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Key Elements of a Good ERP Implementation
By Diana J.P. McKenzie, Amir Azaran and Jamie Newton
The benefits of enterprise resource planning (“ERP”) software can be alluring to any organization. ERP software can increase business process efficiency and reduce Sarbanes-Oxley reporting burdens, and new ERP implementations are correlated with increased share prices. Unfortunately, 90 percent of ERP implementations are late or more costly than first anticipated.
In an effort to help lower this astounding number, we provide the following list of suggestions. As the list indicates, and as our experience in drafting and negotiating ERP implementation contracts demonstrates, it is careful preparation coupled with a sound contractual framework that enables customers of ERP software to better handle many of the problems that are common to ERP implementations.
- Baselining - Before soliciting ERP vendors, a company should analyze its current business processes and service levels in order to develop a sound strategy for the implementation. Often this is best achieved with the help of an outside consultant. To avoid any conflict of interest, any consultant hired to perform a baseline should not be affiliated with any of the potential implementing vendors.
- Business Process Re-engineering - Because vendors become acquainted with a customer’s business processes during the course of an implementation, vendors can help identify business processes that are not “industry best practices.” Therefore, the parties should establish a procedure for the vendor to submit formalized reports providing suggestions on business process re-engineering and organizational change management.
- Vendor Project Team - Because the outcome of an ERP implementation depends on the quality of the vendor’s personnel, creating and keeping a strong vendor project team should be a priority for any customer. Unfortunately, although vendors initially assign their best personnel to a new project to overcome initial hurdles, they are often replaced by the “B” team while the “A” team is reassigned to a newer customer or a more difficult implementation. Customers can help mitigate this “project team shuffle” by creating a contractual right to interview and approve the replacement of any key project personnel. Not only does this assure a quality team from the beginning of the implementation, it more effectively retains the customer-specific knowledge key personnel develop over the course of a project.
- Project Scope Creep - Like most other types of projects, ERP implementations are susceptible to scope creep. Because changes in project scope lead to change orders - which in turn increases the vendor’s profit margin - it is often in the vendor’s interest to actively encourage scope creep. Customers can avoid unnecessary change orders by creating a formal change order governance procedure within the contract. The procedural hurdles put in place by the governance procedure tend to discourage expensive and time-consuming changes.
- Limitation of Liability and Vendor Repudiation - ERP implementation contracts are certain to have a “limitation of liability” provision, which typically puts a cap on each party’s liability for claims related to the contract. But a liability cap will encourage a vendor whose costs of carrying out a complex implementation exceed the liability cap to abandon the project in order to cut its losses. Altering the contract to omit from any liability cap the vendor’s repudiation of the contract prevents the vendor from walking away from implementations when the going gets tough.
- Staff Hiring and Right of First Refusal - It is no secret that finding and keeping qualified technical personnel is challenging in today’s labor market. Customers often find themselves competing with their own implementation vendor for personnel to run an ERP project. A contractual provision that gives the customer a right of first refusal for anyone the vendor considers hiring for the implementation can help to “level the playing field” with respect to access to an ever-shrinking pool of technically-qualified talent.
Customer
- Surveys - Another way to assure a healthy long-term relationship through the parties’ contract is through a provision that requires the vendor to conduct surveys of customer satisfaction. By tying fees to the survey results, the vendor is provided with a monetary incentive to maintain a good working relationship with the customer. This kind of provision can be especially effective if it requires the annual bonuses of the vendor’s key personnel, such as its project manager, to be based on the survey results.
- Customer Referrals - Putting the vendor’s reputation at stake by contractually mandating that the customer be included in all of the vendor’s reference requests, or at least requiring the vendor to prominently display the customer’s name on its Web site, also provides an incentive for the vendor to achieve good customer satisfaction.
Taking the time to address the difficulties inherent in ERP projects in advance through a sound contractual framework will lead to a more successful ERP implementation, saving the customer time and money and allowing the customer to more quickly realize the benefits of ERP.
About the Authors
Diana J. P. McKenzie is chair of Neal Gerber Eisenberg’s Information Technology Practice Group (www.ngelaw.com). McKenzie has a nationwide practice focused on providing practical and strategic legal advice to clients on significant technology, privacy and security, HIPAA and electronic commerce transactions.
Amir Azaran is a member of Neal Gerber Eisenberg’s Information Technology Practice Group. Azaran focuses his practice on technology-related transactions, including systems integration, software development and technology licensing transactions, outsourcing engagements, and consulting and support services agreements.
Jamie T. Newton is expected to graduate from the Chicago-Kent College of Law in 2008. He has served as a summer associate at Neal, Gerber & Eisenberg LLP.
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