Your ERP Contract is Worse Than You Thought
February 12, 2020 Alex Woodie
Marcus Harris knows a bit about ERP contracts and litigation. As a former lawyer for SAP and Infor, he’s the guy that ERP customers would have gone up against in court or a mediation room when a disagreement arises. But he switched sides and now he works on behalf of clients looking to hold their ERP vendors to account. He provided some worthwhile advice at the recent Digital Stratosphere 2020 conference in San Diego.
Like most lawyers worth their salt, Harris would rather not represent you in court. Sure, it gives his firm, Taft Stettinius & Hollister LLP, lots of billable hours, but it comes at a steep cost to you. According to Harris, filing a breach of contract lawsuit against an ERP vendor is, at minimum, a $500,000 affair, and with a $50,000 per month burn rate, the lawsuit can quickly reach into the millions of dollars.
“I like you guys, but we don’t want to have much interaction,” Harris told attendees of Third Stage Consulting’s Digital Stratosphere 2020 event two weeks ago. “There’s better things to do with your time and money.”
Litigation should always be viewed as last resort to fix a failed ERP implementation. “Invest the money you would invested in [the lawsuit] . . . to try to right-side your implementation, because you’re about to spend a tremendous amount of money, potentially more money that you spent on your implementation, if you go down the litigation route,” he says.
Harris, who works out of Taft Law’s Chicago office, says litigation can often be avoided by spending a little bit of time and money up front to craft a good ERP contract. It’s important to set clear expectations in the contract, including spelling out exactly what you expect the software to do, when you expect to do it, and remediations that will take place when milestones are not met. User acceptance testing should be part of those requirements too.
“It’s great to think about this and understand why you want to implement ERP, having identified your business processes and thoughts about these things,” Harris says. “But if you just think about them, it doesn’t do me very much good. What you have to do is you have to detail it in the actual contract . . . so it actually means something, so you can fundamentally pull that contact down, hold that vendor’s feet to the fire and say ‘This is what you committed to. This is what you have an obligation to provide.'”
The problem is that ERP customers rarely spend enough time writing a contract that’s favorable to them, Harris says. When the ERP vendors’ contract is signed without modification, it gives the vendor the upper hand in the relationship. If things the implementation goes sour down the road, it leaves the customer less maneuvering room to seek a remedy.
“These contracts are horrible,” Harris says. “Your contract is worse than you think. They’re incredibly one-sided. Every paragraph, every sentence, every comma, and every period in that agreement, especially if you didn’t negotiate it, is going to be slanted again you and going to be in favor of your vendor.”
Harris’ legal team works on behalf of clients to craft contracts that are more favorable to clients than the standard contract that ERP vendors supply. He encourages all clients to read the contracts carefully, and make changes where they need to, particularly in areas pertaining to warranties, to limitation of liabilities, and review and remedy provisions.
Early legal advice is not necessarily expensive, but late legal advice can be very expensive, Harris advises. “If you’re going to spend $3 million on SAP, spending on legal analysis is money well-spent,” he says. “Spending $100,000 on legal feels saves at least that much on the backend if you have a dispute.”
But ERP implementations go wrong even when you work somebody like Harris to craft a favorable contract. It’s rarely a technology problem (although those sometimes occur), Harris says, but customers invariably feel they were misled. “Clients come to us upset, wanting to sue, because they were oversold on the software,” he says. “They weren’t looking at this with a jaundiced eye. They bought the sizzle, there was no steak behind it, and now they’re upset.”
Harris says he has a number of clients who didn’t spend investigate the ERP software appropriately, and even some who selected their ERP package because that’s what others in their industry are doing. Needless to say, that’s the wrong way to go about selecting enterprise software.
“Generally, the technology works, the software works,” Harris says. “What we see when we’re involved in ERP implementation failure is it’s not a failure of the technology or the software necessarily. It’s a failure of process. It’s a people problem. They’re not IT projects. They’re people projects, and they have to be managed that way. That’s where we get involved. That’s not to say ‘We got oversold technology and the technology truly didn’t work.’ We see that too. But it’s not that common.”
Harris often works with Erik Kimberling, the founder and CEO of Third Stage Consulting, to examine his client’s ERP project failures. Kimberling says he has been an expert witness in a couple dozen of Harris’ lawsuits over the past several years, and the two shared stories about high profile ERP project failures (for more on Kimberling’s tips, see “How To Not Fail With Your ERP Implementation” in the February 3, 2020 issue of this newsletter).
One of the most critical tasks is to document all communications with the ERP vendor and the system integrator who is implementing the software (or the vendor’s implementation staff), Harris says. This is a critical element for holding ERP vendors’ toes to the fire, he says, because if it’s not written down, it won’t hold up in court.
The attorney recounted one case where a client was suing an ERP vendor about a failed project but had some big gaps in the story. “Every time they [the vendor] were making these representations in an email or alluding to them, they’d say, ‘Yeah, but don’t worry about it. Let’s take it offline. Let’s have a phone call,'” Harris says. “The client never documented it. It’s a big piece of evidence that we just don’t have.”
But you also have to worry about sharing too much in those emails. During discovery, lawyers will have access to all email, Slack conversation, texts, and other relevant communications, and they’ll go through them with a fine-tooth comb. For ERP implementations that take years (as the failed ones invariably do), this adds extra time and cost to the litigation, and increases the chances that non-company errata (such as inter-office romances, rivalries, and the IT department’s racist jokes) comes to light. “You’ve got to be careful what you write, because it will come to the surface and it will be used out of context against you,” Harris says. “So always be cognizant about where things are going.”
In most cases when ERP implementations go bad, there’s plenty of blame to go around, Harris says. The vendor will likely accuse the customer of not adapting their own business processes to the way the software works, while the customer will say the implemented software didn’t do what they were promised it would do. Harris and his team will untangle the ERP dream from the ERP reality, and figure out how it got there.
“We spend a tremendous amount of time and due diligence in trying to figure out where the responsibility is,” he says. “Certainly, there’s going to be responsibility outside the client. Usually, in almost every situation, there’s a tipping pint where the point of no return is passed. In the cases we litigate, it’s usually the vendor, the system litigator. We don’t litigate cases where our clients were at fault.”
Another factor to consider before filing suit against an ERP vendor is whether you’re planning on using the software going forward. It’s not unheard of to continue using the software, Harris says. But in other cases, the vendor has been known to pull support from a client who has sued them, so that’s worth keeping in mind.
It’s also helpful to think about what you want to get out of an ERP lawsuit. In some cases, filing a lawsuit will help lower the ongoing cost of maintenance for customers or get them discounts on other products. You might file to get leverage to force a settlement or to reimburse you for the cost of replacement system. “Sometimes it’s perfectly reasonable to file a lawsuit as a strategic move to resolve a dispute you could otherwise not resolve,” he says.
Lastly, Harris stressed the fact that success in court is not guaranteed. “Even with the best facts, you have an 80 percent chance of winning, but you don’t have the best facts,” he says. “This is not a fun deal. This is not something you enter into lightly.”
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