We have often heard that mantra “digitize to survive.” Businesses initiate a digital transformation to drive growth, improve business processes, and enhance the customer experience. According to Gartner, digital transformation is an organizational priority for 87% of senior executives.

A number of studies from academics, consultants, and analysts indicate anywhere from 70% to 95% of organizations fail to realize the expected business benefits of their digital transformations and ERP software implementations. Some studies found that 70% of digital transformations failed due to employee resistance.

The challenges of successfully implementing ERP software or a having a successful digital transformation are daunting. The Covid-19 Pandemic made things worse.  Because of Covid-19, many digital transformations were either rushed or implemented by teams working remotely. When faced with challenges, companies often cut back on change management, data integration, and training. Paradoxically, these are the exact things that help ensure the success of a digital transformation. 

It is no surprise that over 90% of companies polled in a recent KPMG Global Transformation Study have completed a digital transformation in the past two years, but only 18% of the companies rate their digital technology as effective. More often than not, a failed digital transformation falls within three categories:

  • Underperformance: When the digital transformation is underutilized and there is a lack of focus with investment.
  • Regression: When businesses are under the impression they are transforming, but are actually lagging.
  • New Digital Initiative: When companies aren’t prepared and try to launch a digital initiative, but it fails, and the company is now forced to discontinue the digital initiative.

Eighty-seven percent of companies believe that digital transformation will disrupt their industry but only a mere 44% of the companies are prepared for the potential disruption. Implementing a digital transformation with a focus on the customer experience can increase customer satisfaction by 20-30% and economic gains by 20-50%.  But in order for companies to reap the benefits of a digital transformation, an understanding of best practices is required. Companies should:

  1. Focus on delivering business results, and evaluating businesses goals to prevent disorganization.
  2. Be skeptical of promises that a digital transformation will be the technological equivalent of a silver bullet.
  3. Focus on fundamental business needs and use advanced analytics to mitigate risk.
  4. Focus on hiring the right talent, train your existing staff, and consider hiring talent with experience in digital transformation.

Successful digital transformations are crucial for companies to survive today. At the end of the day, the adoption of new technology is meant to increase efficiencies and drive costs down. Be cautious and aware of signs of failure and take the necessary steps to mitigate digital transformation failure.

On April 20, Taft partner Marcus Harris and associate Nick Brankle provided tips to avoid a digital transformation relationship trainwreck. This webinar included ways to manage risk, spot vendor red flags, avoid litigation, and negotiate software contracts.

To watch a recording of this webinar, click here.

A new, fun, and fast way to generate words and images has exploded in popularity. The hero (or villain, depending on whom you ask) is a high-powered, complex form of computer programming called generative artificial intelligence (AI). OpenAI, a company riding on a multi-billion dollar investment from Microsoft, has popularized generative AI with ChatGPT, a now-viral platform allowing users to generate seemingly anything the mind can imagine in text form. Other companies have created platforms like Midjourney or Adobe Firefly, allowing people to do the same but with images.

Copyright issues surrounding generative AI are unsettled. Courts and the United States Copyright Office are still grappling with issues such as:

  • Is the text or image created by a generative AI platform copyrightable in the first place, or is putting text into the prompt nothing more than an underlying idea?
  • If text or an image is copyrightable, who owns the exclusive rights to the resulting image or text under Copyright law?
  • Can a company using a generative AI platform, like Midjourney, use an image created by the platform in external marketing materials, or does such use expose the company to copyright infringement claims?

Artists, creators, and other stakeholders have put these questions squarely before the copyright office and courts. For example, a group of artists filed a class action against Midjourney and other image-creating generative AI platforms, arguing that those companies’ use of copyright-protected works of art constitutes copyright infringement. The companies have claimed “fair use,” which has a complicated meaning under copyright law and a meaning that the United States Supreme Court may dramatically change this year.

Below are some best practices for using these platforms.

  1. Have a written policy. Given the uncertainties, it is wise to implement an internal-use policy for employees using these platforms to increase productivity.
  2. Read the terms of use or terms of service. The terms of use or terms of service may disclose whether a company assigns the rights to all generated content to the user, like OpenAI’s ChatGPT does. Those terms may also require users to put a warning on generated content, telling viewers that it was generated using AI.
  3. Avoid putting confidential or proprietary information into the prompt because confidentiality is not guaranteed. It is worth repeating, reading the terms of use or terms of service before allowing employees to use generative AI platforms. OpenAI, for example, discloses that it cannot delete prompts entered by users. It also expressly advises users of ChatGPT not to reveal sensitive information and that anything entered into the prompt may be used to train the program later. Although these programs have great potential to solve complex problems and fix bugs in code quickly, it is risky to ask these programs to solve bugs in proprietary code. For example, three Samsung employees reportedly put secret company code into ChatGPT to help them fix a bug.
  4. Avoid putting trademarks, celebrities, or well-known images and characters in the prompt. Popular and well-known images and characters may be subject to copyright protection. Celebrities also tend to protect the rights to use their image and likeness. To avoid generating content that could subject you to copyright infringement allegations, publicity rights claims, and/or trademark infringement claims, avoid putting popular characters, celebrities, and trademarks into the prompt.
  5. Choose platforms wisely, but understand the tradeoffs. Not all companies trained their programs using the same content. Adobe Firefly, for instance, claims to have only trained its image-generating program using licensed content or images in the public domain. Firefly may be a good option for companies trying to minimize infringement allegations, but some users of Firefly beta have commented that limiting the training to licensed and otherwise free-to-use content has come with a creative cost—the quality of the Firefly images may be lower than images generated by platforms that scraped content protected by copyright. Using platforms that scraped all content is not completely unwise, especially if companies stick to number three above and use “reverse-image” searching to see if the AI platform spit out something similar that is protected by copyright. And courts may very well determine in the future that “fair use” applies to AI-generated images, allowing near unfettered use, so staying on top of recent developments is a wise move.
  6. Double check statements of fact. It is prudent to double-check the work of programs like ChatGPT because the information it generates is not always accurate.

If you have questions or need help crafting an internal policy, contact our Copyright team.

Taft Chicago partner Marcus Harris will be a featured speaker for Pemeco Consulting’s webinar, “SaaS Contract Negotiations: A Winning Playbook,” on April 27. The webinar will provide insights on the typical negotiation cycle, key contract terms, how to build a strong bargaining position, and how to master negotiation strategies. 

For more information or to register, click here.

Harris has established one of the country’s leading practices devoted to drafting and negotiating Enterprise Software related license, implementation, and SaaS agreements, as well as litigating failed software implementations in courts and before arbitration panels across the country. He is one of the foremost attorneys in the country representing government entities, distributors, and manufacturers in recovering damages arising from failed Enterprise Resource Planning (ERP) software implementations.

Section 365(n) of the United States Bankruptcy Code (11 U.S.C. Title 11) protects the rights of intellectual property (IP) non-debtor licensees.  Section 365 of the Bankruptcy Code allows a debtor –in-possession, or a trustee (e.g., a software vendor) to: (a) assume, (b) assign, or (c) reject certain executory contracts – which would typically include software licenses.  A debtor in possession’s decision to assume, assign, or reject an executory contract is subject to court approval, certain deadlines and other requirements detain Section 365 of the Bankruptcy Code.  Section 365(n) is a carve-out to that broad right that allows a non-debtor counterparty (e.g., a licensee in a software license) the right to either accept the rejection of the license or continue performing under the contract for the duration of the term of that license. 

If the software vendor assumes a contract despite the bankruptcy, both parties can continue to perform their obligations as if nothing had happened.  If the software vendor assigns a contract, the assignee will perform the software vendor’s obligations under the license.  However, if the software vendor rejects the license, the licensee can either accept the rejection or retain its contracted-for rights and continue to use the software for the remainder of the term of the contract.

However, in the context of a software license, the licensee may not be able to continue to use the software without access to the source code and without the assistance of the licensor. Given the unique nature of software licensing agreements, licensees must assess the risks of a vendor going bankrupt, understand the rights and remedies afforded under 365(n), and implement strategies for gaining access to source code to continue to maintain the software. 

Key Points in Drafting Software License Agreements:

  • License Should Be Explicitly Subject to 365(n): The software license agreement needs to include language that it is subject to Section 365(n) of the Bankruptcy Code.  While not dispositive, explicit language makes the intent of the parties clear.
  • Source Code Escrow: Because licensees only retain rights that exist at the time of the bankruptcy, licensees need to make sure that the software license agreement includes the right to access source code and any associated support and maintenance rights to use that source code.  Robust source code escrow agreements and carefully drafted escrow provisions are critical to retaining maximum flexibility and use of the software on a going forward basis – even if the software vendor goes bankrupt.  Having continued access to the software, but no means to maintain or update it, does little good.
  • Separate Licensee Fees from Other Fees:  License agreements often contain payment obligations for (among other things) support, professional services, software development, maintenance, and customizations that are not associated with the license grant.  If these fees are bundled together, a licensee may be obligated to continue to pay fees for services not provided – just to continue to access and use the software.  Delineating licensee fees from other fees minimizes this risk.

Carefully drafting license agreements to account for the potential of a software vendor bankruptcy is critical to achieving maximum flexibility in using licensed software and minimizing business disruption.

Join Taft partner Marcus Harris and associate Nick Brankle for a complimentary webinar on April 20, 2023, at 12:30 PM EST / 11:30 AM CST. Harris and Brankle will provide tips to avoid a digital transformation relationship trainwreck. This includes how to manage risk, spot vendor red flags, avoid litigation, and negotiate software contracts. 

This webinar is pending approval for 1 hour of CLE credit in the following states: Indiana, Illinois, Kentucky, Minnesota, and Ohio. 

Register here.

ERP software continues evolving, and digital transformation remains as relevant as ever for modern commercial enterprises. Keeping up-to-date is essential for your business. Post-COVID, there have been non-stop developments in ERP software trends, pushing IT leaders to reprioritize constantly. Here is a breakdown of the latest ERP trends we expect to see in 2023:

  • Cloud ERP
    • Upon initial thought, cloud may not be the first cutting-edge trend individuals think of when looking forward to 2023. Companies continue to move to the cloud due to its perceived flexibility, lower cost, and supposed ease of implementation. The cloud allows integration, composability, and customization, allowing businesses to scale as needed. Cloud ERPs also help lay the foundation for a broader transformation strategy.
  • Digital Transformation
    • Digital technology is now frequently used to improve and facilitate daily operations. Digital technology can help an organization improve competitiveness, increase employee productivity, boost revenue, and improve communication and overall customer service. In addition, AI tech and advanced analytics are becoming key considerations in digital transformation. Artificial intelligence capabilities are embedded into ERP systems to help with the demand and need for personalization. Many ERP vendors now offer machine learning capabilities within their ERP software.
  • Personalization
    • ERP platforms now offer “low-code” analytics that businesses can use for easier customization and configuration. ERP software vendors now provide products tailored to the specific needs of organizations. In the past, complex scripting languages and difficulties in software development made it costly and time-consuming to provide true customization. The integration of AI-based user interfaces like chatbots that assist with customer information stored in the ERP platform are becoming more common.
  • Mobile ERP
    • 2022 was the year of significant strides in mobile support of cloud-based ERP systems. That trend will continue into 2023. Businesses will continue using fully integrated cloud-based ERP systems, allowing employees to access real-time documentation from remote locations on mobile devices.

As organizations continue acknowledging and appreciating the new wave of ERP trends, flexibility and adaptability are crucial. While mainstream cloud adoption will continue, we expect ongoing legal issues with cloud contracts and digital transformations. To compete in today’s marketplace, organizations should continue to ensure their ERP software takes advantage of cutting-edge functionality and personalization.

With so many companies switching to a cloud solution, it is difficult to imagine it any other way than good. However, that is far from the truth.

Cloud ERP is unquestionably great for vendors. It shortens the sales cycles, decreases contract negotiations, and above all increases software vendor profits. For vendors it results in a consistent revenue stream. Because of the perpetual nature of cloud payments, the cost of cloud solutions for customers over the long term is much higher than traditional on-premise solutions – and the profits for vendors can be exponentially higher.

For customers, the ease of implementation, lower support costs, and the reduced need for IT resources are all valid selling points. But the reality is that the cloud is overhyped, and has substantive risks and disadvantages. While the cloud has been hyped as “next generation” and “best practice,” there are a number of traps awaiting the unwary or the rushed.

Most ERP software packages being sold as cloud platforms were not designed as native cloud platforms, and they are not ready for “prime time.” In the rush to grab recurring revenue and push the cloud’s advantages, many software companies reverse-engineered their products for cloud adoption to get on the profit bandwagon. The practical effect is that while you may be gaining some more advanced technologies in the cloud,  you may be giving up sophisticated functionality that was stronger in your on premise environment. You also may be stuck with decreased functionality because of the inability to modify or customize a cloud solution.

Many ERP vendors exert enormous pressure on their customers to migrate to the cloud, even if doing so might not be in the customer’s best interest. Oracle, for example, notoriously provided sales reps with higher commissions to sell cloud solutions over on-premise solutions in an effort to get customers to migrate.

It is extremely important not to get caught up in the hype about cloud migration. Despite what a sales team or account executive will tell you, it’s not an appropriate solution for every ERP user.

  • Don’t underestimate the costs. There are both hard and soft costs in migrating to the cloud. The hard costs are obvious, although we are seeing clients underestimate the downstream expense. The soft costs are more difficult because they involve a change management strategy that could take a year or more to roll-out depending on the size of the organization and the complexity of its ERP system.
  • Specify security responsibilities in the contract. Since the user will not be operating or controlling the cloud infrastructure, the contract must specify in great detail the obligations and responsibilities of each party to maintain the security of the data being stored. It’s one thing if a user’s employee forgets their tablet with access to your ERP system on a bus; it’s another thing entirely if the cloud files are breached due to lax protections or security by the software vendor. The provider must ensure the safety of the data, protect it from being corrupted, hacked, or otherwise accessed without authorization, and have experts on hand to react immediately if something goes wrong.
  • Ensure there is an out. It is vital to be able to step away from the contract when a problem appears and cannot be resolved to your satisfaction. Another deal breaker should be contract language that fails to protect against cost overruns and completion delays – all too common with ERP.

The bottom line is that the cloud offers many advantages, but it is not a magic potion. You are often giving up robust customized functionality for more generalized but sophisticated technology – and paying more for it over time. Understand what you are getting into, and make sure you can get out of it with minimal business disruption and cost.

From modernizing business processes, accelerating workflows, and increased profitability, there are plenty of upsides to an ERP software implementation or full scale digital transformation. However, there are many things that can go wrong during and after the implementation process that can result in an implementation train wreck. In the cases we litigate on behalf of ERP customers victimized by software failures, the reason for the failure almost always lies squarely with the ERP vendor or integrator.

Failure can take a multitude of forms, from not realizing expected business benefits, blown budgets, extended timelines, and the failure of deliverables to conform to agreed upon specifications.  At the other end of the spectrum are production stoppages, massive loss of revenue and even business failure.  The most common reasons we see for failed software implementations and digital transformations include the following:

  • The ERP Vendor Oversells the Software: It is common for ERP vendors to overpromise and under deliver the ERP software’s functionality and exaggerate the software’s fit for a customer’s business needs. Despite a customer’s best efforts to evaluate and select an ERP system, ERP vendors often engage in puffery and misrepresentations to meet sales quotas. When this happens, customers are often so far into an implementation project they feel compelled to pay for expensive customizations to try to save a software solution that is riddled with extensive gaps in functionality.
  • The Customer is Provided With an Unrealistic Budget or Timeline: In order to close a deal, ERP vendors often grossly underestimate the cost of the implementation or the time it will take to get to “go-live.” This results in missed deadlines and the customer paying more to complete the implementation than is necessary.
  • Inadequate Project Management: ERP vendors often take shortcuts on project management or fail to devote adequate project management resources to a project because of resource constraints. This results in part-time project management or remote project management that is rarely successful.
  • Failure to Sufficiently Test the Software: The lack of adequate ERP vendor project management resources can lead the ERP vendor to take shortcuts on critical project management tasks like conducting proper testing and dry-runs prior to go-live. Going live in a production environment with untested or under tested software can have disastrous results.
  • Inadequate User Training: ERP vendors often fail to properly train users in how to use the software and fail to train users using real data and real transactions. Without proper training, users are ill-equipped to use the software in a production environment.
  • Inadequate Vendor Resources: ERP vendors always commit to providing a seasoned team of ERP consultants with deep industry experience. The reality can be very different. We often see ERP vendors assign consulting neophytes to projects that not only lack industry experience but are unfamiliar with the software product being implemented. There is often a revolving door of consultants on a project with each new person requiring redundant training to get up to speed on the implementation project. Often ERP vendors and integrators will use a customer’s implementation project as a training ground for new consultants.
  • Integration Shortcuts: ERP vendors sometimes under-test the system to intentionally conceal defects to meet milestone and deliverable deadlines. Often this results in a failure to perform proper integration testing to determine if the ERP system can interface with other non-ERP systems on which a customer might depend.

Overall, a digital transformation or ERP implementation can transform your business positively and provide long-term benefits. It is crucial to evaluate the business objectives your organization wants to achieve, understand the implementation/integration process, and use attorneys with extensive software experience to negotiate your vendor contracts to minimize the likelihood that you are the victim of an ERP train wreck.

Oversold and misrepresented software, missed deadlines, inexperienced consultants, and budget overruns are all common occurrences in a digital transformation. The reality is that as a customer, the odds of a successful ERP implementation, or digital transformation, are stacked against you.

When clients come to us in the midst of an ERP or digital transformation train wreck, they are overwhelmed and frustrated. Many times they are convinced they have a case, and want to sue their ERP vendor. Our response is almost always the same: “have you done everything you can – within reason – to make sure that the project can’t be saved?” We counsel our clients to spend what it takes and to devote the time that is necessary to “right side” the project so that they can get a functional product.

Litigation should be the last option, and only considered after you have exhausted all other efforts. But sometimes that’s just not possible. If the vendor is incompetent, the software project is excessively over-budget, the software is inoperable, or the functionality was misrepresented, then no amount of time or money may be able to save the project. If that’s the case, litigation may be a viable option.

If you choose to litigate, understand that the contracts for software and associated services will heavily favor the vendor. The limitations of liability, warranties, and remedies will all benefit the vendor to the customer’s detriment. As a customer, you may have little recourse to recover damages, and much of the responsibility for the failed implementation will be placed on you.  Vendors – especially top-tier vendors, will vigorously defend lawsuits. They hire large law firms with teams of lawyers to defend them. They employ tactics designed to increase the cost and the duration of litigation. Some vendors bend over backwards to protect their salespeople and their commissions.

There’s more:

If you financed your deal, the financing arrangement adds another level of complexity to the lawsuit. If there are multiple vendors, things get even more complicated. If you have withheld payment because of poor performance, it is likely you will face a countersuit

So, is filing a lawsuit against your ERP vendor the best course of action? It can be. But it needs to make sense. Litigating because the software didn’t work the way you expected, or because the project cost more than estimated rarely forms the basis for successful litigation. The failure needs to be objective and identifiable. If there was a misrepresentation, it needs be substantive. If the vendor fraudulently induced you to enter into a contract, the circumstances of the fraud must be pleaded with specificity. And, the failure and/or the misrepresentation needs to have caused damage in excess of the fees it will take to bring the lawsuit. Spending $500,000 in legal fees to recover $100,000 in legal fees rarely makes sense. If you are litigating against a sophisticated vendor, expect that vendor to aggressively defend the lawsuit. You need to be prepared to spend at least the amount you spent on the software and the implementation.

We make our living recovering damages from customers who have been victimized by failed ERP implementations and digital transformations. The process is expensive, difficult and uncertain, but sometimes it is the only option that you have.