The Buyer’s Corner: ERP negotiating tactics

For most of 2010, Canadian companies have taken a wait-and-see approach to ERP. According to IT research firm IDC, Canadian businesses are neither jumping headfirst into new ERP applications nor making significant changes to their existing systems.

Our firm’s on-the-ground experience is consistent with IDC’s findings. Our ERP consulting business is slower in Canada than in the U.S. We’re not the only ones seeing this trend. Software vendors are singing a similar tune: their Canadian ERP sales are, on an adjusted basis, relatively weaker than their U.S. sales. A Canadian sales rep for a well-known ERP vendor recently told me that he’s being relocated to the U.S. to help mop up some of the excess demand.

From a competitiveness perspective, lagging Canadian ERP adoption is concerning. It means that Canadian manufacturers and distributors – particularly in the small to medium-sized segments – are in some respects technologically disadvantaged relative to their U.S. peers. This technological disadvantage has real business consequences that span an organization’s entire value chain, including lower sales, higher inventory costs and lower product quality.

In my view, a tipping point in the Canadian ERP market will be reached in 2011 and 2012. Canadian companies will be compelled to upgrade their enterprise systems, and when they do decide to make the leap, they will need to be prepared for a long and arduous change management project.

This change project starts with system selection. The selection process will take months and, in some cases, can last longer than a year. For one client, we’re into month six of its selection project and, to date, everything has proceeded smoothly. Another company we’re talking to has given itself a year to find the right-fit system.

For the buyer’s management team, the selection phase can be grinding. It consumes key IT, operational and administrative personnel. It’s a distraction from the day-to-day business. Usually, by the time the company has narrowed the field to the top two or three contestants, frustration has set in. Management just wants to choose the system and move on to the implementation project. 

Management, though, should resist its urge to rush negotiations. The total cost of an ERP system – and its ultimate net value – depends heavily on bargaining efforts. Discounts are there to be had. They just have to be found. For example, one of the large ERP vendors is sometimes prepared to offer license fee discounts of 60 to 90 percent to companies that earn less than $100 million in annual revenues. Concessions like these can add up to six-figure savings. Though, many buyers – particularly in the SME segment – don’t have the internal ERP negotiating expertise to land these types of deals. As a result, many end up leaving significant value on the table.

Below are some tips to help you extract the most value from your ERP negotiations, starting with timing.
 
The setup: Timing the negotiations
Timing is critical. If a buyer is lucky enough to time its ERP investment with a trough in the ERP sales market, it’ll have an easier time extracting concessions. Few buyers, however, fall into this category. Most tend to enter the market in and around the same period. These buyers will have to work a little harder to make time work in their favour.

Opportune negotiating windows typically open up near the close of a vendor’s reporting period. Here’s why: a vendor includes a buyer’s project in particular quarterly and annual sales projections. The vendor then translates these sales projections into targets for its sales reps. Sales rep commissions are typically based on meeting those targets.

The key for the buyer, therefore, is to time the negotiations for the end of the reporting period. By pressuring the sales rep’s commissions, the buyer can create urgency, which can translate into favourable concessions.

Managing the vendor’s sales expectations
The buyer should actively manage the vendor’s sales expectations. Vendors use sales expectations – or Total Account Value (TAV) in vendor parlance – to set proposed pricing and sales rep commission levels. As an oversimplified rule-of-thumb: the higher the TAV, the more expensive the system. 

The buyer should take it upon itself to make sure that ERP vendors assign low (but reasonable) TAVs. How? By managing the information it divulges. For one, the buyer should seldom disclose its project budget. However, since vendors know that most prospects won’t divulge budget information, they have developed proxy measures based on company size. Most commonly, ERP vendors generate TAVs based on a prospective buyer’s annual revenues and employee count. If your company is privately held, I would recommend keeping this information close to your vest. If there are compelling reasons to divulge this information, I recommend using broad ranges.

Be warned that vendors acquire TAV information from third-party research companies (among others). Here’s how these arrangements work. The research companies offer "free" ERP research to prospective buyers. The buyer fills out a contact form and gets access to the research. The research company then turns around and sells the information contained in your contact form to ERP vendors. And, as you’ve probably guessed, the information sought on the contact forms typically includes questions about company size and project timing – the key inputs for sales projections and TAV.

Getting the deal done
If the buyer has timed the negotiations and managed its information, it has done its positioning work. The toughest part – contract negotiations – remains. One reason why getting a good deal is so difficult is because almost all ERP vendors keep their list prices a secret. This makes it almost impossible for buyers to gauge whether or not the vendor’s offer is fair value. Another reason has to do with the complexity of the various contracts that the vendors want the buyer to execute.

Oftentimes, the easiest way to cut through all of this complexity is to hire an experienced ERP negotiator. A good negotiator is one who can extract good dollar value while protecting the buyer’s rights and interests. In an ideal scenario, your negotiator should:
• be independent and impartial;
• have good relationships with vendors;
• have strong negotiating expertise;
• have deep subject-matter expertise; and
• be a lawyer.

Having said that, many companies will still decide to negotiate on their own behalves. For these companies, I recommend that they do their due diligence before sitting down at the bargaining table. This means understanding the terms of the contract and researching best-practices. Talking to peers and participating in online communities are good places to start.

Once the negotiations have concluded, the buyer is ready to move onto the main project: implementation.

Jonathan Gross is vice-president of Pemeco, Inc., a consulting firm specializing in ERP selection and implementation. He can be reached at jonathang@pemeco.com.