Tips & tricks: Successfully negotiating ERP software contracts

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ERP software contracts- Many companies use enterprise resource planning (ERP) systems for the management of their main business processes. At a certain point in time, these companies will be confronted with a need to replace or upgrade their ERP systems or switch to the cloud, and will be required to engage in commercial and contractual discussions with (large) ERP software vendors. ERP software vendors inevitably use standard terms and conditions that apply uniformly to all customers and negotiating deviations from these standard terms and conditions is not always easy to obtain for the customer or to manage for the ERP software vendor. However, given the importance of ERP software to a company’s day-to-day operations and the often high value of such contracts, deviations are sometimes unavoidable for customers that require terms that are appropriate to their business.

Below we share a number of tips and tricks for both customers and ERP software vendors that can help to successfully negotiate ERP software contracts.

  1. Use rights: Firstly, it is important to assess who needs to have the right to use the licenses or cloud services. Typically, only the party signing the contract, and sometimes its (listed) affiliates, are granted the right to use the licenses or cloud services. It therefore needs to be verified in each case whether the proposed definition of ‘affiliate’ (which is not always aligned with the Belgian law definition) is consistent with the actual structure of the customer’s company. In addition, it is to be considered whether new affiliates (entities that may be acquired during the term of the contract) also need to have a right to use the licenses or cloud services. In many ERP software contracts, such use right will need further consideration. If other parties, such as end-customers, distributors and third-party goods and service providers also need to have the right to use the license/cloud services, it is recommended to clearly state this in the contract.
  2. License and use metrics: Secondly, it is also important that the software license and use metrics are clearly defined. A typical issue we see in practice with respect to license and use metrics relates to the agreed number of users. While the terms ‘use’ and ‘user’ may seem relatively straightforward concepts, the interpretation thereof can lead to extensive discussions. A widely known example of such discussions relates to ‘indirect use’ or ‘indirect access’. ‘Indirect use’ or ‘indirect access’ is generally understood as referring to a user or third-party application creating, manipulating or viewing data in the licensed ERP software through an interface between the third-party application and the licensed ERP software. According to some ERP vendors, such ‘indirect use’ or ‘indirect access’ must be included in the calculation of the total number of users. This, however, is not always in line with the customers’ expectations and may lead to unexpected consequences following an audit. To avoid such situations, it is relevant to explicitly agree on concrete examples of actions which do not qualify as ‘use’ of the software. Customers also need to assess whether it is acceptable for the ERP vendor to unilaterally change the license and use metrics (e.g. as a part of certain policies). The ERP vendor often requires this flexibility, but from a customer point of view this may need to be addressed during the negotiations.
  3. Audit and over usage: The audit clause is an important clause that requires careful legal review and alignment with the operational and commercial teams. A first point of attention is the starting point from which the ERP vendor is allowed to perform audits and the frequency with which such audits may be conducted. If the customer is still unsure at the contract date about the exact number of licenses it would need, it could be useful that the parties agree on a grace period in order to identify the exact number of required licences in the framework of an audit and to adjust the contract accordingly. A second point of attention are the fees that apply and/or penalties that would become payable in case of over usage. Furthermore, the scope of the ERP vendor’s audit right should also be clearly defined. Access for more information on this topic.

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