After the last few years of nuclear winter in the enterprise software marketplace, ERP vendors, still feeling feeble, are beginning to see the spring thaw. "Vendors are anywhere from anxious to desperate to sell their product," says Jim Shepherd, senior vice president, enterprise applications, AMR Research Inc. (Boston). "It is absolutely an ERP buyer's market."
Here are the best strategies that mid-market companies can adopt in order to get a good deal on ERP software that will carry through to the next decade and beyond:
1. Recognize your value. The typical manufacturer now keeps an ERP system for 20 years or more. "The vendor has a long time to extract money out of that relationship. They tend to be much more aggressive in discounting the software to get the deal done in the first place. They have yeainstallations can expect discounts of 20% - 25% off the software license list price. The largest companies can command discounts of up to 70% or 80% off list, but that's because they're spending so much more overall. The discount size is relative to the amount of potential value the vendor sees from the lifespan of the relationship.
2. Start small. In the past, CIOs would buy for the total potential number of users they might have years down the road, as well as the full spectrum of functionality they might ever need, on the theory that the bigger the order, the better the discounts. "The vendors certainly encouraged that philosophy, or even made it necessary. It was difficult to break the product up," says Shepherd. But incremental buying is the new best practice. "Now we see users buying in much smaller increments. How many users will I really have in the first six or nine months -- not how many will I have ultimately? Which modules will I use first?"
3. Negotiate at the end of the quarter. Some things never change. "You were always better off negotiating at the end of the quarter. These are public companies that are under tremendous pressure to produce good quarterly results. They will cut deals at the end of the quarter," says Shepherd. Just understand that pressure exists every quarter -- don't let the vendor bulldoze you into thinking the window of opportunity is about to close forever.
4. Be a marquee account. Your willingness to act as a reference to potential customers and reporters and participate in conferences is tremendously valuable to the vendor. "You can turn that into very valuable concessions -- training credits, extra attention," says Shepherd. In addition to whatever extras you receive from the vendor, there is a direct correlation between companies that are committed to being references and companies that are successful. "Companies that put themselves out there tend to get the internal management support and resources to make the project a success. We encourage people to do this. The CEO's project never fails," says Shepherd.
5. If you're not spending anything, don't expect to cash in. "Anyone spending money or increasing their commitment is in a wonderful negotiating position. Those who want to trade in seats for something else or change the maintenance terms are not in a good position. Unless you're spending money, the vendor has no incentive to talk to you. It isn't rocket science," says Shepherd.
6. Focus on the big picture. People tend to get too focused on getting a discount on the upfront software license purchase. But because of the buying practices, where you buy only the smallest increment of licenses at a time, "they're negotiating a discount on the first 25 seats that won't apply to any purchases after that," Shepherd says. "They would be better off trying to negotiate things that have long-term implications like support policy, maintenance contract provisions, price protection, even maintenance percentage rates or the rate at which the vendor can raise the maintenance fees. Those things ultimately have a much larger financial impact than the initial discount." It's tempting to brag to management about the discount, but taking a longer view often means bigger gains.
7. Get help during the negotiation. Look at it this way. You negotiate an enterprise software purchase once every 15 years. The vendors do it every day. Who do you think is better at it? "I hear clients say, 'I am a great negotiator, I have a great procurement department,' then they get taken to the cleaners by the vendor. This is an enormously complex sale. You need to get help from someone who is an expert in these things. You will have to live with the results of this for the next 20 years," says Shepherd. It is not uncommon for contracts negotiated by an internal legal department to be worse for the customer than the boilerplate contract offered by the vendor. "It's quite possible for someone's negotiating team to put them in a position where they deliberately negated the rights they would have had in the standard contract," he says. And smaller companies have more of a disadvantage at negotiating than large companies. Therefore, they also need help. "Large companies buy big chunks of application software and services all the time. They tend to have much more experience," he says. You need specialized help for this specialized transaction.
8. Assess the vendor's viability, but assume nothing. Evaluating the software vendor's financial soundness is a standard part of the due diligence period. But post-Oracle's takeover of PeopleSoft, it is important to realize almost any company -- even a giant -- can be taken over at any time.
9. Don't overlook the reseller's viability. Consolidation is occurring on the reseller side, too. Like your software vendor, your reseller could be acquired, with potentially more significant impact on you.
10. Provide for knowledge transfer. As part of your contract with your local reseller or implementation partner, provide for the transfer of knowledge from the outside expert to those inside the company.