Deciding to implement a new ERP or software solution for any business is a major decision. During the evaluation process it important that you not only select the solution that will meet your business requirements but also the vendor who you believe will be the best cultural fit for your company for the next 5 – 10 years.
Once a decision has been made, many organisations want to forge straight into getting started with the solution design and implementation, however, it is crucial that the final step of the evaluation process – the commercials and legal negotiations are carefully considered before you sign on the dotted line.
Towards the end of the Evaluation process, most people are concerned about the obvious financial variables such as software license costs, annual maintenance costs, hourly consulting rates and help desk support. However, the hidden financial variables really need to be considered if you want to understand the total costs of implementing a new ERP or software solution for your business.
1. Understand Roles and Responsibilities
It is important that you clarify the roles and responsibilities of your company and the vendor. A low-cost proposal from a vendor may at first appear attractive, however, the vendor may have a number of assumptions about what you will be taking responsibly for.
- Who will be responsible for configuring the ERP or software solution?
- Who will be responsible for the organisational change management and communication with staff and suppliers?
- Who will be responsible for the adoption of new business processes and training your end users?
- Who will be responsible for data cleansing and migration? How much historical data will be converted?
- Who will be responsible for overall project management of internal and external resources?
- What are the assumptions around configuration or customisation of the software?
- How many internal resources has the vendor assumed you will dedicate to the project?
- Who will be responsible for documenting the business processes and workflows and for doing the testing and integration?
- If external resources are required for any of the above, have you allocated an appropriate budget?
2. Understand the Entire Scope of the Project
The complexity and magnitude of an ERP or software implementation should not be underestimated. It is important to understand the entire scope of the project and in particular the functionality of the modules being proposed.
CMC recommends that all of your end to end business requirements and/or business scenarios are well documented and you are completely satisfied that the vendor can deliver the solution for your organisation with the modules that have been proposed.
The more organised you are in terms of your business requirements, the more control you will have over the outcome. Your vendor is there to guide you, but it is your internal executives and management team that will be responsible for providing strategic direction, allocating resources, making operational decisions and overseeing cost control of the project.
“CMC provided expert advice during our ERP Evaluation and Negotiation stages. CMC’s ability to think outside the box and around the corner, along with their outstanding ability to convey this information to the software vendors resulted in an innovative and cost effective solution for Decon”Rob Guarino - Managing DirectorDecon Corporation
3. Understand the Financials
Understanding the fine print and details around the scope and responsibilities of each party in the contract is extremely important, so make sure you have a knowledgeable team helping you. Engaging the services of an independent and experienced ERP consultant will ensure you have realistic expectations around what is possible when it comes to negotiating cost variables and agreeing favorable terms.
The ideal consultant will take a collaborative approach and be flexible enough to respond to your unique needs. They should also be able to guide your organisation through the negotiation maze. It is a fine balance between achieving cost savings for the business and potentially impairing the project outcomes by the vendor reducing their resources to accede to the cost reduction pressure. CMC clients typically go through two or three rounds of reviews before the Agreement terms are finalised.
It is helpful for you to consider the following 4 financial elements when it comes to software license costs.
Best and Final Offer
Most vendors typically start by offering their software licenses at list price in their proposals. However, vendors will expect you to ask for a discount and they typically have quite a bit flexibility around reducing the costs of licenses, when it comes down to the final negotiation stage.
Where vendors have reduced their prices, it is usual for them to request payment in full for licenses immediately to “lock in the discount”. This usually also requires the customer to commence paying maintenance. It is a good idea to compare savings to costs over a multi-year model to see whether the license discount amount has been substantial enough to offset the annual maintenance that will apply prior to the point where those licenses are actually required for “go-live”.
Finally, resist vendors who create a sense of urgency around “time-sensitive” discounts. This technique is used to meet vendor’s quarterly or monthly financial targets but in CMC’s experience this is rarely withdrawn once the date has passed. You may also request that the Vendor retain the discounts for future licenses for a minimum of 2 – 3 years.
Don’t Buy More Software Licenses Than You Need
When you are deciding how many software licenses you will need, it is very helpful to prepare a detailed matrix that shows the names of each user by functional areas across your business. This way the correct license type and quantity can be confirmed prior to the purchase.
Buying licenses after the Design Stage will also assist you to redefine your processes and this may reduce your required license numbers.
It’s always easier to add more licenses as time progresses but it is nearly impossible to scale back on licenses once you have already bought them. Even if your ERP or software vendor is offering you a massive discount on software licenses, if you don’t need them, don’t buy them because you will still be paying ongoing maintenance costs for all the licenses you acquire.
Timing of License Purchase
It is commonplace for vendors to require full license payment when you sign the Vendor Agreement. The following two approaches that may save you considerable costs:
- Defer license purchases until after the Scoping and Design Stage has been completed. Vendors can typically use internal or temporary licenses to facilitate design workshops if encouraged to do so.
- If deferment is not possible, purchase the minimal number of licenses required for the Design Stage only.
Annual Maintenance Costs (On Premise Solutions)
The Annual Maintenance Fee is usually based on a percentage of your license costs. Most vendors will be reluctant to reduce this fee, especially if you’ve negotiated a great discount on the software licenses. Strategies to minimise this recurring cost may include the vendor agreeing to apply maintenance to the discounted price, capping any maintenance cost increases to the published CPI or locking in an agreed maintenance percentage for 2 – 3 years.
4. Change Management is Critical to Success
One of the most critical non-technical elements of a new ERP or software implementation is Change Management and yet this is often not given the level of attention and focus it needs and is rarely mentioned in the ERP or software agreement. Change Management is paramount to a successful implementation and one of the 5 key work streams to ensure that a company is ready to adopt and embrace the change in processes and roles that will inevitability affect the whole organisation with the rollout of a new ERP.
5 Key Work streams for ERP Implementation Readiness include:
Most vendors will assume that you will be responsible for leading the organisational and business process change which will include:
- Organisational Assessment – People Readiness Assessment, Cultural Assessment & Alignment and Skills Competency and Gap Analysis.
- Organisational Impact – Definition of Organisational Changes, Organisational Role Design and Business Benefits.
- Organisational Change Planning – Communications and Training Plan and Mobilising the Change Team.
The work effort involved in Change Management can be driven by your own internal HR Department or supported by a Change Management consultant who specialises in supporting ERP projects. CMC recommends that you begin the change planning early in your project as a parallel work stream.
It will also be optimal if you can find a change champion in your business who is capable of effective and positive communication with all stakeholders. The vendors will usually include some end user training in their initial proposals, but it is important to understand the time and financial investment required for the change management work stream and how this will impact your overall costs.
5. Invest in Strong Project Management
Strong project management methodology will ensure that scope, milestones, budgets and vendor activities are all kept on track. If you do not have an experienced Project Manager in your organisation, then you may benefit by engaging an independent ERP consulting company to either mentor one of your staff or provide project management support to ensure your project is delivered on time and on budget.
To minimise risk and maximise your financial investment, CMC recommends that you engage the services of an independent ERP consulting firm that can help you with planning for all of the 5 areas above.
Understanding the details around the roles and responsibilities, the functional scope, the financials and the activities involved in Project and Change Management from the client side will help you to foresee and plan your overall project budget. This will provide you with a realistic point of view and more accurate financial information for your business case.
“I would highly recommend CMC to any business that might be considering significant organisational change or an upgrade to their core business systems. The CMC team are committed to realistic and pragmatic outcomes and have delivered executive level support and detailed guidance around requirements definition, vendor evaluation and selection, project management and testing leadership”Michael Gazal - ChairmanPVH Brands Australia