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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

There are lots of ways a digital transformation can go wrong, even with a negotiated contract that spells out in detail what the software vendor and integrator will do, when they will do it, and what they will be paid. This is even more true during a recession. As we have repeatedly said on this blog, implementing software solely because you want the latest and greatest technology almost guarantees failure. The project has to be tied to a business case. Digital transformations that do not add value to the business simply do not make sense. Projects that add value are more likely to have executive and employee buy-in, and are less likely to be postponed or cut during a recession. Even with a strong business case, success is not guaranteed. Recessions put additional pressure on digital transformations.

Below are some signs that you may be headed for an “ERP train wreck.”

  • The Vendor Doesn’t Understand Your Business or Industry: Often vendors use projects as a training ground for incompetent or inexperienced consultants. These consultants may not understand the unique requirements of your business or industry. Sometimes they don’t understand the software they are tasked with implementing. If you were promised the “A team,” but provided with the “D team” because the vendor had more important customers, you could be in serious trouble.
  • The Vendor Misses Deadlines and Milestones: Digital transformations and ERP implementation are challenging. While changes in scope and pushing back deadlines are not uncommon, a vendor repeatedly missing agreed upon deadlines is a sign your project is not going well.
  • Project Status Reports Are Not Provided or Are Incomprehensible: Regular status reports are sometimes the only way a customer can get an understanding of the health of a project, upcoming deadlines, and open action items. If the vendor is not providing status reports, it is a red flag. At the same time, if the status reports hide information, are difficult to understand, or don’t provide meaningful information, your project could be headed for failure and you many not even know.
  • Deliverables Don’t Meet Agreed Upon Requirements: Requirements for deliverables should be agreed upon and documented both in reasonable detail and in a functional design document. While it’s not unusual for a customer to reject a deliverable because of non-compliance with agreed-upon specifications, repeated failure by the vendor to provide deliverables that meet specifications is not normal.

Digital transformations and ERP implementation projects are difficult. Often, one-sided contracts shift responsibility for success to the customer and don’t provide a clear path for managing the project. Without a clear business case, and executive and employee buy-in, the likelihood of success is dim. During a recession all of this becomes amplified. Budget cuts, project delays, and suspensions are more common. Proper change management, project governance, and a clear business case are absolutely critical to a successful digital transformation.

The most important document related to your ERP implementation, integration, or digital transformation is the statement of work. Including milestones, deliverable specifications, and acceptance testing criteria are all critical to getting your implementation or digital transformation off on the right foot. Learn more from Taft partner Marcus Harris in this video:

The Most Important Document You Will Negotiate in Your Digital Transformation – YouTube

Oracle recently made its largest acquisition ever by closing a $28 billion deal for electronic health care data company, Cerner. Cerner is a cloud-based platform targeted around Veteran Affair’s patient safety concerns. Oracle’s acquisition of Cerner is a strategic move by Oracle to expand into the healthcare industry. By acquiring a healthcare company, Oracle aims to increase its presence in the healthcare market, potentially allowing health care providers to easily access and share electronic records while giving Oracle a strong foothold into a rapidly-expanding market segment.

Healthcare continues to be the nation’s largest employer, especially after the COVID-19 pandemic. Healthcare dominates in the domestic economy, and the cloud continues to dominate the tech industry. By incorporating the presence of healthcare into the cloud, Oracle has the opportunity to provide easy access to patient’s electronic records across various healthcare organizations.

When announcing the deal, Oracle cited a Mayo Clinic study finding that doctors would spend hours reviewing documents and medical records for every patient, increasing working hours and the probability of medical professional burnout. With the existing vast amount of data, clinicians struggle to get a 360-degree view of a patient’s care history prior to treating them.

According to Oracle, the deal would decrease healthcare spending and would introduce a new standard of data-driven healthcare.  It would increase productivity, while allowing doctors to treat patients in a timely manner. Oracle’s goal is to deliver “zero unplanned downtime in the medical environment and to capture opportunities to expand cloud, AI and machine learning applications for Cerner’s healthcare clients.”

But what would this mean for current Cerner customers and what are the practical implications?

  • Data security is a concern: The recent Kronos attack has many questioning the security of cloud migrations. Especially with the sensitivity and privacy of healthcare data, customers might find hesitation in the amount of security Oracle can provide.
  • Oracle will push Cerner customers to switch to “Oracle paper:” As with any acquisition, we expect Oracle to push hard to get Cerner customers to sign standard Oracle contracts.
  • Move To Oracle cloud: We also expect that Oracle will aggressively push Cerner customers to the Oracle cloud in a bid to compete with AWS, Azure and other cloud providers.
  • Audit used to generate revenue: Just as concerning are Oracle’s notoriously aggressive tactics in generating revenue from software audits. While Oracle touts its ability to transform the way healthcare data is acquired, shared, and monitored, Oracle’s push into the healthcare industry is about revenue.  We fully expect Oracle to squeeze Cerner customers for additional review by conducting aggressive software audits. These audits are typically not about compliance at all, but about a salesperson’s needs to meet a quota.

If you are a Cerner customer dealing with aggressive audit tactics or threats of noncompliance, it will be critical to develop a strategy to protect yourself from incurring unnecessary costs.

SaaS agreements are often difficult to negotiate and the terms and conditions can be counterintuitive. In this video, Taft Chicago partner Marcus Harris breaks down some of the most important issues you need to focus on when negotiating a SaaS agreement.

Three Things You Must Focus On When Negotiating A SaaS Agreement

Taft was a sponsor of the ITechLaw World Technology Law Conference, which took place at the end of May in San Francisco. In addition, Taft Chicago partner Daniel Saeedi presented “Face Scans, Fingerprints and Voice Recognition – The Current U.S. Regulatory Framework for Biometric Privacy.”

The International Technology Law Association (ITechLaw) has been serving the technology law community worldwide since 1971 and is one of the most widely established and largest associations of its kind. It has a global membership base representing six continents and spanning more than 60 countries.

Does an ERP vendor’s fiscal year matter in the discount you get as a customer? Absolutely. Oracle’s fiscal year ended in May, and Oracle’s salespeople are notorious for pressuring customers into signing deals with significant discounts prior to year-end under the notion that the discount will disappear after the year-end. Customers need to take into consideration the vendor’s year-end and its impact on the vendor’s willingness to provide discounts. However, only focusing on year-end discounts is misguided.

While it is true some discounts will no longer be available, it is unlikely that the vendor will walk away or that all discounts will disappear. While a salesperson may want to close a deal prior to the year-end, salespeople are under constant pressure to make their numbers. In our experience, the discount being offered as an incentive to sign by year-end will change, but it is unlikely to disappear entirely.

Moreover, buying around a vendor’s year-end is not the most effective strategy for securing meaningful discounts. Customers should be methodical and creative to properly motivate sales representatives to achieve the discounts and concessions the customer seeks while focusing on managing the cost of operating the ERP system over the lifecycle of the customer’s relationship with the vendor.

While focusing on upfront discounts, price caps, future options, and the ability to swap out functionality are all important, focusing on flexibility helps reduce the likelihood of a breach of the contract, reduces the likelihood of an audit, and reduces the cost to operate the ERP software over time. Instead of only focusing on upfront discounts, customers should focus on obtaining the greatest amount of flexibility in using the software. The goal should be to minimize unexpected fees and costs. A customer also needs to think about the cost of hardware required to use the software, the training needed to use the software, and any changes required to the customer’s infrastructure to use the software.

ERP vendors do not play fair. The discounts they offer are heavily tilted to favor the ERP vendor over time. The goal is to get you to sign, and then sell you as much software as possible. As a customer, it is important to assemble a negotiation team, focus on specific aspects of the deal, and negotiate the contract so that the contract is tailored to your business needs.

Understanding how to utilize a vendor’s year-end during negotiation can be a useful tool, but focusing only on upfront discounts is short-sighted. A focus on upfront discounts will most likely cost a customer more over the lifecycle of the software product vs. a focus on flexibility.

Drafting, reviewing, and negotiating software license agreements is challenging. In this video, Taft Chicago partner Marcus Harris breaks down three issues to focus on during any review or negotiation of a software license agreement

Three Issues to Focus on When Negotiating a Software License Agreement

Taft Chicago partner Marcus Harris will be one of the featured speakers during the 2022 Digital Stratosphere Conference Live Online Edition, Feb. 8-10, 2022. Harris will present, “Digital Transformation and Contracting” on Feb. 9 at 2:00 pm EST. This event offers insight from the industry’s leading experts for organizations embarking on a digital transformation.

For more information or to register, click here.