While the ERP contract negotiation process is dependent on the facts of the particular transaction, all negotiations have a similar process and a similar trajectory. The cost of the software and implementation, the importance of the software being licensed, the number of vendors, and the risk presented by the technology will all impact the length and difficulty of the contract negotiation process.
- Dollar Amount of the Deal. Smaller sized deals usually demand less of an investment in attorney time and attorney review than larger sized deals. There is also the issue of risk; smaller deals usually (though not always) present less risk to the company in terms of implementation failure. For the most part, it is fair to say that a $5 million deal will usually require more review than a $5,000 deal. The economics also need to make sense. It typically does not make sense to spend $40,000 in legal fees to substantively review and negotiate a $5,000 deal.
- Appetite for Risk. Your company’s appetite for risk will influence both the depth and scope of review and the modifications you make to the contracts. The nature of the software and the amount of money spent on that software are often directly related to risk aversion. A $5,000 single-sign-on software product is fundamentally different than a full scale ERP package costing millions of dollars. The warranties, limitations of liability, remedies for breach, and indemnity obligations will all be negotiated differently depending on the risk presented by the deal.
- Negotiation Strategy. Asking for concessions on issues that may be less important to you allows you to concede on them in exchange for larger more important concessions later. Simultaneously negotiating with two vendors maximizes your leverage and helps you obtain better pricing and legal concessions. Keep in mind that this strategy increases the costs of the contract negotiation. Understanding your leverage is key to being able to successfully negotiate with any ERP vendor. If you are in an important industry, licensing a new product, or spending a significant amount of money (from the vendor’s perspective), you will have more leverage and obtain more concessions. Having a legal team with deep industry experience that knows what to ask for and how to ask for it is critical.
- Contract Terms Seem Simple – Until They Are Not. It is important to have a realistic understanding of how long it takes to negotiate your contracts with your ERP vendor. What looks like a simple three-page order form, often ends up being hundreds of pages long due to the incorporation by reference of URLs in the order form. These URLs often point to additional and more substantive terms and conditions that govern the relationship. This increases complexity and can substantially increase review time.
- Timeline. As attorneys, we conduct an initial review of the contracts to determine risks. We then highlight those risks, summarize strategies for mitigating or eliminating those risks and have a conference call with the client to finalize our changes to the contract and develop a negotiation strategy. We then send the marked up contract back to the vendor. The vendor then reviews our proposed changes and provides a marked up response. This is usually followed by conference calls and exchanges of additional drafts of the marked up contracts. The client/customer should reasonably budget at least one month for a moderately complex contract negotiation. A multi-million-dollar transaction could take significantly more time.
The worst strategy is to rush through the contract negotiation process to get promised pricing discounts. Bringing an important deal to your attorneys at the last minute is not in your best interest. Understanding the contract negotiation process and allocating the proper amount of time to the negotiation allows your attorneys to do their jobs and protect you. Taking a measured and methodical approach to the negotiation process usually results in an end product that serves you well.