An ERP system is the heartbeat of key company processes and the pathway for the flow of information to the people who need it.  It can be a daunting task for any company to rip out and replace this vital tool or to install one for the first time.  Although you may be forced to take this step for a variety of reasons, it is a significant undertaking for a team that is already fully engaged in running your business. The solution that you select and implement will likely be a 10 -year commitment with little room to correct mistakes down the road.  It is a marriage of sorts with the ERP vendor that you choose which means you want to get it right the first time.

Despite its criticality, it is surprising to see how organizations make simple mistakes in addressing fundamental questions before embarking on this commitment.  There is no doubt that due to its complexity, every ERP implementation will face glitches and some unpredicted delays.  There are just too many variables to expect an ERP implementation to go flawlessly.  Having said that, most risks that materially impact your project success can be mitigated through upfront planning, excellent negotiations and contracting, clear focus on key business objectives, and solid project management and executive oversight.

Our experience tells us that there are five key factors that you need to keep in mind when tasked with selecting and implementing an ERP system:

1. What do you need and why do you need it?

Perhaps one of the most common mistakes that we see in our practice is that companies engage in discussions prematurely with software vendors.  This leads them down all sorts of unnecessary paths without understanding what they really want or need.  Once there is a perception of a need, phone calls to software vendors begin and before they know it, demos and proposals are flying without a clear understanding of the end game.  Before you talk to people outside your company, talk to those inside your company.  Find out what problem you are trying to solve or what capability you are trying to enhance.  Gauge your readiness and make sure that you have first mapped out the business processes before you begin evaluating ERP packages.  You may even find that you do not need a new system after you reengineer your business processes and take advantage of the capabilities your current system provides.  Once you have confirmed internally that there is compelling need to move forward, that is when you begin exploring options externally.

2. Are you choosing the right software?

Go back to the business needs that you outlined in the first step and decide where you need critical functionality from your ERP solution to support your business.  Most packages will do a good job on covering the basic needs in finance, operations, purchasing, resource management, etc. but what might differentiate solutions is the ability to meet your more unique needs.  Ideally, the functionality will be built into the solution you choose out of the box or through simple configurations.  Unless there is compelling business case, try to avoid customization because that will saddle your organization with costs and complexity throughout the life of the solution.

As you narrow the field to a few software vendors that have the capabilities you are looking for, be sure you begin negotiating pricing and terms early in the process and before you are past the point of no return.  Do not be enticed by aggressive discount levels and quarter-end pressures.  Exercising patience and introducing competition will get you much more value than succumbing to high pressure sales tactics.  Also, be cautious of the contract terms and conditions as there are many critical points that you can negotiate to increase value and obtain flexibility as business conditions change.  There is no doubt that your plans will change in a significant way during your ERP’s lifecycle and well negotiated contractual terms can go a long way to preserving value.

3. Is the System Integrator (SI) the right fit for your ERP?

For complex, customized ERP engagements, money spent on an SI for implementation can be substantially higher than the purchase price of the software itself.  Of course, with less customization and through the use of cloud ERPs, your implementation cost will be reduced.  In almost every implementation, schedule delays and scope changes are a fact of life.  The key is how you identify, quantify, rationalize, and approve or disapprove these changes.  It is important for you to have knowledgeable personnel who also have the bandwidth to manage the activities of the SI.  The SI is an important resource, but you should not assume that you can rely on them to do everything.  You must keep the SI and your organization focused on why you decided to purchase or upgrade your ERP package and what problem you are trying to solve.  Work with an SI that not only knows the ERP software that you have chosen but one that also has a successful track record in dealing with the specific business issues that you have identified as critical.

The Statement of Work (SOW) that you sign with an SI also has a significant impact on cost and on the behaviors that you are trying to encourage or discourage.  A robust SOW should clearly outline scope, deliverables, key milestones with payment tied to those milestones, acceptance/rejection criteria, well-defined roles and responsibilities, selection and retention of key personnel, a transparent cost structure, and a change order framework that is mutually understood and agreed to by you and your SI.

4. Are you getting a good deal?

Depending on how well you run the sourcing and evaluation process for your ERP selection, you can either pay a premium, pay market pricing, or get what we call an “extreme deal” at Symphony.  Research shows that a hasty sourcing process can cause you to pay more than 2X market price.  But even market price is what we consider to be a premium.  Properly negotiated and structured, a professional who has familiarity with pricing structures can help secure deeper discounts based on benchmarks that are relevant to your business and your industry.  Also, a good deal – or in this case an extreme deal – is not limited to just getting a higher percentage discount.  It is based on your total cost of ownership over the lifecycle of the ERP platform, including maintenance and support, not to mention contract terms and definitions that represent a significant portion of the non-price value you will receive.

5. Have you identified and mitigated risks?

As stated previously, no ERP implementation goes flawlessly.  It is simply a question of how much risk is reasonable, what mitigation steps you take, and what contingency plans you put in place.  For example, we are aware of one company that made a cold-turkey transition from their old ERP system to the new one, with insufficient testing and weak contingency plans.  During a weekend, the company turned off one system and turned on the other, assuming that all data had been properly migrated and that the company could now run on its new ERP system.  On Monday morning, the system crashed and with no access to data, the company had to delay its financial reporting by over two weeks.  The stock was impacted and people were fired.  Simply stated, when you do not have a Plan B, you are gambling with your company.

Assessing risk and taking mitigation steps are not activities that you do once at the beginning of the project and call it a day.  It is an on-going process and a critical part of project management.  Risks evolve during the various phases of your ERP selection and implementation process and as such the plan needs to be constantly refreshed as new information emerges.  This should be one of the main deliverables of the ERP project manager whom, by the way, should be laser focused on the project success and not distracted by day to day operational activity.

Summary

An ERP system is the backbone of your company.  Before you jump into a new solution, it is important to know what problems you are trying to solve and/or what capabilities you are looking to enhance.  There is a lot of analysis and due diligence that goes into selecting the right ERP software and SI, getting the best deal, and mitigating risk through robust project management.  Given the impact, it is prudent to invest the time and resources necessary to get good results and to avoid common mistakes.

Helping small and mid-size companies address the issues above is part of our firm’s service offerings.  If you think we can be of assistance, please feel free to contact us at info@symphonyconsult.com.

In our dynamic world, it is common for companies to deploy new software solutions and enhance or upgrade their hosting equipment.  In the rush to solve a problem or improve efficiencies in the environment, companies often expose themselves to risks based on how the software is deployed and governed.  This in turn leads to compliance issues and makes the company vulnerable to software audits. In this newsletter, we will discuss what steps you can take to prevent exposure and what you can do to respond effectively if an audit materializes.

Prevention

The easiest way to avoid problems with a software audit is to create the right framework from the beginning.  This is a combination of understanding the licensing structure as well as your rights when you are audited.  Here are some key steps for you to consider:

• Obtain a full understanding of the licensing model and the measured metrics for compliance.  This is where contract language can get you in trouble.  Pay attention to the detailed definitions.  We have found that subtle language like the definition of a CPU or Core, for example, can have a huge impact on your rights as you put your software to use.

• Review the EULA (End User Licensing Agreement) in detail and understand each term thoroughly.  Do this early in the evaluation and purchasing processes so you still have leverage to change important terms.  Pay particular attention to the license type (e.g. user vs. concurrent user, machine versus CPU, etc.), key definitions, geographic limitations, audit obligations, and expansion rights. This is your time to mitigate risk and flag areas that need attention.  By the time you are audited, it is too late.

• Get the SW provider involved in sizing your solution but beware of their desire to sell you beyond what you need (i.e. shelf-ware).   Share your deployment plans, locations, hardware specs, use cases, etc. with the SW provider upfront to get their input on the entitlements that you need. Get sizing feedback in writing; this will come to your rescue when/if you get audited. We recently helped a client out of hefty fees during an audit by discovering and using an email as proof that our client’s global usage was known to the SW provider at the time of sizing the solution.

• Understand the licensing impact before initiating a change in your environment. Some EULAs are specific down to the level of serial number of the machine the license is installed on. It may be helpful to have the EULA reviewed by a specialist before your purchase; this can help you by negotiating more flexibility into the EULA and eliminating risks down the road.
• Establish processes for keeping track of your usage on an on-going basis.  This is perhaps the biggest culprit in runaway costs associated with software.  In most environments, policies and procedures are either not present or not followed.  You will need a governance process that controls, monitors, and adjusts usage based on your evolving business requirements.

Response:

How you manage the initial interactions with a supplier and the information you share early in the process makes a significant difference in the outcome of an audit.  Here is what we recommend if you get an audit request:

• Gather information and consult the contract thoroughly to understand what rights you have.  You do not want to assume that the software provider’s assertions are necessarily correct as they often overlook the specific points that you may have negotiated at the time of purchase.   Look at key definitions carefully and make sure you understand how they map into your environment and usage model.

• Assemble a team to ensure due diligence.  Responding to an audit is not a one-person project, although only one individual should become the focal point for discussions with the software provider.  Your team must be comprised of people that understand the current usage model, can identify alternate solutions for mitigating exposure, and ensure the accuracy of the information that you collect and report.

• Don’t be intimidated.  Software providers are skilled at using various techniques to apply pressure such as imposing strict, unrealistic deadlines, asking to true-up at list price, imposing penalties, and pushing for multi-year back pay on support.  These are all points that can be negotiated by a seasoned audit specialist.

• Never negotiate a deal based on the raw reports. In all of our audit-related engagements with clients, we have noticed that the automatic reports contain mistakes (duplicates, decommissioned equipment, users who have left the company, etc.). You need to review and scrub these reports to ensure they accurately represent your actual usage.

An audit can be very disruptive.  Not only is it time consuming, but making a huge payment to settle a compliance issue can upset budgets, bring unwanted attention, and strain the relationship with your software provider.

Symphony Consulting is skilled at helping companies prevent costly audits and responding to them when they occur.  If we can be of assistance, please contact us at info@symphonyconsult.com.

The growth trajectory of the past seven years in high-tech, coupled with the ubiquity of creative cloud and COLO (co-location) solutions, has caused many companies to question and revisit their data center strategy.  Such was the case with a client who recently contacted us.  Their company had been growing rapidly for the past five years and there had not been an emphasis on cost or optimization.  Up to this point, their objective was to grow the top line revenue while putting the development of a long-term cost containment strategy on the backburner.  However, the landscape suddenly changed.  Growth is now projected to be lower and this has triggered new discussions on how they need to optimize their cost structure.

Since the start of 2016, we are seeing a significant rise in data center related inquiries with companies voicing precisely the same concern, suggesting that this is becoming an all too common scenario. These companies are now facing increased pressure to reduce COGS and OPEX associated with their computing infrastructure in order to help improve their margins. In fact, according to Wired Real Estate Group Inc., 90% of firms in the US have overprovisioned their cloud and data center infrastructure by an average of 50%.  This takes away from hard dollars that contribute to the bottom line.

In this newsletter, we will touch on several recommendations to rein in your data center costs:

Establish a baseline (what do you already have?)

Whether your goal is to drive down cost in your current environment or seek to move some or all of your computing workload to a COLO or Cloud Service Provider, we recommend performing a complete, detailed inventory audit of what you already have provisioned.  As Peter Drucker said, “You can’t manage what you can’t measure”.

Over time, unconstrained, hastily planned data center expansions create inefficiencies that increase cost. Underutilized servers are not only a waste of CAPEX, but they also drive up floor and rack space costs, which are billed whether you are fully utilizing it or not.  Licenses or hardware purchased – but not used – creates shelf-ware.  In our work, we have identified over 25 useful attributes to collect during the audit phase.  Part of our analysis includes a complete review of all of your vendor contracts.   Auto-renewal clauses, termination penalties, price increases, and non-optimal SLA’s are just a few examples of areas where significant value can be attained.

Analyze the results (what is the data telling you?)

Once all of the relevant data center attributes have been collected, you need a method for synthesizing and analyzing the data to determine the overall health of your environment. You may find that you have too much capacity in equipment, space, and power in a data center cage or location that was equipped to solve a specific problem in the past but your approach and/or your contract with your COLO provider were not updated to reflect your changing needs.   One client was able to realize a 40% reduction in the cost of their monthly COLO power bill alone by right-sizing their power to meet their current needs.

You may also have old systems that consume more space and power, and whose maintenance contracts get more expensive over time.  We helped a client eliminate over 1,000 servers that were vastly underutilized, resulting in millions of dollars of savings, and avoiding the cost to build a new data center.  The irony is data center management didn’t initially believe they had any excess capacity.  Another client was paying for “gold” support levels for all of their dev/test systems and paying premium dollars for SAN storage because they were charged for what was allocated as opposed to what was consumed.  As we worked with the vendor to gain visibility into actual storage usage, we discovered that our client was paying for more than double the storage capacity they were using.

Delays in equipment refresh, while a potential good short-term strategy to reduce CAPEX, can result in on-going increases in OPEX costs as maintenance, support, and the inherent inefficiencies of power and space on older gear work against you.

Develop a plan (where are we going, and what is the best way to get there?)

Creating detailed forecast scenarios based on assumptions around business growth is essential to creating an optimized infrastructure environment.  “What if” scenario questions are important to consider such as: How much new gear do we need to buy if our installed base continues to grow at the same pace?  How much can we re-deploy or virtualize vs. purchase new?  How do we prevent from being further over-provisioned if business slows down?  When do we need to start planning to be able to take advantage of our COLO renewal?  What are the cost implications if we move some or all of our computing workload to the Cloud?

The key is the development of a detailed plan, asset by asset. A partial list of key questions to consider is: (a) do we still need it? (b) are the latest security patches installed, and if not, can they be?  (c) if an asset is underutilized, can we virtualize it?  (d) are there any application implications to this server if we wish to make a change? (e) is the asset old enough that the best course of action is to decommission it?  (f) is the power in the various racks and cages right-sized for our current and future needs? (g) is the maintenance contract on a server appropriate for its usage or can it be downgraded with no loss in business function?  (h) are we paying for unused floor and rack space? (i) is this server/application a candidate for the cloud?  If so, are there network and system performance considerations that need to be taken into account if we move this asset?

Execute and negotiate the plan

As you evaluate various options, you have five approaches that you can consider: (1) on-premise, (2) COLO, (3) managed service, (4) Cloud, and (5) a hybrid solution.  Each of these solutions carries with it advantages and disadvantages.  In the case of on-premise solutions, which is a fully in-sourced model, technology refresh costs and forecasting future requirements becomes a challenge.  In a fully managed services model, obtaining full transparency to your service provider’s cost structure for hardware deployment, maintenance and support, and support staff becomes critical.  In the COLO business model, you will still be challenged with managing your own hardware but contract renewal terms are often onerous thereby limiting your options.  And finally, cloud solutions, while scalable and flexible, can lead to enormous risks ranging from complying with data privacy laws to cybersecurity to meeting SLAs, introducing you to challenges that you have never faced before.  There are also multiple flavors of cloud solutions for you to choose from.  One cloud vendor offers 39 different on-demand virtual server configurations, and over 500 variations of reserved computing instances.

Conclusion

Most data center ecosystems were built in a piece-meal way and are often misaligned with the current needs.  Regardless of the topology and architecture of your infrastructure, a “data center diet” to eliminate the bloat can result in significant cost savings.  Find out what you have, compare it to what you need, and develop a plan that matches fiscal prudence with technical requirements.

Symphony Consulting can help your infrastructure become lean based on our experience in IT operations management, strategic sourcing, and lean manufacturing. Contact us to learn more at info@symphonyconsult.com. 

The Greek inventor Archimedes is quoted as saying “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”  Since negotiation is really a process of movement, a similar concept applies here.  Instead of trying to move the world however, you are simply trying to move a supplier – hopefully a slightly less daunting task.  A significant part of our work in negotiating contracts for clients hinges on finding ways to create leverage.  In this newsletter, we will discuss some of the common sources of leverage in negotiating supplier contracts.

 Competition: Who are you including in the process?

Competition is one of the underlying forces in the most successful economies in the world.  It can also be an important component in your successful negotiations.  Having viable alternatives gives you more freedom to walk away from a mediocre deal.  It also changes the calculations for the supplier.  If a supplier is at risk of losing the deal to a competitor, their approach may be different.  They tend to be more aggressive on pricing and terms because if they lose the deal, they will have nothing – this is particularly true in areas like software contracts or managed services where the initial investment leads to on-going purchases.  As a result, they are willing to move the value of the deal closer to their break-even point.  Competition also creates a different conversation internally for suppliers.  Typically, an aggressive offer from a supplier will go through some type of internal approval before being offered to a customer.  A significant factor is those discussions is the position of other companies vying for the business.  If there is a real or perceived threat, you will see more favorable pricing and terms from the supplier.

To get leverage from competition, you must set yourself up so you are really willing to move forward with more than one option.  This necessitates that there is representation from sourcing/procurement at the very beginning of the process, not at the end.  There may be some cost, technology, or timing offset between solutions.  You should put yourself in a position to describe the value of the offset and to determine what it would take to make the solutions equivalent.  As long as the alternate supplier can bridge the gap in some form, you should be willing to move ahead.  Often times, we will see clients who include alternative solutions, but they really have a strong preference for a single solution.  Good salespeople are attuned to those subtle messages that communicate a preference and can tell when they have real competition.

Scope: What is being included in the deal?

Although you might go into a negotiations thinking that you are just dealing with a specific item or solution, there are usually other elements that can and should be put into play.  You might be able to gain more leverage expanding the scope of the deal and including more value.  The obvious way to do this is to buy more product or services from the supplier.  For example, we recently had a client that wanted to negotiate a new ERP software deal but they still had a number of point solutions in areas like human resource management, expense management, etc.  By including some of those point solutions in the scope of the deal, we were able to gain leverage.

Beyond just buying more, there might be ways to make the deal more valuable.  Factors like publicity, joint development on a solution, and access to technology can be effective in adding value to the deal.  Before and during negotiations, you should probe for other areas of value and determine whether there is a way to create extra leverage.

Timing: Can you pull-in or push-out the deal to gain an advantage?

It is no secret that you can gain leverage by being able to close a deal at quarter-end or year-end for a supplier.  The sales team often has quotas that they need to meet and are willing to give customers extra consideration during these times.  There are other situations where you may be able to use timing to your advantage.  We have seen cases where a young company wants to be able to show that their technology is resonating in the market and they are looking for early adopters to jump in.  Other times, even well-established companies want to show momentum for a certain product or service.  You may be able to help them based on your flexibility regarding the timing on the close of the deal.

Summary

Negotiations are a process of movement.  In order to secure value for your organization, you will want to influence your supplier to come closer to your ideal solution.  If you can create leverage for your position, you are more likely to get the movement you need with less effort.  It is all about creating the right environment for yourself and doing your homework so you are in able to take advantage of your leverage.  In both our Supply Chain and IT Sourcing practice areas, we regularly facilitate these negotiations on behalf of clients or advise them on approach.  Please contact us at info@symphonyconsult.com if we can help your organization.