Contracting for enterprise financial software: the methodology of parallel negotiations.

• Author: Madden, Michael

This article presents a contract negotiation approach that improves the value of financial software and implementation services by retaining competition throughout the final phases of the procurement cycle.

Motivated in-part by the Year 2000 problem, state and local governments across the country are improving organization-wide decision support by replacing legacy financial systems with integrated software, commonly referred to as enterprise resource planning (ERP) systems. ERP systems enable process reengineering, best-business practices, and seamless information integration across functions and agencies. While the benefits of ERP systems are well-known and highly touted, implementations are risky and challenge even the most resilient organizations. As Thomas Davenport recently noted in the Harvard Business Review, "If you're not careful, the dream of information integration can turn into a nightmare."(1)

Implementation failure risk can be reduced with a well-planned strategy for establishing a contract. A software/implementation services contract is an agreement by the two main parties that defines what is being purchased, outlines the implementation approach and timetable, presents expectations about software performance, and establishes penalties for non-compliance with contract terms or conditions. In ERP procurements, contracts often describe the roles and responsibilities of both the government and the software/implementation vendor. Experts often advise governments that when negotiating for software they should follow the general rule, "If it's not in the contract, it doesn't exist."

State and local governments often have difficulty negotiating technology contracts and they face other disadvantages. There are several reasons for this. First, government procurement procedures are generally designed for commodity purchases; public managers have difficulty conducting subjective "value"-based assessments for software and services. Second, the infrequency of system replacements provides public agencies with few incentives to retain in-house legal expertise with knowledge of intellectual property-rights law. Consequently, vendors that governments are negotiating with have considerably more expertise because they have repeatedly negotiated such contracts. What government agencies do once every decade or so, vendors are doing on a weekly basis. Third, with the demand for ERP systems estimated at exceeding $14 billion worldwide, public and private agencies are making decisions in an extraordinarily dynamic environment - a "sellers market" in which future patterns of industry structure, products, and services are difficult to predict. Lastly, because finance officers are no longer selecting software for the accounting function alone, they often find themselves spearheading the selection of packages that may include functions outside of their core competencies.

This article provides a contracting methodology for large-scale ERP procurements for state and local governments. A step-by-step methodology is provided that offers an approach for retaining vendor competition throughout the final phases of the procurement cycle. Checklists of factors to consider in developing a Statement of Work (sow) and for establishing a contract also are presented. Although the approach outlined in this article is especially well-suited for high-dollar ERP procurements, many of the tips and traps presented have relevance for smaller jurisdictions and projects.

Traditional Procurement Approach

Governments often approach the procurement of software and implementation services as if they were procuring tangible assets or commodities. The short-term costs are given more weight than the life-cycle value of the ERP system to the organization. Typically, a Request for Proposal (RFP) is released, vendor proposals are received, responses to business requirements are analyzed, and demonstrations/site visits are conducted. After deliberations, a single vendor is announced as the winner (usually on the basis of costs presented in the proposal), and the contracting process commences. Led by law department staff, the contract is finalized over a period of three to six months.

As the ERP implementation proceeds, government agencies typically witness a "valley of despair" with any or all of the following conditions: the organization cannot staff its commitment to the implementation; implementation hours and dollars are exhausted creating cost overruns; vendor implementation team members are assigned to other sites; the application and testing of software "bug fixes" delays installation; disputes arise over the inability to meet "go live" dates; or serious concerns are raised by legislative authorities concerning the software, the implementation vendor, or the government's own staff. While this list of problems is by no means exhaustive, it suggests that realistic expectations and assumptions were not confirmed during the contracting process.

Exhibit 1 MAJOR ELEMENTS OF A STATEMENT OF WORK Category Statement of Work Issues Software A general description of each of the software Performance that is being purchased including the name, version, and main function of each of the modules. A detailed explanation of how the software will meet the customer's mandatory or core business requirements including an indication of the degree to which the software will need to be customized, configured, or modified to meet these requirements. Information on all third-parties that will be used to supplement their product's base functionality including the name, version, main function, and a description of the history between the third-party and prime vendor. Other issues to be considered: Ad-hoc and standard reporting capabilities, ease of navigation throughout system, drill-down...