Things you should look for in an ERP Implementation Contract
ERP implementation contracts can prove to be vital during ERP implementations. If we take a step back and look at the business context of the ERP implementation Contract, we realize that
- Buyers need to successfully implement ERP to deliver the projected benefits.
- The service providers need to successfully implement ERP to develop a good customer relationship.
Their ultimate goals are the same. Their intentions are aligned. It’s time for the contracts to start reflecting those intentions because that’s what contracts are supposed to do.
When can the contract promote success?
- First, the contract can define key project details, including deliverables, milestones and acceptance criteria.
- Second, the contract can provide the process for how the parties will work together, including making changes and obtaining required approvals.
- Third, the contract can provide incentives for the service provider to achieve the company’s desired outcome.
What is the need/importance of an ERP contract?
- According to analyst firm Gartner, approximately 75% of all ERP projects fail despite the industry’s focus on delivering better customer service and advanced IT systems.
- The reported costs of abandoned projects can be enormous — $125 million in the case of Avon.
- But the costs of an improperly implemented system are equally high. Hershey and Nike each reported $100 million in lost sales and significant drops in stock price due to problems in their new ERP systems.
These data points are revealing the clear points that the ERP contract should be well structured. Therefore, it is imperative to list out critical points which will have to be incorporated in the ERP contract.
Tips to follow for an ERP Implementation Contract
The scope of work should be linked to a Master Contract
In a number of agreements, the legal department spends more time in drafting the legal clauses which usually consist 90% of the contract clauses and the 10% which is critical such as those listed below are not given much importance.
- Scope of work (SOW) of Service provider
- Milestone schedule
- Payment schedule
- Exclusion from Scope of Work
All the above points will have to be included in the form of annexures to the ERP contract. If these points are taken care by ERP service providers in line with the expectations of the buyer, then you will rarely need to look at the contracts again except for checking the commercial terms.
It is also preferable to include a clause which refers to the work not covered within the scope of work of service providers.This solves 95% of the problems which may occur at the time of contract creation.
Selection of an appropriate model
The best choice of model depends on the project, the buyer’s skills, risks, and buyer’s knowledge of ERP.
Available models fall into three main categories: “assist,” “deliver” and “shared risk”. Each structure has its own unique features.
- Assist structure (T & M): The service provider works by the company’s direction and is paid on a time and materials basis. The company bears the entire risk of budget overruns and schedule delays.
- In the delivery structure (Fixed bid contracts): the service provider commits to working according to a specified schedule for a fixed fee. The risk of implementation lies with the service provider.
- The shared risk structure is designed to reduce overall risk by aligning incentives and creating a spirit of partnership. This is done by establishing a target budget with shared risks and rewards if the service provider exceeds or stays within budget. For instance, the service provider’s hourly rate may be progressively discounted as it exceeds the target budget and, conversely, increased if it comes under budget.
Have appropriate Escalation mechanisms (From Project Manager to Steering Committee)
Most of the ERP projects are not completed on time or not meeting the desired results as it is not properly monitored by the service providers and buyers at various levels.
An escalation mechanism in the contract solves the challenges with ERP implementation such as delay from Service providers or delays in testing by the Buyers.
The escalation matrix should align with the buyers and service providers up to the CEO/highest decision maker at both companies. Therefore, the decision would be taken to resolve the challenges and end objectives would be achieved.
View the ERP contract from a long-term perspective
The Buyer usually pays the rate as demanded by the Service provider as the buyer does not have a choice once the contract is given to the service provider.
Therefore, it is always advisable to view the ERP implementation contract as a long-term agreement perspective. This would include locking in long-term pricing for additional work /change orders.
Rate per day should be finalized along with the original contract period. This is to ensure that Service providers get the best rate.
Other Critical points:
- Pay for the software based on the implementation status. Divide the total ERP implementation into milestones and advise the Service provider to bill based on the milestones. It would be a WIN-WIN situation for both the service provider and buyers.
- Do not incorporate any clause which involves the joint responsibility of service providers and buyers. It leads to a no man’s land position.
- It is preferable to not assume any points which have a material impact on the implementation of the ERP. For example, buyers should not assume that service providers would provide training to internal staff members on completion of implementation. It should be clearly spelled out in the agreement.