Using ERPs for a competitive advantage 8 min read
Enterprise Resource Planning (ERP) systems are the backbone of modern business operations, seamlessly integrating processes from accounting to human resources. With AI advancements, analytics and cloud computing, these systems offer greater capabilities to organisations than ever before.
The rapid evolution of ERP offerings in the market, alongside the discontinuation of several legacy ERP systems, has led to a significant rise in organisations seeking to upgrade or replace their ERP platforms.
Despite the benefits they offer, ERP projects are not without risk and a failed ERP project can lead to catastrophic consequences. There are many high-profile examples of ERP implementation failures resulting in cost overruns, supply chain disruptions, declining productivity and severe reputational damage.
In this Insight, we explore tips and strategies for facilitating a successful ERP implementation.
Key takeaways
- The functionality and capabilities of ERP systems have advanced significantly.
- Implementation of ERP systems can be high-risk. Careful planning, robust project management, and strategic stakeholder engagement are vital to a successful ERP deployment.
- Contracts with ERP vendors and systems integrators should be customised to address technological advancements, current regulatory requirements, and best practice information security protections.
Who in your organisation needs to know about this?
Legal teams, IT personnel, innovation and procurement teams.
What is an ERP system and what are the key features?
An ERP system is a software solution that manages the core processes of a business, such as accounting and finance, customer relationship management (CRM), procurement, logistics, and human resources.
Newer ERP systems offer:
- improved functionality and technology - whether that's automation, AI-driven insights, real-time analytics or more widespread integrations with other business tools and systems;
- enhanced functionality tailored to specific industries and business needs – including both operational needs as well as audit or reporting requirements;
- more robust data security and regulatory compliance measures; and
- a more intuitive user experience.
These developments have made ERP systems indispensable for businesses aiming to improve efficiency, gain valuable insights from data, and maintain a competitive edge.
Seven tips for a successful implementation
To manage implementation risks, careful project management is vital. Below, we set out tips for your next ERP project:
| 1. Leverage your Systems Integrator (SI) and scope their contract carefully |
SIs can, and often do, make or break a project. The value of an SI lies in their experience – leverage their knowledge and ask for input on all key project decisions. Trust is crucial and can be fostered through a good governance framework and a clear understanding of each party's inputs and obligations. Be wary of pricing that seems too good to be true. If the scope of services in your SI contract is too lean, it may increase the risk of scope slippage, change requests and cost blowouts. |
| 2. Identify key stakeholders, clarify their involvement, procure their buy-in, and estimate time commitments |
While there is often one key ERP sponsor (eg the CFO), it is crucial to consider all stakeholders who will be impacted by the new system. Securing leadership support from various business units is essential as each will play a role during the project. Input from key stakeholders should be sought at all stages of the project – from the request for proposal (RFP) design to solution design/scoping, technical discussions, contract requirements, down-selection and ultimately execution and implementation. |
| 3. Evaluate what transitional support is required of existing (outgoing) vendors |
Consider the support required from both outgoing and incoming vendors for a smooth transition. Understanding the scope of work to disentangle existing systems and extract relevant datasets is critical to ensuring the project is delivered on time and on budget. If additional support is required, negotiate this when you have the most leverage (eg when the RFP is issued). |
| 4. Carefully consider and document key pre-implementation milestones |
By carefully planning pre-implementation activities, organisations can de-risk timelines and cost overruns. These include decisions or tasks that are difficult to reverse once implemented or require long lead times for approval (eg updates to Delegations of Authority). |
| 5. Prepare a comprehensive timeline factoring in key contractual milestone dates and internal organisational changes that need to occur |
ERP programs often fail due to change management issues rather than technology problems—the tech works, but people struggle with change. Consider what extra training or hyper-care support you might need from the vendor to ensure a seamless transition to the new ERP system. Avoid aligning policy changes with go-live dates as it can lead to confusion and misplaced blame on the technology instead of new policies. |
| 6. Clearly define the responsibilities of each party in your contract, and specify a single point of accountability |
Ideally, vendors should be accountable for the supply of a successful holistic solution or outcome, not just the delivery of individual components of the ERP solution. Having a single point of accountability - ie 'one throat to choke' - for key milestone (eg particular transition or integration steps) mitigates the risk of finger-pointing between vendors if things go awry. |
| 7. Schedule regular 'health checks' between legal and vendor management teams |
Post-implementation, management of the relationship with ERP vendors and support contractors is often left to operational teams and contract managers. Strategic, proactive legal engagement during the contract lifecycle can assist contract management teams to ensure that contractual obligations are met, potential risks are mitigated, and any disputes are resolved efficiently. |
Addressing key objectives
Contracts with your ERP provider and SI should include contractual controls designed to ensure key objectives are achieved. Below, we have detailed the mechanisms to achieve these objectives:
- Fixed fees can provide price certainty for a pre-defined scope.
- Where time and materials rates are used, contractual protections should be included to incentivise the efficient use of resources and prohibit double charging where re-performance is required.
- Pain-share/gain-share mechanisms can be utilised (for example, splitting excess fees 50:50).
- Cost reductions resulting from technology improvements should be 'baked in' to pricing arrangements.
- Include a clear and detailed scope of services, with customer control over acceptance testing.
- Require suppliers to provide all 'incidental services' necessary for service outcomes (ie a 'catch all' obligation).
- Extend warranty periods past implementation to identify errors and ensure real-world performance.
- Tailor your service incentives, including service levels/credits, performance incentives, and liquidated damages to encourage optimal performance.
- Require the supplier to provide continuous improvement to quality, efficiency and effectiveness of services or underlying technology.
- Include record keeping and reporting obligations, combined with a sensible governance regime.
- Consider including key personnel commitments, particularly for critical services (eg key SI personnel).
- Contract on a non-exclusive basis.
- Design an intellectual property ownership and licensing regime that enables new IP to be shared with any incoming suppliers.
- Consider engaging suppliers on a phased basis to avoid commitment to a single supplier, allowing for stakeholder input at each phase. For ERP vendors, consider rolling out the platform module by module.
- Include robust transitional assistance upon termination/expiry.
- Consider termination for convenience rights.
- Negotiate meaningful supplier liability caps and indemnities.
- Consider suspension for cause rights.
- Include step-in rights or rectification plan obligations, particularly for SI services.
- Require the supplier to remain accountable and liable for its subcontractors.
Recent legal developments
With the rapid evolution of ERP systems, what is 'market practice' in ERP agreements with software providers and SIs has materially evolved. Key provisions that should be carefully considered include:
What is market for liability caps, super caps, and exceptions to the cap has evolved significantly over the past five years, particularly when it comes to data and privacy-related losses.
Vendors are now more focused than ever on minimising their exposure under these provisions. Negotiation is often required to move to a more middle-of-the-road or customer-favourable position.
Contracts should be tailored to include up-to-date information security protections, reflecting the heightened risk of cyber incidents and evolving industry standards and regulatory requirements.
Include detailed security requirements, incident response protocols, and obligations for regular security testing.
Visibility into third-party provided services or components of the ERP system or support services is vital in mitigating cyber risk as well as managing ESG risk and reporting requirements.
There is a growing emphasis on detailing the consequences of programmatic data loss or corruption in connection with ERPs (eg data loss due to bugs, faulty system logic, updates or patches, or misconfigured processes).
Consider not only the scope of the vendor's liability in connection with such loss but also what data that liability should extend to, and the vendor's reconstruction and restoration obligations.
The increased use of AI as part of ERP systems can help businesses unlock new functionalities and efficiencies.
Include provisions for AI performance standards and transparency, data usage and privacy compliance, and vendor obligations for regular updates and improvements. Liability for AI errors should also be addressed, as well as clear IP rights over AI-generated outputs.
Consider what obligations are imposed on the vendor for technology improvement during the life of your agreement, as well as your organisation's rights to access these improvements or updates.
Given the pace of technological advancement, this is particularly critical for ERP systems requiring difficult or costly integrations or which have long contractual terms.
What businesses can do
An ERP upgrade is a major IT investment that, if well implemented, can significantly enhance business operations and provide a competitive advantage. Getting it right relies on meticulous planning and execution from a strategic, operational, and legal perspective.