Tips and tricks: Successfully negotiating ERP software contracts

Many companies use enterprise resource planning (ERP) systems for the management of their main business processes. At a certain point in time, these companies will be confronted with a need to replace or upgrade their ERP systems or switch to the cloud, and will be required to engage in commercial and contractual discussions with (large) ERP software vendors. ERP software vendors inevitably use standard terms and conditions that apply uniformly to all customers and negotiating deviations from these standard terms and conditions is not always easy to obtain for the customer or to manage for the ERP software vendor. However, given the importance of ERP software to a company’s day-to-day operations and the often high value of such contracts, deviations are sometimes unavoidable for customers that require terms that are appropriate to their business.

Below we share a number of tips and tricks for both customers and ERP software vendors that can help to successfully negotiate ERP software contracts.

1. Use rights: Firstly, it is important to assess who needs to have the right to use the licenses or cloud services. Typically, only the party signing the contract, and sometimes its (listed) affiliates, are granted the right to use the licenses or cloud services. It therefore needs to be verified in each case whether the proposed definition of ‘affiliate’ (which is not always aligned with the Belgian law definition) is consistent with the actual structure of the customer’s company. In addition, it is to be considered whether new affiliates (entities that may be acquired during the term of the contract) also need to have a right to use the licenses or cloud services. In many ERP software contracts, such use right will need further consideration. If other parties, such as end-customers, distributors and third-party goods and service providers also need to have the right to use the license/cloud services, it is recommended to clearly state this in the contract.


2. License and use metrics: Secondly, it is also important that the software license and use metrics are clearly defined. A typical issue we see in practice with respect to license and use metrics relates to the agreed number of users. While the terms ‘use’ and ‘user’ may seem relatively straightforward concepts, the interpretation thereof can lead to extensive discussions. A widely known example of such discussions relates to ‘indirect use’ or ‘indirect access’. ‘Indirect use’ or ‘indirect access’ is generally understood as referring to a user or third-party application creating, manipulating or viewing data in the licensed ERP software through an interface between the third-party application and the licensed ERP software. According to some ERP vendors, such ‘indirect use’ or ‘indirect access’ must be included in the calculation of the total number of users. This, however, is not always in line with the customers’ expectations and may lead to unexpected consequences following an audit. To avoid such situations, it is relevant to explicitly agree on concrete examples of actions which do not qualify as ‘use’ of the software. Customers also need to assess whether it is acceptable for the ERP vendor to unilaterally change the license and use metrics (e.g. as a part of certain policies). The ERP vendor often requires this flexibility, but from a customer point of view this may need to be addressed during the negotiations.


3. Audit and over usage: The audit clause is an important clause that requires careful legal review and alignment with the operational and commercial teams. A first point of attention is the starting point from which the ERP vendor is allowed to perform audits and the frequency with which such audits may be conducted. If the customer is still unsure at the contract date about the exact number of licenses it would need, it could be useful that the parties agree on a grace period in order to identify the exact number of required licences in the framework of an audit and to adjust the contract accordingly. A second point of attention are the fees that apply and/or penalties that would become payable in case of over usage. Furthermore, the scope of the ERP vendor’s audit right should also be clearly defined. Access for more information on this topic.


4. Suspension or termination of the license/cloud service: Taking into account the often business-critical nature of ERP software for a company, customers typically also pay attention to the ERP vendor’s suspension and termination rights. The more business-critical the application, the more impactful the ERP vendor’s right to suspend and/or terminate the service delivery will be for the customer. In addition to limiting the relevant triggers, ways to manage or control the execution of such rights could, for example, involve agreeing on a prior notification, a period to cure any breaches and/or an escalation meeting to management level.


5. Termination of support services and reinstatement fees: In relation to on-premise products, it is not always clearly stated whether the ERP software contract allows for the termination of the support services without terminating the license itself and/or to terminate certain support services separately. It is in both parties’ interest to clearly agree this upfront to avoid extensive discussions at a later stage. Moreover, before terminating any support services, it needs to be taken into consideration that ERP software contracts may require to pay a ‘reinstatement fee’ in case the customer would decide to reinstate the support services after a temporary termination.


6. Liability: Like in every contract, the liability clause deserves particular attention. Typically, customers will focus on whether the liability cap is sufficiently high in light of the risks it is exposed to. This is mainly a commercial discussion. Often, customers require unlimited liability for certain types of damages. As it will be almost impossible for ERP software vendors to accept unlimited liability (unless in the usual cases of e.g. fraud or willful misconduct), a typical workaround is making them subject to a supercap. In addition, it needs to be verified whether the types of losses for which a party cannot limit its liability by law are effectively excluded from the liability cap in order to avoid that a limitation of liability clause would be unenforceable or considered null and void under the applicable law. Many ERP software contracts are drafted from an Anglo-Saxon perspective and contain a clause which fully excludes the ERP vendor’s liability for certain types of (indirect or consequential) losses. As the concept of ‘indirect’ losses does not exist under Belgian law, it is recommended to include an exhaustive list of the types of ‘indirect’ losses for which liability is excluded. In relation to service levels (for instance with respect to incident management and availability of the ERP system), it is often stipulated that the applicable service credits are the customer’s sole and exclusive remedy for the ERP vendor’s failure to achieve service levels. It should always be assessed whether the amount of the service credits and/or the fact that such service credits are its sole and exclusive remedy are appropriate and enforceable, taking into account the customer’s business risks as well as taking into account the recent Belgian B2B Act (on which more information can be found here).


7. Data protection: Particularly in relation to cloud services, the location of storage of personal data may be of key importance. There is a trend among ERP vendors to give customers the option to choose the data center location/region in which their personal data will be stored. Some ERP vendors also offer a (payable) option to only work with sub-processors located in the EU. In addition, it is in both parties’ interest to make sure that the data processing agreement is compliant with the GDPR. Finally, it needs to be validated whether the period to retrieve customer data at the end of the contract is sufficiently long. To avoid discussions in the future, it could also be relevant to pre-agree on the format in which the customer data needs to be returned.

Appropriately dealing with these common issues and pitfalls during the contract negotiations, is a first step towards a successful ERP software contract. In any event, customers should be aware that proper contract negotiations with (large) ERP vendors require the necessary investments, both in time and effort.

If you require further information or legal advice in this respect, please contact the authors.