In Part 2 of our six-part series on cloud-based ERP Projects, our specialist team of lawyers look at the key challenges in moving to cloud based ERP systems, suitable for organisations considering the re-procurement and/or migration to a cloud-based ERP solution.
The global appetite for cloud-based ERP software systems has increased dramatically over the last few years. Gartner undertook a market analysis in 2018 which it published in May 2019, reporting that the global software market saw annual growth of 10% in 2018, becoming a $35billion market.
Challenges in contracting for cloud ERP
If you’ve taken the decision to move to a cloud ERP system, there are some key contractual challenges that you should be aware of. If you’re used to a contract that had an on-premise solution provided under it, then the cloud contract suite will be markedly different to what you are used to. There is often limited ability to negotiate on the licence terms of a cloud ERP contract given the standardisation of the product you are buying. If you’re looking to retain overall control and require bespoke customisation on the majority of modules or applications, cloud ERP may not be the right product for you. Getting your organisation to understand these limitations and the consequent benefits of the cloud ERP model is half the battle and should be tackled early on in the planning and decision-making process.
Once a decision has been made to proceed with the cloud ERP model, there are various contractual issues that you will need to be aware of when agreeing your arrangement with your chosen supplier. Based on our experience, the top five key issues are:
- SaaS Terms. ERP suppliers typically offer standard terms to customers (“cloud”/“master” services agreement, Data Processing Agreements and Service Level Agreements). Key areas for negotiation where standard terms are unlikely to offer sufficient protection are limits of liability, GDPR, TUPE (if applicable), datacentres/disaster recovery and availability/service hours. Your key terms should be identified at the outset, and you should understand your negotiating parameters before entering the negotiation.As well as the ERP supplier/vendor there will typically be an implementation partner. This multi-supplier environment relies on a clear delineation of responsibilities and articulating SMART (Specific, Measurable, Achievable, Relevant, Time-bound) dependencies between all of your suppliers. “Best of breed” solutions can further widen the pool of suppliers. A collaboration agreement can help with integration in a multi-supplier environment.
- Licensing model. Organisations should consider carefully how they want to be use software/licences. For example, if one contracting authority is procuring on behalf of a shared service, they will need the right for that shared service to be able to use the software. Considering ways to build flexibility into the licensing model may be required.
- Data, data, data. How data is treated is critical for the cloud ERP model. Where it is located and stored, how it is kept secure, how it is used, the customer’s right to regular and frequent extraction of data for use in other customer systems and how the data is migrated at the beginning and end of the contract (and by whom and at what cost) are all issues that need to be properly considered. Understanding your organisation’s ‘redlines’ with regards to the treatment of its data is critical to shaping your requirements. We know first-hand that some suppliers do not host in the UK, and some suppliers who do host in the UK in primary data centres, also back-up to a secondary data centre outside the UK. Early engagement with your data protection officer, information teams and information security teams will be key to ensuring that you end up with a solution that safeguards your data in a way that is acceptable to your organisation.
- Service Levels. Service Levels, or Key Performance Indicators (KPIs) are usually standard and non-negotiable in SaaS contract terms, and sometimes not included in an ERP supplier’s standard terms at all. Depending on the breadth, buying power and business criticality of the service, it may be possible to agree enhanced service performance arrangements with the ERP supplier. You’ll need to consider that the more ‘gold plated’ the service levels the more likely the cost will increase. It is therefore prudent to consider the relevance and applicability of your service levels – can you live with reduced support on public bank holidays, for example?
- Transition and Exit activities. Although not a traditional implementation, there will be some implementation and integration work to ensure that your organisation can access the ERP software and use it. Whether or not your organisation chooses to adopt a waterfall or agile development and delivery, will be a key question. The transition and exit of a service/solution is normally the greatest risk period in any complex IT project because it is when data is migrated and it is when unknown/unexpected complexities can be uncovered. This can cause delays and additional cost can soon stack up. Being clear about responsibilities for transition and exit, including for example whether the supplier can provide any transition assistance prior to termination of the cloud services will be important. Often supplier terms exclude this service altogether, or if included it is heavily caveated e.g. provided on a time and materials basis, giving you little cost certainty.
Join us for Part 3 of our six-part series: Part 3 considers which procurement procedure under the Public Contracts Regulations 2015, as amended, may be suitable for your ERP Project, relevant to any contracting authority/public body considering purchasing an ERP System.
This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any of the issues raised in this blog, please contact us today by telephone or email enquiries@sharpepritchard.co.uk.
