United States: Contracting For ERP Implementation Success

Keywords: ERP,

Stories of ERP implementation disasters are numerous and stunning in scale and frequency. These failures are so common that reading the literature on the subject leads to the conclusion that successes are in the small minority. In fact, one recent study estimated that only 6.4% of ERP projects are completed on time and within budget.1 The reported costs of abandoned projects can be enormous—$125 million in the case of Avon. But the costs of an improperly implemented system are equally high. Hershey and Nike each reported $100 million in lost sales and significant drops in stock price due to problems in their new ERP systems.2

While many of the risks in an ERP implementation project are beyond the control of the lawyers supporting the project, understanding why these projects often fail and what success looks like will help you guide your business clients to a contract structure that promotes success.

Why Do ERP Implementation Projects Fail?

Companies routinely underestimate the complexity and difficulty of ERP implementation projects. Among the most-cited reasons for implementation failures are (1) lack of a clear understanding of what the company wants to achieve, (2) lack of a detailed plan for achieving what the company wants, (3) underestimating the effort required by the company's management and personnel, (4) unplanned reports, interfaces, forms and enhancements, (5) insufficient testing, (6) insufficient training of company personnel impacted by the project, (7) insufficient work done to overcome the natural resistance to the changes needed to adapt to the new systems, (8) incentives for the implementation provider to expand the project and (9) inadequate project management.

How Can the Legal Process and Contract Structure Support Success?

The contract can promote success in three important ways. First, the contract can define key project details, including deliverables, milestones and acceptance criteria. Second, the contract can provide the process for how the parties will work together, including making changes and obtaining required approvals. Third, the contract can provide incentives for the service provider to achieve the company's desired outcome.

What is the Best Contracting Approach?

Develop a Project Plan

A solid project plan would set forth a detailed list of activities, staffing, interim and final deliverables and associated milestones. The project plan should be linked to the contract through the use of defined terms and milestone dates from the contract. Each milestone should clearly identify all required completion criteria. Contentious milestone discussions often signal that the parties have not clearly defined and documented the project's goals and scope.

Allocate Responsibilities Between the Parties

This can be done using a matrix that details project activities and defines which party will be responsible for each activity. "Joint Responsibility" should not be used since that may mean neither party will be in breach if there is a failure. Likewise, assumptions should be removed unless there is a clear outcome if an assumption fails. If there is a constraint that may be exceeded, it is best to have a clear change process and default pricing in case price changes cannot be agreed.

Choose a Deal Structure

The best choice of structure depends on the project, and the company's skills, risks and service provider. Available structures fall into three main categories: "Assist;" "Deliver;" and "Shared Risk." Each structure has its own unique features.

In the Assist structure, the service provider works at the company's direction and is paid on a time and materials basis. This approach allows the company to start quickly and make changes at its discretion, but the company bears the entire risk of budget overruns and schedule delays.

In the Deliver structure, the service provider commits to work according to a specified schedule for a fixed fee. This makes the service provider highly motivated to complete the project quickly and efficiently, but may result in the company having to sign change orders that increase the fixed fee and extend the schedule if the contract fails to clearly and completely define desired outcomes. These risks are heightened by the service provider's financial incentive to understate scope and price to win the deal.

The Shared Risk structure is designed to reduce overall risk by aligning incentives and creating a spirit of partnership. It does this by establishing a target budget with shared risks and rewards if the service provider exceeds or stays within budget. For instance, the service provider's hourly rate may be progressively discounted as it exceeds the target budget and, conversely, increased if it comes in under budget. However, like the Deliver structure, the Shared Risk structure requires an up-front investment in carefully defining desired outcomes. The Shared Risk structure also requires more sophisticated contracting to address changes in scope and direction because of their impact on the target budget and incentives. This requires, among other things, defining clear boundaries between chargeable and non-chargeable changes.

What is Legal Counsel's Role After the Contract is Signed?

Contractual processes and protections are only valuable if understood and properly applied by the parties. Legal counsel supporting an ERP implementation project should train the company's project team and key stakeholders on the key operational elements of the contract, including the importance of aligning project activities with the responsibility allocations in the contract, and documenting changes using contract processes and documents. Legal counsel should then periodically check in with the project team to make sure the project is staying on track and to address questions that arise from time to time that require legal interpretation and guidance. If disputes arise, legal counsel should assist in promptly resolving those disputes to help foster a productive project environment.

While the success or failure of an ERP implementation project lies primarily with the operational, technical and business teams, a well-crafted, well-managed contract can dramatically increase the opportunity for success.

This article was originally published by Inside Counsel.

Originally published 20 November 2014

Footnotes

1. November 2013 article by Analys Evenstad of Denver IT consultant Panorama Consulting Solutions citing a Standish Group report in CFO.com.

2. "10 Famous ERP Disasters, Dustups and Disappointment," March 24, 2009 CIO Feature by Thomas Wailgum.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2015. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions