It seems a growing number of companies are coming to us to negotiate and draft contracts for an upgraded ERP software system. As part of understanding what we need to include in the contract, we ask the company’s CEO, COO, CTO or General Counsel why they are making the upgrade.
Frequently, the answer revolves around the following: “our vendor told us we are falling behind in technology and need to upgrade to stay current.”
While we appreciate companies’ confidence in asking us to handle the legal components of upgrades, a pattern seems to be emerging among ERP vendors and integrators: convince users to spend millions on an upgrade that may not be necessary. When this happens, it is being done not because the upgrade is in the best interests of the user but of the vendor and the integrator.
Yet many of the newer ERP software systems are not yet mature enough to work as well as a lot of legacy installations. Before succumbing to the siren call of the vendor, users in companies of every size need to conduct a thorough due diligence inside their organization to determine whether the enhanced system will actually benefit their organization.
ERP Upgrade Precautions
For companies opting to upgrade their ERP software system, there are some things the contract needs to include. Prime among these is a specific detailing of the stated or implied promises being made by the vendor and integrator as to the functionality and performance of the newer model.
If either the vendor or the integrator are reluctant or unwilling to include these warranties in the contract, it’s best to walk away from the deal. They’re signalling they know something you don’t. Yet if there is a problem down the line, these written assertions will become your best argument should the dispute end up in litigation.
Here is the crux of the issue.
Despite their largely successful track records with more mature systems, there is a legitimate question whether the newest generation of ERP software systems are up to the task. SAP’s S4/HANA, Oracle’s ERP cloud and Microsoft’s D365 lack the track record of their predecessor systems of supporting the complex needs of many businesses and other organizations in the private and public sectors.
Until they have demonstrated their ability to seamlessly take over from a more mature ERP software system, a user being urged to upgrade needs to proceed cautiously. If a careful, internal analysis makes a business case for upgrading, then do so. Just remember to include in the contract all of the specificity in the agreement for your legacy system.
Along with language that spells out the improvements an upgraded system will bring, some other points to cover include:
1 – Outlining all sales material as an appendix to the new contract.
2 – Detailing the specific responsibilities of the vendor, integrator and the user
3 – Drafting provisions that prevent “scope creep” without a senior person’s authorization.
4 – Removing or limiting binding arbitration clauses that may reduce your ability to recover damages from the vendor or the integrator if there is a problem.
There is an unfortunate history of ERP “train wrecks.” Take steps upfront to reduce the likelihood of your organization being involved in another one.
Buy the Steak, Not the Sizzle
In nearly every aspect of running their organization, executives and senior managers are incredibly disciplined. Yet when it comes to their ERP software system – often, the engine that is driving the entire business – we’ve seen too many decisions made for the wrong reason. Most common seems to be viewing ERP software systems as a technology tool, not a management solution.
This is likely to result in the transformation heading straight for the rocks, similar to where the Sirens lured Circes and his entire crew to their demise.
If you are looking at upgrading your ERP software system and want to discuss the pros and cons of the legal aspects, feel free to contact us. We’re happy to share our experience and knowledge, as well as refer you to highly respected independent ERP consultants who can help senior management navigate what can often be treacherous waters.