A Legal Perspective on Enterprise Resource Planning (ERP) Software: 10 Things In-house Lawyers Should Consider Regarding Problematic ERP Installations

Every professional is painfully aware of the disruptive, even infuriating impact of faulty computer software and smartphones. And, as bad as it may be, it’s a whole other story when faulty software affects an entire business, sometimes even threatening day-to-day operations.

Malfunctioning or failing enterprise resource planning (ERP) software installations are not only painfully common, they can be time-consuming, demoralizing and costly, and even pose an existential threat to the business itself. With such high stakes, it is incumbent on in-house attorneys to anticipate potential installation issues in order to protect their company’s right to demand remedial efforts and/or seek recovery of costs and damages incurred.

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. By any measure, the use of ERP is widespread, with some studies showing that 81% of organizations have installed or are in the process of installing an ERP system.1 Given their centralized importance, it’s no surprise that ERP installations can be extremely expensive, with some surveys reporting that 35% of organizations have incurred installation costs of 1-3% of their annual operating revenue and A further 20% suffered installation costs between 3 and 5% of annual turnover.2

Unfortunately, due to a host of emerging issues (including the increasing customization of ERP products), ERP installation is also prone to extreme customer dissatisfaction and, at times, outright failure. Some studies report that 26% of installations were judged by the licensee as a “failure”, 46% of licensees were “very dissatisfied” with their ERP vendor, and 74% of installations went over budget for the project.3

Although each installation follows a different path, the savvy internal advisors at each company should always keep the following ten preventive and corrective considerations in mind: five regarding pre-installation preparation and five regarding an installation that seems to fail quickly. .

Before Installation

  1. The dossier must always reflect that the licensor is the main expert. Regardless of the skill of your company’s IT department, an ERP installation is an overwhelming undertaking. While some personnel in your company may have a limited understanding of what is going on in a facility, it goes without saying that your licensor has many times the experience of anticipating issues and pitfalls that can slow down or completely derail an installation. When reviewing and preparing governing contracts and other project control documents (statement of work, ordering documents, etc.), ensure that nothing circumscribes or limits the primary role of your grantor as resident expert with primary responsibility for ensuring the success of the project.
  2. “Evergreen” vs. replacement ERP systems – Don’t be fooled by your company’s limited experience. Each installation is either “permanent”, i.e. a completely new ERP installation, or intended to replace an existing ERP system. In almost every way, replacing an existing system is more complicated, more error-prone, and in most cases faces greater internal resistance. In such situations, intentionally or not, software vendors can take advantage of a company’s limited experience by downplaying the complication of a replacement ERP and subtly shifting a disproportionate amount of responsibility to the licensee.
  3. Negotiate (or, at a minimum, be aware of) contractual limitations of liability and limited warranties. Each licensor and third party vendor agreement is warranted to have carefully constructed disclaimers and limited warranties accompanied by the only and exclusive remedies for problems in an installation. Don’t wait for an installation to go south to familiarize yourself with these provisions. Although they are often boilerplate and therefore unlikely to be entirely subject to excise duty, knowledgeable lawyers should seek to relax certain aspects of these provisions.
  4. Clearly delineate the roles and responsibilities of the parties. Most large-scale ERP installations have three potentially responsible parties: the licensor, the licensee, and a third-party vendor that assists with the installation. Make sure you have a thorough understanding of the vetting documents regarding the respective roles and responsibilities of the three parties and make sure there are clear contractual provisions that remove ultimate liability from your business as much as possible.
  5. Get it in writing. Despite the fact that the installations are excessively papered, many performances still do not arrive in writing. For example, a Licensee may believe that it was assured that there would be an “80/20 split” of resources provided by Supplier and Licensee respectively. However, once the installation begins to head south and the finger pointing begins, the incumbent may discover that such depictions were never made in writing.

During (or after) a failed (or failed) installation

  1. Get experienced advice with problematic ERP installations. ERP installations are deceptive in that they tend to appear under control until the fateful moment when it is instantly clear to all parties that a critical moment has already passed or is rapidly approaching. Hiring an experienced attorney early can help ensure that your business is prepared for emergency decision-making and that a case has been created to protect and support those decisions.
  2. Limit your company’s points of contact with the licensor and third-party vendor. While it’s common for there to be dozens of important touchpoints in a complicated installation, this can work against the licensee once an installation becomes problematic. Ensure there are as few points of contact as possible to avoid an adverse case that could ultimately prevent recovery of lost costs or, at a minimum, a licensor’s willingness to expend resources to remedy a faulty installation.
  3. Beware of competing threats of termination of service by the licensor. Problems can arise when there is a dispute over a problematic installation while the licensee is simultaneously relying on the use of the licensor’s software. Ensure your business is not vulnerable to potentially debilitating license termination threats that limit your ability to protect your business throughout installation, or the ability to recover lost costs in the event of installation failure. ‘facility.
  4. Pay attention to the contractual elections of remedies. Many control agreements have specific procedures that a licensee must follow in order to secure their right to repair services and/or recovery of lost costs. It is important to ensure that these provisions are reviewed and adhered to in order to secure your company’s rights.
  5. Tightly control all communications.Ensure that no one, including the lawyer, offers communications or otherwise behaves in a way that could be seen as an interpretation of the terms of the contract that could be considered to expand or reduce the terms and conditions of the applicable contracts. Especially once the matter begins to become contentious, one can expect the licensor to attempt to solicit statements from the licensee that inappropriately shift blame to the licensee.

It’s safe to say that there is no such thing as a “typical” ERP installation, let alone an “easy” one. While there is no one-size-fits-all approach to protecting your business from a troubled setup, careful preparation and attention to control agreements and understanding your business’s legal rights will help both preserve rights to repair services and, if necessary, to recover costs and damages.