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A Legal Perspective on Enterprise Resource Planning (ERP) Software: 10 Things In-House Counsel Should Consider Regarding Troublesome ERP Installations

May.29.2019

Every professional is painfully aware of the disruptive, even maddening, impact of malfunctioning computer and smart phone software. And, as bad as that can be, it is another matter entirely when malfunctioning software impacts an entire company, at times even threatening daily operations.

Failed or failing Enterprise Resource Planning (ERP) software installations are not only distressingly common, they can be time-consuming, demoralizing and expensive, even posing an existential threat to the very business. With such large stakes, it is incumbent on in-house counsel to anticipate potential installation problems in order to protect their company’s right to demand remedial repair efforts and/or seek recovery of expended fees and damages.

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. Under any metric, ERP use is extensive, with some studies showing that 81 percent of organizations have either installed or are in the process of installing an ERP system.1 Considering their centralized importance, it is not surprising that ERP installations can be staggeringly expensive, with some surveys reporting that 35 percent of organizations experienced installation costs of 1 to 3 percent of annual operating revenue and an additional 20 percent experiencing installation costs between 3 and 5 percent of annual revenue.2

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

While every installation follows a different path, savvy in-house counsel of every company should always keep in mind the following ten preventative and remedial considerations: five with regard to pre-installation preparation and five with regard to an installation that appears to be failing fast.

Before the Installation

  1. The record should always reflect the fact that the licensor is the primary expert. No matter how savvy your company’s IT department is, an ERP installation is an overwhelming undertaking. While some members of your company’s staff may have limited understanding of what goes into an installation, it goes without saying that your licensor has many times the experience anticipating problems and pitfalls that can slow down or entirely derail an installation. While reviewing and preparing the governing contracts and other controlling project materials (statement of work, ordering documents, etc.) ensure that nothing circumscribes or limits your licensor’s primary role as the resident expert with the bulk of the responsibility in ensuring project success.
  2. “Evergreen” v. Replacement ERP Systems – Don’t be fooled by your company’s limited experience. Every installation is either “evergreen,” meaning an entirely new ERP installation, or intended to replace an existing ERP system. By nearly any measure, replacing an existing system is more complicated, more error prone and, in most instances, 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 shift a disproportionate amount of responsibility to the licensee.
  3. Negotiate (or, at minimum, be aware of) contractual limitations of liability and limited warranties. Every licensor and third-party vendor agreement is guaranteed to have carefully constructed limitations of liability and limited warranties accompanied by sole exclusive remedies for problems in an installation. Do not wait until an installation goes south before familiarizing yourself with these provisions. While they are often boilerplate, and are therefore unlikely to be entirely excisable, savvy counsel should strive to soften certain aspects of these provisions.
  4. Clearly delineate the parties’ roles and responsibilities. Most large scale ERP installations have three potentially responsible parties: the licensor, the licensee, and a third-party vendor that assists with the installation. Be sure to have a thorough understanding of the controlling documents regarding the respective roles and responsibilities of the three parties and ensure that there are clear contractual provisions that remove as much of the ultimate responsibility as possible from your company.
  5. Get it in writing. Despite the fact that installations are excessively papered, a lot of representations still do not make it into writing. For example, a licensee may believe they were ensured that there would be an “80/20 split” in resources respectively provided by the vendor and licensee. However, once the installation begins going south and the finger pointing commences, the licensee may discover that such representations were never made in writing.

During (or After) a Failing (or Failed) Installation

  1. Obtain counsel experienced with troubled ERP installations. ERP installations are deceptive in that they tend to appear under control until the fateful moment where it is instantly clear to all parties that a critical juncture has either already passed or is rapidly approaching. Early retention of an experienced attorney can help ensure that your company is prepared for emergency decision making and that a record has been made to protect and support those decisions.
  2. Narrow your company’s points of contact with the licensor and third-party vendor.  While it is typical for there to be dozens of important points of contact through a complicated installation, this can work against the licensee once an installation becomes troubled. Ensure that there are as few points of contact as possible in order to prevent an adverse record that may ultimately prevent recovery of lost costs or, at minimum, a licensor’s willingness to expend resources to remedy a failing installation.
  3. Beware of concurrent threats of service termination by licensor. Problems can arise when there is a dispute regarding a troubled installation while the licensee is concurrently relying on use of the licensor’s software. Be careful to ensure that your company is not vulnerable to threats of potentially debilitating license termination that circumscribes your ability to protect your company through the installation, or the ability to recover lost costs in the event of a failed installation.
  4. Pay attention to contractual elections of remedies. Many controlling agreements have specific procedures that a licensee must adhere to in order to secure their right to remedial services and/or recovery of lost costs. It is important to ensure that these provisions are reviewed and followed in order to secure your company’s rights.
  5. Tightly control all communication.  Make sure that no one, counsel included, is proffering communications or otherwise comporting themselves in a fashion that could be viewed as a construction of the terms of the contract that could be viewed as expanding or narrowing the terms and conditions of the applicable contracts. Especially once the matter begins to get contentious, the licensor can be expected to attempt to solicit statements from the licensee that inappropriately shift the blame to the licensee.

It is safe to say that there is no such thing as a “typical,” much less “easy,” ERP installation. While there is no one size fits all approach to protecting your company from a troubled installation, careful preparation and close attention to the controlling agreements and understanding your company’s legal rights will assist both in preserving rights to remedial services and, if necessary, recovery of expended fees and damages.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Arthur (Art) Beeman
Partner – San Francisco
Phone: +1 415.365.7280
Email: abeeman@crowell.com
Joel T. Muchmore
Partner – San Francisco
Phone: +1 415.365.7202
Email: jmuchmore@crowell.com

1 ERP – Facts, Statistics, and Trends in 2017, September 11, 2017, accessed at http://www.technousa.com/blog/erp-trends-facts-statistics-2017-18.

2 ERP – Facts, Statistics, and Trends in 2017, September 11, 2017, accessed at http://www.technousa.com/blog/erp-trends-facts-statistics-2017-18.

3 2017 Report on ERP Systems and Enterprise Software, Panorama Consulting Solutions, accessed at https://www.panorama-consulting.com/wp-content/uploads/2017/07/2017-ERP-Report.pdf.