ERP Selection & Negotiation

Transcription

1 NOVEMBER 2012 The Art and Science of ERP Selection & Negotiation inside: 2012 AlixPartners, LLP

2 2 Enterprise resource planning (ERP) packages were first introduced more than 20 years ago. Some ERP predecessors, such as MAPICS and McCormack & Dodge, have been available for more than 30 years. Yet still, the selection and implementation of a new ERP system often remains a risky, challenging, and mysterious process. In our experience, a combination of timetested program management disciplines and newer approaches to the ERP selection and negotiation processes can lessen the risk, remove the mystery, and reduce the cost of an ERP implementation. Choose Carefully An effective ERP selection process is required for a successful ERP implementation. During the selection phase, articulate and agree on objectives, define selection criteria, select software and implementation partners, and, most importantly, establish the legal and working relationships with the system integrator who implements the ERP system (the implementer). This process should be completed in no more than eight to 12 weeks. In our experience, the most successful selection efforts focus on features that provide the company a competitive advantage in terms of cost structures or new customer offerings (e.g., shortening the time it takes to close the company s books each month, automating labor-intensive chores like daily credit card reconciliations, or accommodating things like mobile wallets ). Companies can explore ERP systems more basic functions and features in a half-day software demonstration during the due diligence phase of the ERP. The most critical decision in selection process is the choice of implementation partner. While it is important to select an ERP package that has the breadth of functionality necessary to support your company s current and future needs, the truth is that the capabilities of ERP packages within a given tier ranking are all relatively similar (ERP packages are ranked by the breadth of their functionality). There are, however, significant capability gaps among the various implementers. These gaps explain why virtually every ERP software company can point to several satisfied customers while at the same time having several welldocumented cases where that company s software implementations have failed. Ultimately, the difference between success and failure lies in the strength of the implementation partner, the commitment of the company, and the clarity of the relationship between the two AlixPartners, LLP

3 3 Negotiate Well Partnership clarity is achieved during the negotiations. We recommend a short contract of pages that focuses on the non-standard, unique, and strategic requirements. These requirements are critical; they will determine the extent of the package customization and, by extension, the cost and duration of implementation. Shorter, more open-ended contracts enable the company to maximize the value it realizes from all the special features of the selected ERP system during the implementation design phase. The contract-negotiation period is also a good time to get a feel for the quality of the integrator s staff and to assess their professional and personal attributes. Based on this assessment, you can decide if the integrator s approach and culture fits your own. The negotiation can result in significant reduction in both costs and risks of cost overruns with the ERP software provider and the integrator, particularly if the final negotiations are done with two potential partners in parallel. In these cases, we have seen software license cost reduction of up to 60% and implementation cost reduction of up to 15%. When negotiating with the implementer, it is important to remember that a long-term partnership is at stake; it is in both the buyer s and the integrator s best interests that it be a profitable relationship for the integrator. Five Tips for Negotiating an ERP Software License Deal 1. Treat software as a commodity: Most ERP providers provide basic functionality, and the functionality gap within individual ERP tiers is continuously narrowing. This gives buyers considerable negotiation power to wield. Always have the multiple competitors on line and clearly communicate that you can walk away without disrupting your future plans. to address both current and potential future needs (offering better discount if the volume is bigger). As a result, buyers accumulate major unused licenses and functionality modules that wait on the shelves while generating annual maintenance costs of about 20% of their acquisition price. Know your needs and buy accordingly. 2. Don t over buy: ERP software providers push their clients to buy as much as possible 3. Make your deal sustainable: Business climates change. Your company might enter 2012 AlixPartners LLP

4 4 a merger, carve out some business units, expand functionally (new modules in the ERP) or geographically (new countries), or divest assets. Your deal must cover all these possibilities or you risk additional fees at each event. 4. Use your leverage while you have it. Once the deal is signed, future discounts are more difficult to attain. As soon as you implement the ERP, you re locked in, your switching cost is usually prohibitive, and the provider knows it. You ll never have more negotiating power than you do before you sign the deal. 5. Any deal with any price is profitable for software vendor: When you buy ERP software, there are no direct costs linked to the deal (all associated costs are sunk cost). This means whatever the selling price, the deal is profitable for the vendor in theory, the starting selling price could be zero. This gives tremendous negotiating power to the buyer. Typically, salespeople can t go below a certain level without permission from a superior. Negotiating your deal at quarter- or year-end, when the vendor s reported financial results are on the line, can help achieve discounts of 20% to 40%. 10 Tips for negotiating an ERP implementation services deal 1. Prepare the project. Before starting the negotiation phase, make sure that all the critical elements of a successful implementation are fully in place. Make sure you have: secured the right project sponsorship; clearly defined project objectives and scope; organized clear and consistent deliverables into a timetable; defined the project teams roles and responsibilities; identified both parties commitments in terms of resources, logistics, etc; and established project governance (issue escalation, tie breaking and decision making, scope management, risk management). 2. Require a fixed price contract. The vendor will usually agree to such a contract only when one of two conditions exists: The scope is clear and well documented (this is rarely the case since preparing this document is a major undertaking, and the vendor added 20% to 30% to the estimate as an insurance against the expected overruns (known as contingency ). Take two steps to minimize the implementation cost: Establish a time and material basis deal for the design phase, and then switch it to a 2012 AlixPartners LLP

5 5 fixed price implementation in a second phase once the scope is fully defined. However, remember that the scope and cost during this first design phase can drastically change (and never to a lower number). Use the contractual cost estimate as the base for actual-cost calculation. Create a payment structure that provides the incentive to do the right thing. Under this type of agreement, the two sides share the project risks and rewards. In the case of overrun, the vendor receives only 50% of its standard rate. If the project final cost is below the contractual estimate, the vendor is paid 50% of the saved (under budget) amount. 3. Include a termination for cause and/or convenience clause. The ability to cancel the contract enables the buyer to switch integrators if performance is unsatisfactory. For this reason, it s essential to make sure that your switching costs during the project are as low as possible or non-existent before the final deal is signed. There are levers to help you to achieve this: Make sure that the implementation partner would use standard market tools and methodology. Imposing current standard project management tools and methodology (e.g., ASAP methodology to implement SAP) reduces the potential switching costs and facilitates comparison and benchmarking (cost and timeline) among candidates. Include specific deliverables, such as up-todate documentation or knowledge transfer to the internal team (rightly sized), with tangible measures and KPIs throughout the project for each major phase. 4. Set milestones. Even if the ultimate result is a successful go-live, slice the project into welldefined deliverables for each phase and link the billing schedule of the project to those deliverables. 5. Pay attention to the cash cycle of the project. IT service provider companies are primarily focused on P&L (e.g., objectives are sales and profit driven) and less on balance sheet. Monitoring, then leveraging, the cash cycle makes it easier to get favorable payment terms. 6. Assign success fees or penalties. The criteria should be based on meeting expectations of both quality and timeline. Success fees or penalties linked to on-time go-live will discourage implementation partners temptation to expand scope (and revenue) along the way. 7. Share the risks and rewards. Structure the overall project cost in a way that gives both sides the incentive to do the right thing. For 2012 AlixPartners LLP

6 6 example, it can be useful to split the over-and under-budget amount between the buyer and the implementer; agree that budget overruns will be billed at a 50% rate while 50% of any under-budget amount will be rewarded to the integrator. 8. Clearly define your terms. This includes: Conditions to change the scope of the work and the associated pricing. This is the area that can create the most friction during the project. Define in detail. Process to select and change the implementation partner team. Carefully consider skills and fit as well as how team changes will be managed. Conditions to cancel or terminate the project. In the current business environment, macroeconomic changes could force cancellation, particularly considering the length of time needed for some ERP implementation projects. Intellectual property. Clearly define the rights of usage and transfer of any developed codes in the case of mergers, acquisitions, etc. Consider change of control restrictions. These are often introduced by the software vendors and may force the buyer to repay all or a portion of the license cost at the rate effective at the time of the acquisition. Plan ahead; there will be very little negotiation leverage at that point. 9. Protect against potential vendor insolvency. If code development is a major area of the project, deposit developed codes in escrow at clearly defined intervals throughout the project. 10. Define the warranty period. Arrange for post-delivery support with specific service level agreements after go-live for the stabilization period. conclusion An effective ERP selection process positions the enterprise for a successful ERP implementation. Selecting an ERP solution that does not fit the organization s operational, financial controls, and market requirements, or selecting an implementation partner that lacks the product and industry experience will almost certainly result in project delays and cost overruns. But even more importantly, the enterprise will miss great opportunities to achieve the improved operational efficiency and increased agility that will enable it to compete and win AlixPartners LLP

7 7 For more information, please contact: Amir Hosseini Director Steve Nezer Director snezer@alixpartners.com +1 (646) AlixPartners conducts a broad range of surveys and research in industries around the globe. To learn more about our publications, or to contact the AlixPartners professional nearest you, please visit AlixPartners, LLP is a global business advisory firm offering comprehensive services in four major areas: enterprise improvement, turnaround and restructuring, financial advisory services, and information management services. The firm was founded in 1981 and can be found on the Web at AlixPartners, LLP

8 8 DISCLAIMER IMPORTANT INFORMATION REGARDING THIS WHITE PAPER This white paper regarding ERP selection and negotiation ( White Paper ) was prepared by AlixPartners, LLP ( AlixPartners ) for general information and distribution on a strictly confidential and non-reliance basis. The recipients of the White Paper accept that they will make their own investigation, analysis and decision relating to any possible transactions and/or matter related to such and will not use or rely upon this White Paper to form the basis of any such decisions. Accordingly, no liability or responsibility whatsoever is accepted by AlixPartners and its employees, partners or affiliates for any loss whatsoever arising from or in connection with any unauthorized use of the White Paper. This White Paper may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. Those differences may be material. Items which could impact actual results include, but are not limited to, unforeseen micro or macro economic developments and/or business or industry events. The information in this White Paper reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the White Paper to reflect events, circumstances or changes that occur after the date the White Paper was prepared. In preparing this White Paper, AlixPartners has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise provided to us. AlixPartners has not audited or verified the data reviewed in connection with the preparation of this report. This White Paper is the property of AlixPartners, LLP, and neither the White Paper nor any of its contents may be copied, reproduced, disseminated, quoted or referred to in any presentation, agreement or document with or without attribution to AlixPartners, at any time or in any manner other than for the internal use of the recipient, without the express, prior written consent of AlixPartners AlixPartners, LLP