ERP Journey: Negotiating More Than 'Bare Necessities' in ERP Contract

Recently I had the opportunity to practice spontaneous negotiation during my annual fishing trip to Alaska. It seems that a local and I had been planning to fish the same stretch of river at the same time. While sure of my legal position, thanks to the valid fishing license on my person, I felt compelled to examine the nonlegal and noncommercial factors after seeing him stand, stare and establish his 7 1/2-foot Alaskan brown bearhood. Though I was across the river and 40 feet away, we communicated perfectly.

It is a tribute to my negotiating skills that the entire process took place without verbal communication, unless you count the subsonic sounds of quivering and my initial "Oh [expletive]!" In a matter of seconds we moved past the fishing-on-the-river claim and on to my survival. We finally agreed that if I backed away slowly and then turned and ran for my life, everything would be hunky-dory. Maybe it was just the wind whistling past my ears, but over the sounds of clomping wader boots and rapid breathing I thought I heard him humming "The Bare Necessities" from The Jungle Book.

Vendors' standard form contracts aren't nearly as clear as bear negotiating, but they are equally one-sided. When you boil them down, they say, "The playing field is tilted in our favor, and our attorneys have informed us that this is how things should be. We will try to do a good job, but if we don't, well, we'll feel pretty bad for a while. You, on the other hand, must pay us a lot of money before we do a darn thing, and if you screw up, the laws won't allow us to get all we deserve from you."

We had spent eight months establishing confidence in our prospective vendor. However, after I read their standard contract, the phrase "trust but verify" popped into my head.

If we were a larger organization, we might have our staff attorneys talk with the vendor's staff attorneys and -- wait. We don't have an attorney on staff; they do. Guess where the process will get bogged down?

If you've ever ordered a car from the factory or had a house built for you, then you know how hard it is to wait for the goods once you've picked what you want. We devised a two-track strategy to shorten the wait and streamline the process. Track One would focus on getting a contract signed, starting with the writing and signing of a letter of intent. This letter, signed by both parties, would memorialize all the known issues and make sure there weren't any deal killers. Co-writing a document that states that either party can opt out of the letter of intent, without recourse -- what could be simpler?

One of my associates asked me, "Why waste time on something unenforceable?" Fair question. I told him it was like bread crumbs that we dropped together, making sure we didn't get lost negotiating the "whereas's and wherefores" of the contract. He wasn't convinced.

Track Two would proceed with planning and analysis, incurring costs as if we had a contract. We invited our ERP supplier's project manager to a two-day project-planning meeting where we agreed on both a possible and a probable implementation schedule. We also assigned some data capture and cleansing homework to our internal project team and followed that up with a fast-track software training overview. This team consists of eight associates who will spend 50% or more of their time on this project for the next 8 to 12 months.

In retrospect, streamlining this process was a little like improving the aerodynamics of a sloth. Track Two, the planning and analysis, went forward on schedule without a hitch. Track One didn't. While we were able to agree on the content in the letter of intent, getting from plain English to contractual language took weeks.

Intangible, or just immeasurable?

Not surprisingly, the toughest things to negotiate are the toughest things to define. One of these was the cost of consulting. How many hours does it take to get from here to there? What if it takes more time -- a lot more time -- than predicted? We rejected both fixed price and open-ended estimates as not evenly sharing the risk. We agreed on language by which the less accurate the estimate, the less we paid per hour. We didn't want to overpay, and the vendor didn't want to work for free. Perfect.

Next on the toughest list were changes. Some software guys get very protective when anyone suggests their pride and joy can be improved. We promised to request changes only when necessary. Suggesting that we might want them to pay to alter perfection was close to heresy. "You want me to sacrifice my virtual flesh and blood, and you don't want to pay?!"

Now, what we should buy? We had more than 100 line items and 10 pages of supporting documentation. The basic problem: Nothing is simple. Take the question of how many users and how many licenses. Different applications have different ways of measuring users vs. licenses; end of the month user counts are different from midmonth. We risked overbuying licenses for the core system and underbuying for ancillary products. After a day of wrangling with these worms, you begin to feel your life force seeping away. And we still had maintenance costs to go.

Every contract will have a series of clauses that should go both ways, like the promises and penalties regarding confidentiality and termination of the agreement, but they don't start that way. Every ERP contract also will include clauses about training, conversions, services and warranties. Attorneys understand confidentiality and terminations but need help with IT stuff. They will say things like, "How would you describe bad training? How do you measure subpar software performance?" And the one we heard the most: "What does that mean?" These are memories that make my head hurt.

When we were done exploring the dark interior of the contract, we threw it back to our vendor's legal department. There is a difference between having a lawyer on retainer and having a legal department. The entrepreneur is motivated to solve your problems quickly, whereas the other seems to concentrate on puffery and procrastination.

Of course, the only good attorney is my attorney. When I saw that her annotated version of the original contract had as much text in sidebars as in the body of the contract, I asked her, "Why don't we just rewrite the contract?" She pointed out that a fresh contract could take the software company's attorneys weeks or months to review.

In the end it took almost two months to get to a final contract. As John F. Kennedy once said, "Let us never negotiate out of fear, but let us never fear to negotiate." This is true for negotiating with sovereign nations and software vendors.

And after negotiating with Baloo on an Alaskan river, I agree -- except when the opposing negotiator can eat you for breakfast.

Next: The contract is signed, and the work of planning and analyzing begins.

Les Johnson is CIO at North Coast Electric Co., a wholesale electrical distributor in Bellevue, Wash. To comment on this story, email ERPJourney@ciodecisions.com.

This was first published in June 2005

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