As we noted in our first article on artificial intelligence in construction, artificial intelligence (AI) is a broad term that generally refers to technology that uses algorithms to process data and simulate human intelligence. In our first two articles, we discussed machine learning and then image recognition and sensors-on-site. In this article, we discuss two more AI-related topics: (1) building information modeling; and (2) smart contracts.

To read the full law bulletin authored by Cincinnati partner Joe Cleves, Jr., click here.

Despite COVID-19 shutdowns, re-openings, and partial re-closings in some parts of the state, Illinois manufacturers of all sizes are grappling with serious management decisions. Many halted the implementation of planned installations or upgrades to an Enterprise Resource Planning (ERP) software system or deferred part of their project when the pandemic began. Now, they are trying to decide whether to proceed or wait until their business returns to something approaching “normal” – whatever that might be once the virus recedes.

It is a huge decision with managerial, financial, operational, and employee relations implications that ripple throughout an organization.

For large manufacturers headquartered in Illinois or those that have operations in the state, re-starting or proceeding with a digital transformation in the current environment might also attract the attention of shareholders, Wall Street, business reporters, and even the SEC.

For smaller companies with sales between $50 million and $100 million, one or two factories and a warehouse, a complex supply chain, and perhaps a few hundred employees, the effect of a wrong decision might be the difference between thriving and barely surviving.

Digital Reopening Strategy

A recent report from McKinsey & Co. suggests that a corporate reopening strategy needs to include shifting IT and technology to a restart mode. Among the key reasons is that accelerating digital transformations will ensure that they reflect the needs of customers, employees, and the entire supply chain.

McKinsey writes, “The IT infrastructure must be relevant, secure and able to meet emerging (and changing) expectations … Executives will need to draw up a business-led technology road map to accelerate their digital transformation with urgency.”

This directly affects ERP software systems during and after COVID-19 and is why Illinois manufacturers should consider fast-tracking projects now.

Every technology project must reduce a company’s costs during and after COVID-19. Yet investments in the right ERP technology can contribute significantly to growth during the recession, which shows no signs of ending soon.

The key is ensuring that the project is relevant to an organization’s digital ecosystem in whatever comes during and after the pandemic.

The place for manufacturers to begin is by reviewing their existing contract or, for a new project that halted when COVID-19 hit, reviewing one still waiting to be signed.

If the ERP contract is negotiated and drafted – or redrafted – properly, and performance of the vendor and integrator is monitored closely, once the system comes online it should help enable a manufacturer to restart successfully and cost-effectively.

Regardless of its size, there are five key points a company needs to keep in mind as it considers fast-tracking at least portions of a new or upgraded ERP software system.

1 – Your business has likely changed. The “next normal” will require another major change as dramatic as the one when the lockdowns took effect. ERP users will continue to face a raft of unknowns that will not be clear for a while. The user’s operation may be functioning in one location but not in another. Supply chains will continue to be disrupted. Access to markets may be restricted.

2 – Recalibrate your ERP strategy. For most manufacturers with an ERP software system, what was a solid technology strategy in February may not be practical several months later. After the broad corporate strategy and direction is recalibrated, do the same with the ERP strategy, because it may need to be adjusted. This does not mean that an integration needs to be further delayed. Rather, it might be necessary to change the requirements that led to upgrading a legacy system or installing a new one. ERP vendors and integrators are much more likely to be willing to renegotiate the terms of a contract because they are even more vulnerable than many of their customers.

3 – Build a new integration roadmap. A major reason so many ERP integrations end up in a lengthy court battle is that the user did not start with a clear idea of the implementation process and how milestones would be measured and monitored. Not doing this has always been an expensive mistake, but in the time of COVID-19, it can lead to disaster for the company, with an impact on not just operations but also the bottom line. Whether or not you used a consultant at the beginning of the project, retaining one now is critical to an ERP project at this point.

4 – Include a change management initiative. Everyone has been affected by the pandemic, whether by wearing masks and following stay-at-home orders or because their pay was reduced and their job redefined. Just as senior management needs to work closely with IT to monitor the progress of an ERP project shifting back into high-gear, they also need to ensure HR is ready to help create a workable change management program. Many employees are still in shock from the effect of the pandemic on their daily lives. Without an effective change management program, employees are likely to revert to form quickly, blocking any significant shift in how they do their jobs.

5 – Management must control the change as they restart ERP projects. Despite the many unknowns over the several months, senior management can find ways to control effectively restarting ERP software system projects. Doing so requires understanding how the project will fit into Kimberling’s “next normal” and what the system needs to deliver now, however the business has had to change.

Restart ERP With Caution

A problem that has plagued many ERP projects is a slow decision-making process and seeing ERP as a technology solution rather than a management tool.

Right now, slow decision-making is the same as not deciding. A plan-ahead team is needed to identify and work through potential obstacles.

One way to sidestep problems is to work with counsel to renegotiate contract provisions that need reconfiguring to today’s reality. Vendors and integrators are in a vulnerable position, especially regarding specifics on deliverables. The responsibilities of the user, the vendor, and the integrators need to be very precise. Spell out what work will be subcontracted, and which party will be responsible for third-party performance.

For organizations just starting out on an ERP project, executives are contending with not just a transformation of the business, but also a type of contract they have not likely previously negotiated. Contracts for ERP software systems are nothing like the loan documents, sales agreements, leases, or employment offers that are typical of what businesses regularly review.

It is imperative to proceed with caution.

We have seen how large, sophisticated organizations with considerable resources can run into problems with their ERP projects, starting with the contracts they sign. Smaller manufacturers in Illinois need to be even more careful as they proceed with their efforts.

This article was originally published in the Fourth Quarter 2020 issue of The Illinois Manufacturer.

 

In this article, we continue our series on artificial intelligence (AI) in construction. Here we address image recognition and sensors-on-site. This technology uses cameras and other sensors to assess vast quantities of video, pictures, and other recorded conditions from worksites. Such technology has the potential to: (1) monitor worksite conditions for safety risks and hazards; (2) enhance equipment and material management, boosting productivity; and (3) improve worker safety by identifying unsafe behavior to inform future training priorities.

To read the full law bulletin authored by Cincinnati partner Joseph Cleves, Jr. click here.

Since their inception, ERP software systems have historically been used almost entirely by large organizations: major corporations, financial institutions, federal and state government agencies, and similar behemoths with complex structures and massive operations.

Over the last few decades, ERP vendors have focused aggressively on the small to medium-sized business market. Today, a growing number of smaller businesses (stand-alone manufacturers with roughly $50-100 million in sales) have implemented ERP projects.

This shift marks a sea change in ERP users.

It also means that executives and in-house counsel are contending with not just a transformation of the business but a type of contract they’ve not had to previously negotiate. Contracts for ERP software systems are nothing like the loan documents, sales agreements, leases, or employment offers typical of what smaller businesses review regularly.

Here are six mistakes smaller businesses should avoid when venturing into an ERP software system effort:

1 – Seeing ERP as a technology tool. It isn’t. Viewed correctly, ERP is a management tool that uses technology to more efficiently run a company. Understanding this has widespread implications – from selecting a vendor and its product, to deciding which integrator to choose, and determining how the information will be used once the system goes live.

2 – Not planning for scalability. Small businesses plan their future growth. Likewise, they need to plan how their ERP software system will be scalable as the company grows. This needs to be factored into how business processes and requirements will take them into the future, rather than automating current business processes. If this is not part of the decision process, a company may find itself having to replace its entire ERP software system three to five years down the line, a major undertaking and a huge expense that can be avoided.

3 – The contract is straightforward. None of them are. An ERP contract may seem forthright, but since the vendor and integrator wrote it, it favors them. Many of the clauses need to be negotiated and rewritten, including those that spell out which side is responsible for which activity, who is authorized to approve change orders, and other provisions such as paying for software licenses (which may not be needed).

4 – The vendor and integrator does it all. They won’t, even though many of them will tell you that they will. Starting up with ERP is nothing like ordering a new machine for the factory and then paying little attention until it is delivered and installed. To avoid cost overruns and delayed timelines, senior management must stay actively involved in every aspect of the project.

5 – It will be easy. Implementations are never easy. ERP software systems are incredibly complex and integrating them with existing systems is a major undertaking – for large and small businesses alike. The challenges that plague a Fortune 100 company during an implementation might be on a smaller scale for a smaller business, but it is still highly disruptive.

6 – Forgetting about the users. All change is hard for employees. Launching ERP will change the way many workers do their jobs. People may not be ready for the discipline required by ERP systems. It becomes vital to plan for change management. Critical project activities such as training, communications, and organizational readiness are vitally important.

As many businesses reopen, projects that were on to-do lists and put on hold during the COVID-19 lockdowns are being reviewed and renewed. With extensive experience negotiating, drafting, and litigating ERP contracts, Taft’s Technology lawyers can help you identify potential problems before they arise.

Failed ERP software system implementations and integrations happen frequently and the problems are legion. However, there are ways that organizations can avoid their own failures. In a recent Taft Technology Insights post, we discussed how to avoid a failure if restarting a deferred integration during COVID-19.

We are frequently retained by companies whose projects are in such disarray that vendor or integrator relationships are beyond repair and disputes are heading to court. We spend a considerable amount of time reviewing contracts, emails, reports, and memos, and speaking with key figures as part of negotiating a settlement or preparing a court argument. Over the years, we have seen patterns emerge where the reasons behind the failure of the ERP software system could have been uncovered and corrected long before reaching the point of no return.

While not all ERP failures can be avoided, many can be salvaged if the user takes certain steps – often beginning when the project is first being considered.

Mitigating Risks of ERP Failure

Along with working with an independent, technology-agnostic consultant from the outset, a user can do several things internally to mitigate risks or salvage an implementation that is in trouble.

The Boy Scouts’ “be prepared” motto is applicable for ERP projects. The ERP contract should require weekly or monthly project status reports, and include a senior-level contact at the integrator who isn’t part of the project team to review both progress and challenges.

Beyond this, the user should consider having a “go team” on standby to swoop in at the first sign of a problem. The team would conduct an assessment to identify the likely root cause of the issue. Members of the group must be familiar with ERP and the business goal of the new installation or upgrade and might include people from the user’s IT department, plus finance and operations.

Often, the root cause of the problem can be discovered by the go team and fixed by the integrator.

If the first intervention is unsuccessful, it may be time to bring in a consultant to review the project and determine steps to right side the implementation. When an ERP project derails because the actual integration plan bore little resemblance to the project plan, it is sometimes the result of senior management’s inattention. Whatever the cause, it is critical to determine if the project can be saved. Efforts spent on righting the project will cost less and have less impact on the business than starting over with a new software product or litigating the dispute in court.

ERP Misaligned with Requirements

In preparation for filing a failed ERP implementation lawsuit, we typically conduct an extensive review of project documentation. Sometimes the project documentation does not align with the business requirements of the ERP software system. The requirements should be written into the contract and the project plan, so if a dispute arises it becomes part of the legal agreement between a user, vendor, and integrator.

When this information is missing or inadequate, it triggers a variety of issues. As one example, there are occasions when we discover that the integrator staffed a project with unqualified individuals.

Whenever we negotiate and draft a contract, we try include a provision that allows for the approval and replacement of consultants.

Not Foolproof

Obviously, there is no way to foolproof an ERP software system against failures. It is an incredibly complicated management tool tying together suppliers, factories, inventory and warehouses, invoicing and payments, and employee information. With so many moving parts that all need to work together smoothly, it is not uncommon for something to go wrong.

It is incumbent upon users to not only draft a solid contract but also to draft contingency plans that allow a successful intervention as quickly as possible when an issue arises.

Taft’s Technology lawyers have extensive experience negotiating and drafting ERP contracts with vendors and integrators, and litigating disputes when they arise. Whether you are launching a new ERP initiative, upgrading a legacy system, restarting a project delayed due to COVID-19, or resolving a dispute with a vendor or integrator, we can help.

If ERP software system integrators were as smooth at integrating new or upgraded projects as they are at selling, it is likely they would be involved in fewer court disputes with users. Often, disputes happen because senior management hands off responsibility for the effort to the integrator rather than owning it as an integral part of management’s job.

In reality, people in charge of an organization cannot delegate authority for an ERP project to either the vendor or an integrator. Interests are usually different. Ensuring this does not happen should start when the project is in its inception phase, before vendors demo the product or submit a proposal.

This carries through to the contract negotiation stage, while the software is being customized and when the integrator starts to mesh ERP with other business systems.

Avoiding Integrator’s Tricks

The development and launch of an ERP software system should be owned by the executive suite, similar to a launch of a new product line.

Deciding to proceed or restart a digital transformation – whether during or after COVID-19 – is a huge effort. Top executives – even the board, in some instances – must set the pace, tone, and boundaries of the project.

This includes riding herd on the integrator.

Indeed, a survey of ERP users done by Third Stage Consulting found that managing deficiencies with the system integrator is one of the most common problems that organizations have as they strive to make the system operational and bring it online.

During the sales cycle, integrators will assure a user they will be partners on the project. The integrator’s main job is to make the system work properly. But an undisclosed part of its job – and compensation – is to upsell additional services to the user during the project. So, it is incumbent on the user to control the integrator closely.

The starting place for controlling an integrator is to specify in the contract with Accenture, Oracle, SAP (or any other outfit) precisely what they are obligated to do. There should be a number of detailed provisions:

  • Spell out who has the authority inside the user’s company to approve change orders.
  • Name the third-party contractors that will be used by the integrator, and include in the contract their experience with both the ERP software system being integrated and the user’s specific type of business, and how they will be managed.
  • If practical, include the names of specific people who will work on the project both at the integrator and third parties, along with how the user will be notified if there are personnel changes at any of the service providers.
  • Require monthly or quarterly reports on both the progress that has been made, and exceptions to either the contractual timeline or what was stated in the integrator’s RFP response.
  • Provide contact information for a designated, senior-level person at the integrator with whom the user can discuss everything from progress to resolving problems. This person should be an executive, not a project manager or account person who may be motivated to protect their position with their employer.
  • Include an ”out” provision that lets you fire the integrator if they are not meeting certain, defined obligations or causing issues with the project.

If an integrator recommends buying additional software licenses, ask it to specify in writing why they are needed, how they will enhance the project, and when they will be used. Vendors and ERP software system integrators are notorious for recommending license add-ons that may not be needed for years, if at all. But they receive fees for all of that time.

Integrator’s Secret Sauce

Many integrators do not really want you to know – or understand – how they make their money. The best way to protect yourself and your organization is to be aware of how they work, and to have a tightly written contract.

While this should be a last resort, do not be afraid to fire your integrator if discussions fail to resolve a major conflict. Doing so is never easy, but it is easier than suffering a failed software implementation.

If you have questions or concerns about an integrator, or the contract it wants you to sign, feel free to call or email Taft’s Technology team. We will be pleased to share what we know and help you through the process.

Artificial Intelligence (AI) is a broad term that generally refers to technology that uses algorithms to process data and simulate human intelligence. Examples of AI technology include machine learning, image recognition and sensors-on-site, building information modeling (BIM), and “smart contracts” stored on a blockchain-based platform. This technology can be used in the construction industry by way of design, operations and asset management, and construction itself. Construction leaders interested in staying ahead of the curve should consider its advantages, and the legal implications.

To read the full law bulletin authored by Cincinnati partner Joseph Cleves, Jr., click here.

When the integration and implementation of an ERP software system starts going off the rails and all sides begin pointing fingers at each other, often many of the user’s fingers point at the vendor’s project manager.

In a way, this is understandable, even before the root causes behind the looming failure are known. The project manager is supposedly in charge, ensuring that all of the pieces fit together, and it is his or her job to make the system work smoothly.

Often, it turns out the project manager is at least partially responsible.

Yet, if the user’s senior executives are paying attention as the ERP project unfolds, they should be able to see issues with the project manager before there is a crisis. Almost always, clear signs emerge that enable a user to spot an underperforming project manager well in advance of massive problems that could threaten the entire integration and implementation.

For users, there are strategies for ensuring that your project manager is kept under control.

Where the Buck Stops

The key thing to remember is that, as the user, you will literally own the project and so you must also “own” the integration.

Often, in successful ERP implementations, alongside the vendor’s project manager is a company-assigned executive sponsor. Typically, this is a senior executive who has ready access to the CIO, CEO, CFO, or other top-level decision maker.

The executive sponsor should understand the business case for the ERP software system, be aware of how it should fit into the company’s operation, and know when a problem is beginning to appear. In many instances, this person works hand in glove with an outside consultant in keeping tabs on the progress. The person in this role also helps ensure that project tasks, budgets, and timelines are being met.

We have seen instances where a CIO was fired when a project went astray. Yet nobody senior to the user was heavily involved in the implementation, so the CIO became a scapegoat because the business never truly “owned” the project.

Controlling the Project Manager

One of the things often discovered in ERP contract disputes is a woeful lack of documentation. Mediocre project managers are notorious for neglecting to create and work from detailed project documentation.

While the integrator should be contractually obligated to provide much of the documentation, the project manager is responsible for ensuring that the plan is updated as it proceeds (with meaningful information upon which the customer can act), and the deliverables are being met.

Without documentation, if the vendor has to install a substitute project manager, the new person won’t be able to see the exact status of the project. Documentation enables them to be able to start working quickly.

But the larger purpose of proper documentation is that it provides everybody access to the metrics that will reveal whether the integration and implementation are meeting all of the requirements and expectations set out for the system.

Everyone in a company is busy – especially if you are still working from home during COVID-19. Requiring the project manager to provide regular updates to both the program director and CIO is an important tool in keeping direct control over the entire project.

Remember that the vendor’s project manager may have a vested interest in not reporting issues to a user. They may assume they can correct it before anybody notices, and their own job, salary, and bonus might be on the line. As author Sinclair Lewis once said, “It is hard to get a man to see a different point of view when his salary depends on him not seeing it.”

Shortstopping a Failing Project Manager

It is not uncommon for a project manager to be inadequate for the job.

When we negotiate an ERP contract for a client, we strive to include who will be assigned, their qualifications for the task, and their experience with the user’s industry.

More often, though, project managers are overwhelmed. They are tracking countless moving pieces and dealing with a range of personalities. Step in quickly, uncover the reason there is a problem, offer to provide additional internal support if that will ease the problem, and get the project manager and integration back on track.

If that still does not work, demand that the project manager be replaced.

Be sure to document the issues, the conversations, and the outcome. It will help you if the project falls apart and mediation or a trial becomes necessary.

Taft partners Scot Ganow and Phil Schenkenberg will be featured speakers for the “Cybersecurity for In-house Legal Counsel” Seminar on Oct. 26. The virtual seminar will help in-house counsel understand the legal constructs and terminology widely used within the cybersecurity space, and to provide practical ways they can be more responsive and efficient when cyber issues arise. Taft is a sponsor of the event.

Ganow will present “Legal Overview and Key Cyber Risks for Businesses,” which covers the laws, regulations, standards, and best practices affecting not only an organization’s obligations but its opportunities with its most powerful asset:  Its Data.

Schenkenberg will moderate the panel discussion “Governance and Working Relationship Considerations in Privacy and Data Security.” The panel will explore how governance structures and relationship building within the C-suite can drive success in meeting privacy and security goals.

Register to attend here.

Many organizations are looking at ways to restart ERP projects that were deferred when the pandemic forced widespread lockdowns. Whether a company was in the midst of upgrading a legacy system or had been on the verge of moving forward on their first ERP software system, we suggested five ways senior executives can fast-track an ERP transformation safely and cost-effectively during the COVID-19 pandemic while warding off a potential “train wreck” as they recalculate and recalibrate their overall technology strategy.

At the same time, it is important for users to recognize that both vendors and integrators of ERP software systems are in a vulnerable position right now. They have been as hard hit by the shutdowns and recession as nearly every other business. Perhaps more than at any time, users are holding a great hand of cards in terms of their ability to negotiate or renegotiate favorable terms.

There are six things to understand when dealing with vendors and integrators.

1 – Know their weak points. You will be talking with a sales team. They are under enormous pressure from their organization right now to get you to sign a deal. Corporate profits for the year are on the line as is the bonus package each member of the team will get when you pick up a pen to ink the deal.

The ERP business is incredibly competitive when times are good; today, in the midst of a pandemic and steep recession they are likely to make reasonable concessions you demand. In some ways, it is like buying a new car. When the salesperson says, “I do not think that my manager will approve your offer” and you get up to leave the showroom, they’ll do what it takes to keep you from going to another dealer.

2 – Don’t take anything at face value. Sales teams are notorious for saying what they think a potential buyer wants to hear. They will assure you that they know all about your industry or sector even if their experience may be scant. The slick demonstration put on during the sales process may not be how the product will actually work when it goes live. Many of the software disputes we have litigated over the years had their origins in a vendor or integrator making misrepresentations during the sales process and demonstrating capabilities that did not quite work as demonstrated.

If they say it, ask them to write it.

This is why when we negotiate an ERP contract, we always strive to include all of the sales material as an attachment to the agreement. It adds weight to a user’s argument that what had been promised did not get delivered when the ERP software system failed to meet expectations.

3 – Plan for higher costs. In our long career of working with ERP from both sides of the table, we have come to know that the vast majority of the integrations go over the original budget. Sometimes, it happens because, as the system is being developed and integrated, the user wants additional features or components added. But often it is the result of a vendor or integrator “upselling” things that aren’t actually necessary such as licenses for software enhancements that may not be needed for several years.

Budget overruns are commonplace as ERP software systems are integrated. To prevent surprises, add anywhere from 10-percent to 25-percent of the price quoted for the project. No executive or shareholder will be upset if the budget is not spent.

We have seen many organizations completing a project and wonder why it cost so much more than anybody thought it would.

4 – Plan for longer integration. Just as many projects cost more than was planned for at the outset, nearly as many take much longer to complete than is anticipated – sometimes years longer.

Each delayed integration has its own unique reasons behind it: Management not knowing up-front precisely what it wanted the ERP software system to do so specifications were changed; the integrator not possessing sufficient experience in and knowledge of a user’s business’ circumstances that were not planned for sufficiently in advance.

By planning that a system will take X number of months longer than expected, there will be great joy if the system is switched on ahead of schedule.

5 – Know who’s in charge of what. Every contract for an ERP software system must detail who will be responsible for what at each stage of the project. Specify who is authorized to make change orders and that the changes will be documented in writing.

Often, an integrator will subcontract part of the project to one or more third parties. Ensure that the master contract specifies what third party contractors will do, their experience with not just the software but integrating ERP in the user’s industry or sector, how they will be managed and supervised, and who is responsible for their actions (or omissions).

Many court battles hinge on a version of “he said–she said” arguments. Clearly detailing where responsibility lies for each phase of a project can eliminate many of these disputes.

6 – Expect the unexpected. The adage “what can go wrong, will go wrong” is not a bad way of thinking about an ERP project. Creating an integration plan around a worst-case scenario reduces the possibility of an unexpected dragon rearing its head on the horizon, breathing financial, operational, or technological fire.

It is highly unlikely that a vendor or integrator will tell you in advance, “… and here are all of the ways your project may run into trouble” so a user will need to figure out where the project may get derailed and plan accordingly.

Moving Ahead

Done strategically, thoughtfully, and carefully, many organizations will be able to revitalize an ERP project that had been put on hold as a result of the pandemic.

We have devoted our career to negotiating, drafting, and litigating ERP contracts. We know where potential problems lie and ways to minimize them. We are happy to share with you what we have learned and can also refer you to our experienced network of consultants who also work extensively with ERP. If you have a question, feel free to call or send an email.