Cloud ERP software – how to negotiate a good deal
Perceived flexibility doesn’t always work both ways
The perceived flexible nature of cloud-based software has meant it has become an ever more present fixture in organisation IT infrastructures.
Many organisations have opted to implement, usually at a substantial cost, a cloud-based ERP solution on a long-term contract, often from the big, blue-chip providers.
This can be beneficial to a growing business who may foresee a need to increase the number of user licenses in the future.
However, if growth does not go to plan, it soon becomes apparent that the perceived flexibility doesn’t work both ways. Once the number of licenses has increased, it is very difficult to reduce mid contract. This is a huge financial strain on any organisation who are no longer getting value for money.
And what makes this worse is that many organisations facing this predicament are simply unaware that the problem exists.
Clarifying requirements and making sense of the cost model
Without appropriate management, organisations can find themselves paying for more licenses than they actually require. Completing a full audit on the number of licenses an organisation requires - a straightforward exercise - is a crucial first step.
It is often the case, however, that there are several different license types and associated unit costs. Therefore, organisations should complete a full requirements audit to understand whether a license type is meeting or exceeding the specific user requirement.
Building a cost model, using the contracted rates, which reflects the organisational requirements will provide the clarity on what an organisation should be paying, and therefore the opportunity for a tangible saving.
Dealing with intermediaries. Are they really adding value?
The contractual agreement itself is frequently held with one of many accredited, approved, software vendors, as opposed to the software developer itself. The vendor would usually, at an additional cost, provide services to adapt and maintain the piece of software for their client.
There will also be a contractual relationship between the vendor and developer, providing the vendor with a proportion of revenue from the software license. This means that companies are negotiating with more than one party, but usually only have contractual and commercial engagement with the vendor.
Recognising the Alternatives and the Negotiation Levers
Using Porters’ ‘5 Forces’ model (full credit to Michael E. Porter of Harvard, "How Competitive Forces Shape Strategy," May 1979 (Vol. 59, No. 2), pp. 137-145.), it is possible to understand Competitive Rivalry for each of the interested parties, and therefore identify the appropriate ‘negotiation levers’.
The ERP solutions market is crowded, with many providers keen to leach business off their competitors.
It is therefore important to identify alternative software solutions and develop a cost model, taking into account implementation, ongoing costs and the disruption that it can cause to the business. The alternative software developers could propose a viable commercial offer, in return for a level of commitment, but importantly at a user specification that reflects the organisations requirements.
It is equally important to identify viable alternative vendors for the cloud-based solution. This process can identify opportunities for increased discounts, or a commercial incentive, in return for a commitment to selecting them as a partner at the end of a contract term.
These alternative options identified are your ‘negotiation levers’ when engaging with each of the interested parties of the agreement.
Executing the negotiation
In order to effectively execute any negotiation, it is vital to engage with the appropriate person.
In this case, negotiations should be directed to the most senior individual available within each interested party; the software vendor and the intermediary.
In reality, this would be at executive level within the software vendors organisation and a senior sales manager within the software provider.
Engaging each party separately in a ‘face to face’ meeting, where they are aligned to the disparity identified within the commercial agreement, allows the effective utilisation of the appropriate negotiation levers. Conditioning the interested parties to understand that, in the long term, the proposal is also in their interest - and providing insight into the recognised alternatives - will put pressure on each of the interested parties to allow for a resolution.
The interested parties will inevitably communicate with each other, as they may have a contractual agreement. Persistent pressure is critical from the internal stakeholder group, to gain traction with each of the parties in approving a potential new deal.
Despite the potential difficulty in navigating a negotiation at this level, if done correctly it is possible to realign the agreement to the organisations requirements whilst still under contract.
You can get a good deal!
A relatively small multi-site manufacturing business saved more than £100k per year on the cost of their cloud-based ERP software through right-sizing, commercial negotiation and re-contracting.
Points to consider
- Auditing user licenses for cloud-based software demonstrates the gap between what is being paid for and what is actually required. This will reveal the real opportunity for tangible cost savings.
- Mapping out the external stakeholders and using Porters 5 Forces to understand key negotiation levers is critical to the success of the negotiation strategy.
- Prepare and execute a detailed negotiation plan. Executing the negotiation with precision is required when engaging with the big blue-chip software providers.
- If you do it right, you can get a good deal