Right in Our Backyard: The Crash of Silicon Valley Bank and What it May Mean for ERP Licensees

If ever pride went before the fall of an institution, Silicon Valley Bank (SVB) is a prime example.

SVB, founded in 1983 in Santa Clara, California, had touted itself as the “financial partner of the innovation economy”. In support of its self-praise, SVB claimed to bank for nearly half of all U.S. venture-backed startups as of 2021. With more than $200 billion in assets and status as the sixteenth largest bank in the U.S., SVB was a Silicon Valley institution.

But on the latest Black Friday in financial history – March 10, 2023 – SVB suffered a sudden and swift collapse, marking the second-largest bank failure in U.S. history. For all its glitz and glamour along with its affiliation with start-ups offering the latest new thing, SVB was crushed largely as a result of a good, old-fashioned run on the bank. The more things change, the more they stay the same: SVB was done in by a phenomenon that our ancestors endured during the Great Depression.

What Silicon Valley Bank Can Teach Us About Risk Management in the ERP Space

All business – not just banking – is fundamentally about trust and confidence. When those pillars of commerce erode, business becomes more about speculation, and risks become unmanageable. And, when companies rely greatly on any service – whether banking or ERP technologies – they are especially vulnerable. Beeman & Muchmore has followed the SVB story closely, and after our years (if not decades) of helping clients manage critical risks, we know to train a keen eye toward the potential knock-on effects for our clients.

We harbor concerns that the worldwide recession in the tech industry, which started some months ago with massive layoffs, will deepen upon the collapse of SVB. With profit margins stressed as IT spending weakens, ERP vendors looking for quick money to soften the downturn will become more assertive in attempting to squeeze money out of their existing client base.

In our space, managing the risk brought out by aggressive ERP providers boils down to two core issues: (1) putting in place preventative measures at the ERP procurement stage; and (2) defending your rights in a reactive response to ERP vendor demands in auditing and compliance.

Preventative: ERP Procurement

The purchase of ERP licenses and/or installment contracts can be a rushed affair, often even happening through online portals with click-through agreements. It is entirely typical for licensees to never fully understand their license rights until they retrieve the terms while defending against an audit or compliance demand. Often, licensees are aghast when they come to fully understand how they have unknowingly compromised their rights.

Borrowing on the adage that “an ounce of prevention is worth a pound of cure,” Beeman & Muchmore has established a Procurement Practice. Our Procurement Practice will look to manage those risks for our clients by offering counseling on the front end – before ERP contracts are finalized and executed.

Beeman & Muchmore has a rich history of negotiating for our clients against the most prominent ERP vendors in the world. Our counseling has included negotiations related to the procurement of ERP systems by our clients and how the terms and conditions of a contract best manage risks related to those technologies. For example, we have focused during the procurement phase on contract provisions for dispute resolution that mandate negotiation periods which largely take litigation off the table, thus protecting our clients from threats of costly and distracting lawsuits by vendors.

With the formation of our Procurement Practice, Beeman & Muchmore will further build out its database and resources related to ERP contracts and be prepared to protect our clients on the front end from belligerent audits and other stratagems by software vendors in search of dollars in a soft economy.

Reactive: Audit Defense and Other Compliance Issues

However, not even the most proactive preventative measures will eliminate the risk of aggressive vendor compliance disputes. And, as ERP providers feel the pinch of slowing sales in a sluggish economy, it is a virtual certainty that they will target their existing licensees with either formal audits or aggressive sales. In the case of Oracle, new Java licensing metrics have launched a wave of “soft audits” (a.k.a. sales calls that are audits in all but name) while also bundling Java into formal audits. In our experience, Oracle’s formal audits are taking an increasingly aggressive posture: fixing higher dollar figures to allegations of noncompliance, resolving more slowly and relying more on bare knuckle tactics.

It is not just Oracle. Following suit, second tier vendors, such as Quest and Micro Focus (the latter recently purchased another similarly situated two tier vendor, OpenText), are ratcheting up the aggression in their auditing approach. Showing little to no hesitation in bringing disputes right up to the brink of litigation, in some instances, they are actually litigating against their licensees.

Any licensee who is fielding requests from a software vendor is best advised to lawyer up and proceed with caution. Beeman & Muchmore is built on its extensive experience fending off vendors in formal and soft audits, and we are always available to speak to your issue.

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The SVB debacle has reminded us that risk is the one constant in business. Wishful thinking or turning a blind eye to those risks will not make them go away. It is the unwavering duty of Beeman & Muchmore to meet those risks squarely for our clients and maintain the trust and confidence which are the pillars of our law firm.

Published on March 20, 2023