The general counsel at any sized company knows how to draft everything from employment contracts and leases to complicated sales agreements. But few are familiar with what Enterprise Resource Planning (ERP) software systems actually do, let alone the traps lurking in these types of contracts.
This isn’t surprising given that the lifespan of most ERP systems can be 15 years or longer. So, chances are a general counsel may only see one or two such contracts in their entire career.
Because the ERP implementation and software licensing contracts are as complicated as the software itself, there are a number of key things for general counsel to keep in mind as they review these contracts. While this is not an all-inclusive, “how to DIY” guide, as an attorney who’s devoted his career to negotiating and drafting contracts for ERP software systems, these are the seven main areas where we have seen companies slip up most-frequently.
1 – Specify the vendor as the expert. No matter how qualified the internal IT department might be, the contract has to spell out that the vendor is making representations based on their knowledge of the product and experience in the user’s industry, and that the user is accepting their word. If there is a failure down the road, this will help document the vendor’s responsibility.
2 – Detail liability and warranty limits. The template contract given to the company will contain one-sided and onerous limitations on liability and warranty disclaimers. The agreement with the vendor and any third-parties it or the company uses must include detailed language on liability and warranty limitations along with specifying what remedies will exist in the event of an ERP implementation “train wreck.”
4 – Define everyone’s responsibility. Your company will have responsibility for certain activities during the software integration as will the software vendor and integrator. These must be carefully negotiated and drafted into the agreement so no one can say later “Didn’t think that was our job.”
5 – Put everything in the contract. We have seen numerous situations where assertions made in marketing material and proposal responses are filled with generalities and vague promises that have little bearing on what the product will actually do. We always try to insist that all of these materials are included as part of the contract so that if there is an issue later on the user has it in writing and the vendor or integrator are bound to what they’ve presented when trying to close the deal.
6 – Watch out for contractual remedies. In template contracts provided by vendors and integrators, usually there are onerous provisions specifying what the user’s company must do to exercise its rights under the contact with respect to warranty remedies and indemnification. Review these provisions carefully and, ensure that they are followed to the letter.
7 – Have a Mechanism for Controlling Scope. Ensure that no one involved in the project on the company side says or does anything that, later, could be construed as narrowing or expanding the project’s scope. Negotiating a detailed change control process can be critical to keeping the project on track and the scope manageable.
Too often, senior management sees their ERP vendor and integrator as their partner. In many instances, that’s the case, but in a growing number of situations – especially when the vendor and integrator are among the behemoths in the ERP business – the opposite turns out to be true. It’s the job of general counsel to protect management against itself in case you have to enforce the contract down the line.
We’ve spent our career as lawyers focusing on negotiating and drafting ERP software system contracts, as well as litigating disputes when things go horribly wrong. If you’re an in-house attorney whose management is planning to replace a legacy ERP system or is considering one for the first time, we’ll be more than happy to share what we’ve learned over the years. Feel free to call us.