By: Arthur S. Beeman and Joel T. Muchmore
Every professional is painfully aware of the disruptive, even maddening, impact of malfunctioning computer and smartphone software. And, as maddening as that can be, it is another matter entirely when malfunctioning software impacts the daily operations of an entire company as happens with a failed ERP installations.
Failed or failing Enterprise Resource Planning (ERP) software installations are not only distressingly common, they can be time-consuming, demoralizing and expensive, even posing an existential threat to your company. Considering the large stakes, it is incumbent on in-house counsel to anticipate potential installation problems in order to protect their company’s right to demand remedial repair efforts and/or seek recovery of expended fees and damages.
ERP software is the integrated management of core business processes—the virtual artificial intelligence that organizations use to collect, store, manage and interpret data from a multitude of business activities. Under any metric, ERP use is extensive, with some studies showing that 81 percent of organizations have either installed or are in the process of installing an ERP system.1 Considering their centralized importance, it is not surprising that ERP installations can be staggeringly expensive, with some surveys reporting that 35 percent of organizations experienced installation costs of 1 to 3 percent of annual operating revenue and an additional 20 percent experiencing installation costs between 3 and 5 percent of annual revenue.2
Unfortunately, due to a multitude of issues (including increasing customization of ERP products), ERP installation is also prone to extreme customer dissatisfaction and, at times, outright failure. Some studies report that 26 percent of installations were judged by the licensee as a “failure,” 46 percent of licensees were “very dissatisfied” with their ERP vendor and an astonishing 74 percent of installations exceeded project budget.3
While every installation follows a different path, savvy in-house counsel of every company should bear in mind the following ten preventative and remedial considerations: five with regard to pre-installation preparation and five with regard to an installation that appears to be failing fast.
BEFORE THE ERP INSTALLATION
- The record should always reflect the fact that the licensor has the primary responsibility for implementation. No matter how savvy your company’s IT department is, an ERP installation is an overwhelming undertaking. While your company’s staff may have some understanding regarding the complexities involved, your licensor is better positioned to anticipate problems and pitfalls that can slow down or entirely derail your project. While reviewing the governing contracts and project materials, ensure that nothing limits your licensor’s primary role or otherwise places the responsibility for project success with your company.
- “Evergreen” v. Upgrade – Don’t be fooled by your company’s limited experience. Every installation either puts in place an entirely new ERP system (“Evergreen”) or is an upgrade or modernization of an existing ERP system. By nearly any measure, upgrading an existing system is more complicated and more error prone than installing an entirely new system. If your installation is an upgrade, beware of software vendors that downplay the complications of an upgrade and subtly shift a disproportionate amount of responsibility to the licensee and/or fail to allocate sufficient resources.
- Negotiate (or, at minimum, be aware of) contractual limitations of liability and limited warranties. Your licensor and/or third-party vendor will almost certainly have put in place carefully constructed limitations of liability and limited warranties accompanied by sole exclusive remedies for problems in an installation. Do not wait until an installation goes south before familiarizing yourself with these provisions. While they are often boilerplate, and are therefore unlikely to be entirely excisable, savvy counsel should strive to lessen the impact of certain aspects of these provisions.
- Clearly delineate the parties’ roles and responsibilities. Many large-scale ERP installations have three potentially responsible parties: the licensor, the licensee, and a third-party vendor that assists with certain aspects of the installation. Before your company undertakes any installation, be sure you are comfortable with the respective roles and responsibilities of the three parties and ensure that they are clearly delineated in the controlling agreements.
- Get everything in writing. Despite the fact that installations are excessively papered, a lot of representations still do not make it into writing. For example, members of your IT staff may believe there is an agreed-upon “80/20 split” in resources that will provided by the vendor and the licensee. However, once the installation begins going south and the finger pointing commences, you may discover that any such representations were never made in writing.
DURING (OR AFTER) A FAILING (OR FAILED) ERP INSTALLATION
- Obtain counsel experienced with troubled ERP installations. ERP installations are deceptive in that they tend to appear under control until the fateful moment where it is instantly clear to all parties that a critical juncture has either already passed or is rapidly approaching. Early retention of an experienced attorney can help ensure that your company is prepared for emergency decision making and that a record has been made to protect and support those decisions.
- Narrow your company’s points of contact with the licensor and third-party vendor. While it is typical for there to be dozens of important points of contact through a complicated installation, this can work against the licensee once an installation becomes troubled. Inhouse counsel should ensure that there are as few points of contact as possible in order to prevent your vendor from creating an adverse record that may ultimately limit your company’s options one an installation begins to go south.
- Beware of concurrent threats of service termination by your licensor. Your company can find itself in a bind if a dispute arises regarding a troubled installation while your company is also relying on that licensor’s software. Be careful to ensure that your licensor is not positioned to leverage threats of a potentially debilitating license termination in order to prevent your company from protecting its rights during a failed or failing installation.
- Pay attention to contractual elections of remedies. Many installation agreements have specific procedures that a licensee must adhere to in order to secure their right to remedial services and/or recovery or offset of lost costs. It is important to ensure that these provisions are reviewed and followed in order to protect your company’s rights.
- Tightly control all internal and external communication. Especially if a troubled installation begins to get contentious, your licensor or third-party vendor can be expected to solicit statements from your employees that will shift any of the blame to your company. Once an installation becomes troubled, the best and safest thing to channel as much communication as possible through counsel and otherwise limit the points of contact.
Because there is no such thing as a “typical” or an “easy” ERP installation, there is also no one-size-fits-all approach to protecting your company from the myriad of potential pitfalls. However, by taking certain of the preventative and remedial actions described above, your company will be a better position to demand corrective actions and, if necessary, recovery of expended fees and damages. Learn more about our software auditing and licensing practice.
1. ERP – Facts, Statistics, and Trends in 2017, September 11, 2017, accessed at http://www.technousa.com/blog/erp-trends-facts-statistics-2017-18.
2. ERP – Facts, Statistics, and Trends in 2017, September 11, 2017, accessed at http://www.technousa.com/blog/erp-trends-facts-statistics-2017-18.
3. 2017 Report on ERP Systems and Enterprise Software, Panorama Consulting Solutions, accessed at https://www.panorama-consulting.com/wp-content/uploads/2017/07/2017-ERP-Report.pdf.
Published on 5/31/2020