs attracted to ERP vendors such as SAP, PeopleSoft and Oracle are often unprepared to manage the contractual negotiations required for a successful deal. Despite this challenge, SMBs can still develop positive and constructive contractual relationships with ERP vendors. To do so, however, they must first prepare themselves by developing negotiation and contract management skills and principles. Vendor Sales Tactics Large ERP vendors are known for their sophisticated sales processes. They prefer to deal with the highest-level person available in the organization, generally at a "CXO" level. Their sales presentations tend to be professional and well done, but sometimes are a bit overwhelming to SMBs. Large ERP vendors will present solutions and suites of products as the answer to all of an organization's problems. Typically, these venders start out with artificially inflated software pricing, as much as 20 percent over their negotiated price, holding back levels of discounts as incentives to close the deal. Vendors will also present attractive offers to enterprises just before their fiscal or quarter end in an attempt to complete the deal at the last minute. Requests for Proposals SMBs should prepare a request for proposal (RFP) if they plan to license any software that will play an important part in their organization. This is the most effective way to gather requirements within the enterprise, establish measurement criteria relative to acceptable performance, and ensure credible competition for their procurement. However, in response to an SMB's RFP, many large ERP vendors already have templates in place to generate a response. Although the templates are usually detailed and professional, they can sometimes be overwhelming for SMBs to review. SMBs must look for specific responses that fit their specific needs and not get bogged down in the reams of superfluous information that is often part these proposals. Gartner 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Buy Only What You Need For many large ERP vendors, selling a solution or suite of products is the goal. It is a challenge for SMBs to perform an "apples to apples" comparison of different vendor's suites or solutions. The functionality being presented may also be more than what SMBs need. SMBs should ensure that bids only include the functionality required by their business. Often, the minimum software "solution" provides functionality that is not needed (and too expensive). Most vendors have come up with better scaling to enable the pricing to be in line with SMB budgets, but often these specially packaged solutions haven't been marketed long enough to gauge where problems and constraints may arise. Gartner has witnessed proposals where an ERP vendor underestimates the actual requirements of an organization just to present a competitive price. For example, the number of user licenses may be underestimated to present a price within a reasonable estimate of what that organization can afford to pay. It is important for SMBs to be very clear and keep the vendor focused on the functionality required. Accelerated Solutions Most ERP vendors offer accelerated solution and implementation programs that are specifically targeted at SMBs. Accelerated ERP contracts can be different from traditional ERP agreements. On the surface, the terms and conditions of these contracts appear to be simple: an acceptable, working solution is provided for a fixed price in a fixed time frame. Most often, the vendor is basing its fixed price on the time it will take to implement the solution. Typically, little room is provided for application customization. For SMBs with few pre-established business applications and formal processes, this type of software and deployment contract can be attractive. The trade-off when using this approach is that SMBs must make their processes conform to the ERP vendor's interpretation of best practices not much of a factor if processes are not formalized or are outdated to begin with. However, SMBs that have internal and external applications that must be maintained and interfaced with, or have unique processes that deliver competitive differentiation, must scrutinize the contracts with more diligence. SMBs should ensure that the vendor demonstrates the solution in front of the line-of-business personnel that will be responsible for the process. Processes that will require customization or modification should be identified so they can be reflected in the contract. Accelerated ERP packages offer full functionality, but additional features and integration cost money; determining how much is necessary is one of the key steps required in planning a successful and affordable implementation. Negotiation Skills: Advantage Vendor Most Tier 1 software vendors have experienced negotiators on their staff with negotiating tactics that make it hard to get concessions. An SMB often does not have the same level of negotiating expertise available within its organization. More often the CFO, by default, becomes the primary negotiator for the SMB and quickly becomes immersed in details extending well beyond accounting. Although traditional midmarket ERP providers may be willing to make extensive changes to their license agreement or use the customer's contract, large ERP vendors typically are very reluctant to use any contract except for their own. The goal of the ERP vendors is to make as few changes as necessary to win the deal. Also, the vendor might not agree to negotiate a software license agreement until it has already won the deal effectively eroding the SMB's leverage before negotiations have even begun. SMBs should realize that their ability to negotiate the "best deal" will be contingent on the maintenance of competition throughout the procurement process. Frustration often arises when the SMB negotiator is authorized to make contract concessions, while the vendor representative involved in contract talks does not have the same authority. Vendor representatives have to continually consult and seek approval for changes at a higher level in their organization (akin to car salespeople having to talk to their manager 1 May

3 prior to making a deal a tactic used to drag out and reduce the negotiating leverage of their customer). One tactic SMBs can use to counteract this is to send a list of requested changes to the vendor and require it to respond directly in writing. A "no" or "not available" response should not be acceptable. A full explanation should be included for any change that is not acceptable to the vendor. Tactics and Suggestions SMBs should recognize that getting the "best deal" doesn't always equate to "the lowest price." Negotiating the final terms of ERP contracts requires a balancing act between being fair, flexible and cautious. SMBs should negotiate a realistic price upfront that accurately reflects the delivery of a solution that meets their needs without depriving the ERP vendor of an honest profit. The ERP contract should be flexible enough to accommodate surprises, such as unplanned requirements overlooked in the RFP or the need for additional training, while being comprehensive enough for use as an implementation guideline. SMBs can help level the playing field by seeking outside expertise familiar with ERP implementations and contract law, and that have no history or plans for doing business with the vendor in question. The following objectives can help guide the ERP negotiation process: Document a mutual understanding and acceptance of what is being purchased and how it will be implemented. Negotiate the best software and services at the lowest price. Develop licensing and service agreements that define the customer-vendor relationship over the solution life cycle. Choose the vendor that provides the best overall solution and value to the organization. SMBs can improve their chances of success by paying attention to the following negotiating guidelines and suggestions that address contractual implications before, during and after the ERP deal is struck. Prior to Negotiations Clearly define "must-have" requirements, and focus on assessing the vendor's ability to fulfill only those requirements before beginning negotiations. Check vendor references (not only functionality and service) by specifically asking about adherence record with respect to contract terms and conditions. Look for pending lawsuits that might reflect past contractual disputes and check to see how the dispute was settled to get an indication of the vendor's propensity for litigation. Perform intelligence on your top two or three vendor picks. Buying an ERP solution from a vendor that is coming off a weak quarter or that is trying to break into your vertical industry can work to your advantage relative to gaining concessions or discounted pricing. Most large ERP vendors use value-added resellers (VARs) and other consultancies to implement their deployments in the SMB market. If the VAR is the primary contact, then an equal amount of due diligence should be performed to evaluate it. The contract should ensure mutual discipline and responsibility by both the vendor and the VAR. SMBs should recognize that contracting with multiple parties for an ERP system can lead to finger-pointing later on if roles, responsibilities and mutual discipline and accountability are not ascertained in the contract. SMBs should seek to have actual software license and maintenance agreements signed by the vendor, so that if the VAR goes out of business or cannot deliver, the vendor will stand behind the contract. 1 May

4 Include the vendor's RFP responses as part of the contract. The RFP is an integral document that ensures both parties agree on the goals to be achieved. If there are any unexpected changes or unachievable objectives down the road, this document can be cited and used as reference. During Implementation Don't allow an ERP vendor or VAR to start work before the contract is signed (it happens often). Without a contract in place you have few rights, will lose leverage and will have a mess sorting things out later if things go wrong. Negotiate payments that are tied to deliverables and milestones in the project. Use hold-back and escrow mechanisms (for example, 10 percent to 20 percent) as leverage and to keep the vendor on target whenever possible. Milestone achievements should go beyond mere delivery to acceptance of the deliverable. Negotiate for the degree and quality of skills and, if known, the specific individuals who will be used to deliver the ERP implementation. This will help ensure that good team members are not replaced by untrained and inexperienced personnel midway through the project. Include conditions that give each side the right to suggest to the other side that a key person is standing in the way of success, with appropriate measures for addressing this issue. Ensure that acceptance, rejection and redelivery processes are clearly defined in the contract. With all the effort involved in quick ERP deployments, training is often overlooked and underemphasized. During contract negotiations SMBs should request a strategy (type, level and amount of training) for training technical staff and end users. Often, this training is found to be insufficient. SMBs should negotiate for training terms that ensure the success of the project, including discounted rates for startup-specific and custom training during the first year of the implementation. Large ERP vendors often include provisions that state that if a company doesn't accept or reject customizations within 45 or 60 days, they are automatically accepted. Ensure the contract states specifically that the customization is not accepted until it is functioning properly, regardless of time frame. Future Contingencies Ensure that software license rights can be transferred from one site, operating system or platform to another. There are instances of companies that could not move their headquarters because the contract prohibited the software license to be relocated without renegotiating a new license. Ensure ERP software maintenance fees begin after the software has been installed. Attempt to cap future-year maintenance increases that recognize the effects of inflation, such as what is indicated in the Consumer Price Index. Negotiate clauses that address what would happen if the company suddenly downsized or decided to reduce the use of a particular solution. Prepare for vendor mergers. Although larger ERP vendors are obviously less prone to this, it is wise to ensure that contract terms will not change if the software vendor is acquired or merges with another company. Use current negotiations to get better prices on future software purchases. You may be able to get a deal for additional modules and seats purchased within the next five years at a prespecified discount or at the current list price. 1 May

5 Bottom Line: In negotiating ERP deals with large enterprise vendors, it is key to remember that prior to the purchase, time is on the side of the buyer. Despite the pressure to "get it done," SMBs should take their time in their efforts to get the best deal now and in the future. Business leaders chosen to negotiate ERP deals should use all available resources, both internal and external, to maintain their leverage throughout the contract negotiation. By understanding vendor tactics and using proper negotiating guidelines, SMBs can ensure they receive a good deal on ERP solutions and deployments even when dealing with large ERP vendors. 1 May