Software Audits from Oracle, SAP, Microsoft, and Salesforce: What You Should Know

Getting an audit notification from your software provider can be nerve-wracking, but after reading this you’ll realize this is less likely due to something you’ve done wrong and more likely a tactic to throw you off-course.

If you’ve never been through an audit before, you don’t know what to expect, what to do, or how to make sure it’s over as quickly as possible with minimal expense to your organization.

In this article, we’re going to make all this crystal clear by outlining the audit processes of large enterprise software providers like Oracle, Salesforce, SAP, and Microsoft. There are a few key things you need to take into account that apply to all of these providers: ● Use your contract as your best weapon to defeat audits. Take action if there is any sort of grey space in terms of what is allowed by the supplier.

Use your contract as your best weapon to defeat audits. Take action if there is any sort of grey space in terms of what is allowed by the supplier.
You’ll do best if you bring in outside assistance. An expert who has experience guiding businesses through software audits will be a huge help throughout the process.
You need to control all the information that is shared with the supplier in your own format and spreadsheets.
The more you are proactively sharing information with suppliers, the less basis they have to bring up an audit.
Audits are brought forth to customers for many commercial reasons. The more proactive you (the customer) are with sharing information, addressing audit risks in meetings, and creating a paper trail, the less likely your supplier is to audit you.

What is a Software Audit and How Did Your Company Get Selected for One?

A software audit is both a technical and contractual review of your organization’s use of a specific software platform within your IT environment. Most large enterprise software companies like Oracle and SAP have separate departments that focus purely on license compliance audits. These teams look and feel like a shared service organization inside of a large software company. They work with a customer’s account management team to take an aligned, yet separate and distinct, position on behalf of their software company. We will discuss the similarities and differences between these different teams later in the article. One common similarity across all of these suppliers is that the audits will compare your usage and processes to any specifications, standards, or contractual agreements in place.

Why your company? Why did you get singled out for an audit?

There are three primary operational/contractual triggers for a software audit:

If there is any sort of consumption-based pricing in your contract;
If you have any sort of restricted-use license in which you are only allowed to use a license for certain functionality; or,
If you have recently acquired or divested a company.

While not mutually exclusive, you’ll also find the timing of these audits is very suspect and robotic in nature. The two primary timing triggers are:

Anytime a large software company needs to identify “unearned revenue” to meet quarterly revenue targets; and,
A pending contract renewal.

These large enterprise software companies know that it’s very common for their customers to be out of compliance due to the sheer size and scope of their operations. This is augmented by the fact they know anytime there is employee turnover within a customer’s IT organization (especially their “software asset management” department) the company is susceptible to additional compliance risk as a result of lost tribal knowledge of the environment, past internal audits, etc. Taking all of this into consideration makes it relatively easy to understand why a company like Oracle can confidently predict net new revenue from their existing client base. In addition to market pressure for additional revenue, a customer’s upcoming contract renewal also serves as an all too common trigger. The general rule of thumb we tell clients is anytime you have a contract renewal coming up nine to twelve months, your supplier is likely to introduce an audit. Your supplier will use this as an opportunity to distract you and gain the upper hand in an anticipated contract negotiation that hasn’t even started. Suppliers do this because it automatically puts you in a defensive position. Naturally, you will be forced to concentrate on defeating the audit instead of allocating that same time to figuring out what you need for the upcoming contract renewal. They want to gain as much leverage and understanding of your business as possible before going into a renewal negotiation. The audit is merely a tactic large software providers use to 1) seek out unearned revenue for their company to meet revenue targets and 2) gain the upper hand in your contract renewal negotiations in the hopes of minimizing any revenue loss from your account. The fact of the matter is that it’s very common for customers to be unintentionally out of compliance. Knowing this, it’s important you know what to do in order to defend your company from what is potentially a very costly situation.

Here’s an example to help illustrate this tactic

By way of an audit, an ERP provider could discover you are misusing the license, giving the supplier reason to charge you a larger fee. Often, sales revenue targets for these audits are about 30% of your annual maintenance/subscription costs. Let’s say you are spending $1M on core licenses, the audit will likely lead to around $300k in costs on top of that. If you can defeat the audit and keep your core license costs at $1M, then you will be happy and reward yourself for fending off the extra charges. In reality, the supplier didn’t expect the $300k in the first place, the audit was just a way to distract you from putting time and effort into your upcoming renewal negotiation. It’s a win-win situation for them - if they win the audit, they put the money towards their sales revenue to meet their quota; if they don't, they’ve distracted you from being prepared to save money on your upcoming contract negotiation. As a sales rep, finding new business is much harder than auditing an existing customer. Suppliers will target big companies because they don’t have perfect internal controls and mistakes are likely to happen.

What to Do When You Get an Audit from Oracle

When Oracle conducts an audit, they engage their License Management Services (LMS) team to run the process. The audit process often involves installing software code within your secure environment. It is a listener software that will hit your mainframe servers and figure out how many other systems are connected. This is important because, historically for this on-premise software, you are licensed based on the interconnectedness of both physical and virtual server environments. Your supplier wants to know how much “value” you are getting from their platform so the software they install provides a report of how many systems are interconnected. In a nutshell, the software delivers a report that illustrates when your technical architecture is in non-compliance. This automatically gives Oracle the upper-hand as it forces the customer to validate the information. The best tactic to defeat this process is to never allow the software in your environment to begin with. You have the right to refuse listening software within your Oracle contract. Unless your contract explicitly calls out installing software, tell Oracle that installing software does not comply with your IT security protocols. Look to determine if you have audit language specified in your contract. The older the contract you have with Oracle, the more likely you have the right to refuse the audit, or to at least not allow the listener software to be installed within your environment. If this is the case, tell Oracle that instead of installing the software, you will run the audit yourself using their tools and spreadsheets with no software included. This means you are in control of what information is being shared with Oracle. Controlling the information is incredibly important in any audit, especially when suppliers are involved.

What to do when Salesforce Conducts an Audit

Salesforce audits customers when there is a restricted-use license available. When this happens you need to think critically about negotiating with Salesforce. Salesforce is Software as a Service (SaaS) in the cloud which means they have more ability to freely monitor your utilization of licenses within your environment and can freely audit for misuse. When you have a Restricted Use License (RUL), you have permission to use the product for a specific business purpose leveraging a certain number of standard and custom objects. Standard objects are modules within the Salesforce platform, such as contacts, accounts, or prospects. A custom object is something that was built by a Salesforce developer specifically for your company. The license limitations in an RUL are a contractual limitation, not a technical one. A contractual limitation means there is legal language on your Order Form specifying how the license may use a predetermined number of standard/custom objects even though there is a set quantity limitation, technically there is no way to shut off access to other custom objects for that user. This license is often in place for a subset of users who only need limited access to your tool. For example, an employee who is only viewing the data and not editing it. If this group starts editing objects, it becomes in and of itself a compliance issue. Salesforce makes it easy for the end-user to accidentally do this without realizing they are in breach of the license. They will use this opportunity to accuse you of using the license incorrectly and request that your organization upgrade these licenses to full users and will seek compensation since the inception of the misuse. Contractually, Salesforce has the right to charge you full retail price for those non-compliant users. Another time when Salesforce audits come into play is when a client is on a SELA Agreement (Salesforce Enterprise License Agreement).

How do you get around Salesforce RUL audit problems?

The best thing you can do is to establish quarterly check-ins with your account team at Salesforce. Use these meetings to stay on the same page with your account team and create a paper trail that shows how your users are engaging with the platform. If you are accused of breaching restricted use, but have established quarterly check-ins with a paper trail, you can respond to Salesforce by saying “We met with your team and they didn’t bring anything up during our meeting so why should we believe you now?” Without quarterly check-ins and a paper trail, you get into a he-said-she-said argument. Often times, the employee in breach of license may have accessed the wrong objects once or twice throughout the life of an account. Salesforce will create an argument that the license has been systematically misused for a long period of time. We treat this event like a litigation. If you don’t have a paper trail of record, then you have no legal foundation for a defense. When comparing the perspective outcome of the party that has records and the other that does not, the person with records almost always wins in court. Keep careful documentation about your interactions with Salesforce, and have open conversations about audit and license use risk. This will build a strong foundation and reduce the risk of an audit.

How to Handle an Audit from SAP

An audit by SAP is very similar to an audit by Oracle in that, historically, their licensing model is primarily “consumption-based.” This means your price is based on your company’s revenue, profit, services used, how many suppliers you have, or any number of a series of variables. This model falls under the concept of Value-Based Pricing and is a subjective assessment of value captured from the utilization of the software. SAP will use many of the same tactics as Oracle which we’ve outlined above. One thing to specifically note about SAP is that they very frequently introduce audits during merger & acquisition (M&A) announcements. When supporting clients with M&A IT Sourcing, we commonly tell our clients to “get ready for the ‘ransom letter.’” These aren’t our words but rather those of our clients who received notifications from suppliers such as SAP immediately after announcing a large acquisition to the market. Want to know if you’re susceptible to these ‘ransom letters?’ Take a look at your contract and keep an eye out for any language within your contract that indicates they will “readdress the terms of the contract if you the customer acquires or divests entities during the term of the contract.” If you have this language within your contract you will more than likely receive a similar notification within 1 month of publicly notifying your M&A intent. In order to defeat an SAP audit, take the same approach we would take with Oracle and then protect yourself moving forward by changing your pricing model to a fixed baseline model that is attached to the reasonably certain variables in your company such as the number of employees.

What to Do When Microsoft Audits You

Microsoft’s audits vary depending on the products and services within your contract. Similar to Salesforce, Microsoft will commonly focus on those licenses that have restricted use. A very common audit for those clients with perpetual Microsoft Office licenses is the 1-to-1 validation of windows desktop licenses to computers within a customer’s environment. Similarly, for those clients with an active Office 365 subscription, Microsoft will look closely at the utilization of subscriptions that are inherently limited in their intended use. This is augmented by a deep analysis of computers and users in your ecosystem to ensure the capabilities being used are properly licensed. If you are paying for any physical or virtualized servers from Microsoft within an SCE agreement, you will commonly be audited to ensure your consumption metrics are within your contracted allocation. Frequently with Microsoft, you are leasing the utilization of servers either on-premise or in the cloud. Generally speaking, if you have a physical piece of hardware from Microsoft on-premise, they will almost certainly conduct an audit at renewal time to monitor utilization as part of their “optimization analysis.” In a nutshell, they will try to move you from an on-premise environment to the cloud. Conceptually this is fine but they will use that audit as leverage to do a lift and shift into Microsoft Azure. Microsoft Azure is a very attractive product for the sales team because they are heavily incentivized to get your company into the cloud. The market is looking at how Microsoft’s cloud growth is going year after year and as a result, the company wants to increase its usage. Essentially, Microsoft will audit to try and sell you on Azure. This isn’t necessarily a bad move to make but knowing key motivators will keep you ahead of the game and alleviate any potentially detrimental surprises.

What Happens Next?

If you’ve been audited by any of your enterprise software providers, we recommend bringing in outside help to guide you through the process. Leveraging their experience and expertise will go a long way to mitigate both short and long term risk that can easily rise into the millions. Don’t solely believe what your account executive is telling you, oftentimes they don’t have all the information needed and they are heavily incentivized by their employers. Your outside expert will be able to comb through your contracts, identify risks/opportunities, and drive both cost savings and containment. With the proper assistance, you’ll be able to confidently stand your ground and mitigate risks before they are realized.

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From Fortune 500 giants to fast-growing innovators, TNG has helped clients save 20% – 40%+ on enterprise software contracts — even when they thought it was impossible

The Difference Between Gartner & The Negotiator Guru

Gartner, at its core, is a market intelligence firm. It uses a wide-angle lens to give you a big-picture view of market and industry trends. You can use their data as general negotiation guidance and add their toolkits to your own.There is absolutely value in this broad-stroke model but it can be limiting when it comes to looking for data and resources that more specifically mirror the size and needs of your organization.

In this article, I want to outline the similarities and differences between a simple market intelligence firm approach and a niche service provider approach. There are many reasons you might want to research best practices from a 30,000-foot view as well as dive deeper at a 5,000-foot view. Many of my clients will use both Gartner’s and The Negotiator Guru’s (TNG) services to achieve the best results for their companies. The graphic below gives a basic overview of the similarities and differences between our companies and we’ll break each one down in this article.

There Are Some Similarities Between Gartner & The Negotiator Guru

Both Gartner and TNG provide information on market and industry trends as well as general guidance on IT Cost Optimization. We have each developed our own toolkits to strategically approach each client’s needs. We overlap when it comes to providing general guidance to CIO’s. Our companies also both provide rate benchmark data although, as you’ll read below, we go about this in different ways. Gartner has quite a bit of data they provide in aggregated terms which is useful but, without isolating the information by industry or annual spend or similar categories, it can be difficult for CIOs and their supporting functions to narrow down actionable intelligence that is defensible and realistic.

There Are Many Differences Between Gartner & The Negotiator Guru

The keyword I would use to describe the services Gartner and TNG have in common is ‘general.’ Gartner is a great resource for general information across a wide array of topics but rarely provides niche depth that our customers are longing to consume. In contrast, TNG has a deep and disciplined focus within the IT Software vertical which enables our team to share actionable insights that are localized, specific, and highly relevant to our clients. In fact, it was our early clients that helped shaped this disciplined focus as they made their niche needs clearly known to our team. Due to our outstanding client family, TNG has been on a journey to fill our clients’ market intelligence needs for specific supplier relationships. This has organically driven our firm to be the worldwide leader in Salesforce Contract Negotiation Advisory Services which typically is 80% of our work portfolio at any given time. With the average cost of a Gartner subscription being $30,000 per seat, plus additional consulting costs in order to receive personalized advisory services, it’s worth your while to be informed on what they can and cannot help you achieve. Because we provide specialized data and consulting services, we’re able to dig deeper into our clients’ businesses and tailor our process to better achieve the results they’re looking for. The following are a few of the specific areas The Negotiator Guru differs from Gartner in terms of what services and results we can offer our clients.

Right Size

While Gartner has a wealth of industry data and information, it can be nearly impossible for a client to look at the data and isolate a specific instance to best compare themselves to their peers. This leaves clients feeling informed but uncomfortable about how this information is applicable, and more importantly defensible, within their environment. In certain circumstances, Gartner will provide “best in class” rates for a specific digital capability or service portfolio. One would argue that this provides directionally correct price targets to use as a market intelligence within their supplier negotiation. We generally agree, however, it’s important to note that your software sales executive (or worse yet your internal colleagues) will very quickly share with you that you don’t fit the profile of those rates for XYZ reason. We know this because we’ve been in these conversations on countless occasions. In the rare case that you obtain “best in class” rate information for your specific topic of interest, you are still missing a critical piece of knowledge which we call our “Right Size” guidance. Using conservative figures, there is a 15-20% value-capture opportunity just by applying Right Size practices to your research and internal analysis before entering into any IT contract negotiation Our supplier-specific expertise is one of the biggest contributors to this Right Sizing approach. Within our Discovery Phase, we take an inventory of your current products and licenses and match them against your actual business needs. Almost always, we find that our clients are over licensed and have shelfware within their environment. This is an example of Right Sizing. From a Right Pricing standpoint, not only do we understand “best in class” rates, we localize price targets based on industry, client size, and contract value. This enables our clients to feel 100% confident about the market intelligence as we’re benchmarking their rates against that of their like size industry peers. To expand upon this difference, we’ll use our expertise in Salesforce as an example. As raised and validated by leading consulting and intelligence firms, TNG has the most comprehensive database of Salesforce rates in the world. This capability allows our team to quickly and easily perform a price benchmarking exercise for our clients. In many instances, we’ll inform prospective clients that their rates are within an acceptable margin of their “Right Price” benchmark and that the only real opportunity (if any) is to pursue “Right Sizing” inside of their environment. At TNG, our culture and client centric values direct our work and guide us to only accept prospective clients where we know with certainty there is a strong potential to drive huge impact.

Being able to combine Right Price and Right Size analysis will have a significant impact on the effectiveness of your supplier negotiation strategies.

Contract Language Risks

As a result of our deep supplier-specific expertise, our team on average analyzes 5 - 15 software contracts per day. As a result, we know what’s “normal” with all of the large enterprise software platforms and any common risks that are inserted unbeknownst to our clients. By doing this every single day, our team is easily able to identify commonly-used, ambiguous language that always favors the supplier. Large software companies know their customers rarely spend time analyzing terms and conditions within their contracts. Furthermore, the widely accepted principle of Software-as-a-Service (SaaS) leads clients to believe the terms are standard and unchangeable. Unfortunately, this simply isn’t true. As part of our Contract Execution Phase, we conduct a deep dive assessment of our client’s supplier contract as part of our standard service (another major difference from Gartner). To put the impact of this added service into context, our team identifies a unique contractual risk within SaaS contracts alone 33% of the time. If the contract we are analyzing is not a SaaS contract, contractual risks are identified, on average, 85% of the time. Knowing what to look for in each supplier’s contract language helps our clients avoid common pitfalls and supplier-centric renegotiation strategies.

Sales Playbook Coaching

Another key difference between taking a general approach on market intelligence (Gartner) vs. a software specific deep niche (TNG) is the ability to learn and leverage the sales playbook(s) for these large enterprise suppliers. It may not surprise you that within the most successful software sales organizations are repeatable and prescriptive sales playbooks that guide the near robotic actions of their sales representatives. As a result of learning these sales playbooks we are literally able to tell our clients the moves their suppliers are going to take next. This intelligence allows us to be one step ahead within the negotiation process while leveraging the interests of both parties. While the art of negotiation is an art and not a science, arming yourself with this intelligence allows you to deploy counterintelligence strategies inside of your organization (to counteract common supplier tactics such as divide and conquer) while also proactively preparing counterpoints to their foreseeable arguments. As a result, our clients commonly tell us that they were the most prepared they have ever been before, during, and after a negotiation.

Advisory and Execution Services

We don’t just tell you what is possible. We help you achieve it. The biggest criticism most companies have of typical market intelligence and/or management consulting firms is that they’ll tell you what “best in class” looks like but will leave you to figure out how to achieve it within your organization. If they do offer advisory services that help you implement their “best in class” then it will be for additional fees that eat away at the cost savings potential, etc. We’re a full, beginning-to-end provider who will help you all the way through to the execution of the contract.. At TNG, we not only share a “best in class” picture but also create a realistic future state localized for your business. We help you implement that future state while also limiting risks to your organization long after our engagement ends. This is all part of our standard duty of care for our clients.

4-Step Negotiation Process

Our proprietary 4-step negotiation process allows us to deliver a clear and consistent service to our clients. In the interest of brevity we won’t go into detail of what each step entails, however, please know that within the Discovery and Strategy steps you will walk away with a forward looking roadmap as part of the overall engagement. If even offered, this would be an extra advisory fee from Gartner and/or any other market intelligence and/or management consulting firm. The graphic below quickly outlines our negotiation process:

Compensation & Fees

Our compensation for these services is also entirely different from Gartner’s method. As mentioned above, Gartner’s average subscription rate is $30,000 per person plus any additional consulting fees. With this package, you have access to their standard publications, toolkits, and potentially a limited number of “analyst calls” which are quick conversations with the author of the publications. Any additional advisory assistance, if even possible, comes as an upcharge. Even with this additional cost, you will be on your own from an execution standpoint.

We charge either an Advisory Fee based on annual contract value or we offer a Pay Per Performance option with a simple baseline calculation. We don’t charge based on a subscription service to our articles, we provide all this information for free. Our rates contain no hidden charges or surprise upsells. On top of that, we’ll help you execute the strategies we develop with you. We’re incredibly transparent with how we price our services and our clients never question the value they achieved from engaging with TNG.

Combining a Broad Overview Approach with a Specialized, Niche Consulting Firm is a Winning Equation

One of the questions we hear frequently is whether someone can/should work with both Gartner AND The Negotiator Guru. The answer is yes! Gartner provides a lot of good, general information. TNG helps you zoom in on the information that is most relevant to your organization so you can determine which key findings are critical for driving cost savings/avoidance while lowering your contractual risk. Gartner is a market intelligence research firm that has a very limited advisory component separate from their articles. They do not generally provide execution services. TNG provides information without a subscription fee and our advisory and execution services are provided in the same package. Bringing in TNG to help you pinpoint your specific needs, value capture opportunities, and execution strategies will provide immediate and long-term intrinsic value for your organization. Remember, TNG will only accept you as a client if there is clear and distinct net positive impact potential… well, we can’t speak for the other guys.

Quid Pro Quo: Salesforce & Salesforce Consulting Partners

We commonly get asked the following questions in varying forms:

Is The Negotiator Guru (TNG) a Salesforce Partner? Are you on the AppExchange?
What are the differences between TNG and a Salesforce Partner?
Why can’t my Salesforce Partner advise me on the best possible rates/products for my Salesforce environment?

Before we get into the specific answers to the above questions, let us share a brilliant unsolicited quote from one of our recent multinational clients regarding the motivational differences between TNG and a Salesforce Partner:

Expecting a registered Salesforce Partner listed on the AppExchange to give you completely impartial advice on Salesforce pricing is like expecting a court room prosecutor to share their notes with the defense before every trial.

Why, you might ask? The answer is simple: All Salesforce Consulting Partners have an unavoidable conflict of interest with their clients. Why? Because of the inherent need for these “Partners” to make both their client and Salesforce happy. In this article we’re going to cover this conflict of interest and why TNG is different. Salesforce Partners Always Have

Two Clients (and one isn’t you) Salesforce Partners have two customers:

You the client; and,
Your Salesforce account management team (hereby collectively referred to as “Salesforce”)

The fact of the matter is that your Salesforce Partner is, by design, incentivized to keep both its client and Salesforce happy. The difficult truth is that you, the customer, are the least important of the two clients. Yes indeed, more often than not, your Salesforce Partner has a greater long-term interest in keeping Salesforce happy. Yes, we know this sounds horrible, but we hope you appreciate our directness here. Let’s dig into two key, but interrelated, reasons:

‍1. Business Relationships

Your Salesforce Partner focuses heavily on keeping a strong business relationship with Salesforce. Why? Because Salesforce is their single most effective sales channel to acquire new business. When Salesforce identifies a new or existing client that needs custom development work, they have the entire Salesforce Partner community to consider when providing a recommendation to their customer. Naturally, those Salesforce Partners that are “supportive” to their sales process will be referred more and more business.

‍2. Money

‍More referrals = more business = more money. Back in the 18th century Edmund Burke once said “…never bite the hands that feed you.” Presenting this differently, if you were a Salesforce Account Executive and you had a Salesforce Partner repeatedly suggest changes to an account that materially decreased your sales compensation revenue, would you continue using that Partner when you have others options available? To be clear; we are not saying that all Salesforce Account Executives are unethical in how they conduct business. However, we are stating that there is an inherent fundamental conflict of interest for the Salesforce Partner who commercially needs to appease both parties. The unfortunate situation is that while a Salesforce Partner may know a customer is being sold more products and/or services than they actually need, they rarely speak up for the reasons above. We’ve even been told there is an informal blacklist inside of Salesforce that keeps track of these Partners that raise cost avoidance opportunities during the sales process. We don’t like writing about this topic but we know every customer wants the truth.

‍Why TNG is different

Quite simply we are only focused on keeping you, the client, happy. When the firm was founded we only included a “pay for performance” compensation option to ensure our incentives were aligned with the client. Over the years, we added an “advisory fixed fee” option purely based on repeated client requests.

‍TNG’s Right Size & Right Price Process

Part of our secret sauce is a deep focus and understanding on 1) how Salesforce works, 2) you as a customer, and 3) best practices on how to quickly drive savings in your environment. While strategic negotiation is an art, our Right Size & Right Price process is more of a science based on its repeatability across all industries.

The Right Size process

‍ focuses on identifying consumption based savings opportunities within your organization.

Our three most commonly identified opportunities within this process are:

“shelfware” elimination
license optimization
governance enhancement. On average, we identify 24% savings opportunity within this process alone.

‍The Right Price process purely focuses on your product and service price points within your specific Salesforce contract. The vast majority of our clients reach out to us for this service alone. Specifically, they want to know how their prices compare to their peers and if they’re getting a “good deal.” We have the largest database of Salesforce rates in the world and can quite easily identify if there is a price optimization opportunity within your various SKUs. Unlike other large market intelligence firms, we are able to isolate your realistic “should cost” price points based on your industry, annual revenue, and annual contract value. The others simply will share a “best in class” rate which is ambiguous and often self-serving. On average, we identify a 22% savings opportunity here but your specific opportunity could be as high as 305% (yes, this was a real client). Fit-for-Purpose Engagement Style The Founder of TNG, Dan Kelly, feels strongly about providing our clients options on how they engage our firm depending on each individual client’s needs. Some clients want a “negotiation-as-a-service” approach while others simply want the output of our Right Price process to identify target price benchmarks to use within their own negotiations. We welcome you to start a conversation with our firm to determine how we can most effectively and efficiently support you.

‍Summary

To recap, here are the basic points of what we’ve covered in this article:

Your Salesforce Partner has motivation to keep both you and Salesforce happy;
They aren’t able to easily share cost savings opportunities with you in fear of losing future opportunities with other Salesforce customers;

The Negotiator Guru is only focused on driving cost savings for you by negotiating with Salesforce, the client;
We have a proprietary negotiation process that includes both the art of negotiation and the science of opportunity creation inside of your Salesforce organization,
On average, we save clients 20-50% on their Salesforce annual expenses through our Right Size and Right Price process; and,
On SELA Agreements (Salesforce Enterprise License Agreement), we typically generate a 41.3% savings for our clients.
We only accept clients within our full negotiation service where we know we can make a huge impact.

What to Look Out for When Negotiating with ERP Providers like Oracle & SAP

Do you know how to protect yourself and stay in the driver’s seat during contract negotiations so that you won’t be held ransom by your ERP provider? In this article, we’re going to outline the top things you need to take into consideration when negotiating contracts with Oracle, SAP, and any other ERP system.

We’re going to share with you the key terms to clarify in your contracts to avoid extra costs and substantial frustrations down the road.

What to Look for in an ERP

While no company has a crystal ball to know exactly what the future will look like, you do need to identify how you’d like your business to function over the next 10 years.

Why 10 years? Typical business roadmaps project as far as 3-5 years in the future. Most ERP systems relationships last a minimum of 10 years. You need to know how your business will function in order to know what you’d even need an ERP for and what it would need to do. You need to be risk-averse in your contract negotiation in order to cover your bases for what could happen.

Once you have your future vision in place, you’ll look at the supplier landscape. Compare what each of the top ERP systems providers offers and how it’ll meet your needs outlined above. Create a Supplier Decision Matrix and stack each contender against it to determine which is the best for your corporation.

Once you know which ERP software is right for your corporation, you’ll need to dig deep to really figure out the total ownership cost. This is the tricky part and is best handled through careful contract negotiation, financial analysis, and service management.

Key Things to Consider When Negotiating an ERP Software Contract

The contract is the most important factor when determining the total cost of ownership of the ERP and there are generally only two triggers for renegotiation once a contract is in place: mergers & acquisition activity and contract renewals.

Providers know that you don’t read ERP contracts every day. They design contracts in complex and ambiguous ways, which leads to more revenue for them—and more fees for you. Each of the following points needs to be specifically addressed and outlined in your contract to prevent your ERP from holding you ransom at various times over the course of your relationship.

Pay Attention to Intellectual Property Ownership

Many ERP contracts will state that any systems or processes developed while using the ERP are now Intellectual Property (IP) owned by the ERP provider.

We worked with a customer recently in the manufacturing industry. They had developed a process for creating their materials more efficiently going through the production line. According to their contract with their ERP provider, any process developed using the ERP software can be considered ERP owned IP. As such, we needed to carefully negotiate the situation with the ERP provider so as to not cannibalize the newly found process improvement which led to millions in positive P&L impact.

In a contract, you need to be very clear who owns the rights of process improvements as far as when it may directly or indirectly utilize an ERP system. Your ERP is the backbone of your business, and if properly set up, it touches most aspects of your business. Naturally, this complicates any opportunity to disentangle from that ERP. If Oracle, SAP or any other provider wanted to play hardball, they could say any process improvement that utilizes an ERP system could be co-owned or sole-owned by that ERP, and then they could take that process and sell it.

Make it very clear who owns what when negotiating your own contract. It needs to be clear that the client owns all IP that are developed for the benefit of their company.

Be Smart About Your License Cost Model

Everyone knows ERPs cost a lot. New contracts with smaller providers will often undercut themselves for the first year or two but will see a massive uptick in years 3-8 because the ERP knows it’s incredibly difficult to leave an ERP once you’re integrated into it.

The cost models of ERPs vary depending on the makeup of the customer’s business and what will be the most profitable for the provider. Some of the pricing models include:

Seat-based: Typically the number of humans who log in to the system. These licenses can be either Perpetual or SaaS based.
Site-based: Number of physical locations, etc.
Consumption Based: Number of processes, inputs, etc., into the tool.
Value Based: The newest model within the marketplace and yet the scariest of all. A cost associated with the perceived value of using the platform within your business.

Generally speaking, seat-based pricing is the most cost-effective for companies looking at ERPs, but this depends greatly on what your 5-10 year plan looks like to know which would be the most beneficial to you.

In addition to your unit cost, there could also be annual maintenance expenses. This acts like an annual expense and is generally a percentage of your perpetual license fee/net spend with the ERP. There are 2 ways to host an ERP system:

On-premise: Software that is loaded on the servers you’re in control of.
Software as a Service (SaaS): Software is hosted in the cloud by the provider.

Either way, you need to be careful how you license a product because if you don’t have control of consumption and volume-based metrics, it can skyrocket your costs.

Know Your Audit Rights

This is one that gets people in trouble a lot. Generally speaking, Oracle and SAP will not proactively limit access or connectivity to your ERP. This almost always is the responsibility of their customer, based on their unique needs. As such, these providers will contractually allow themselves unfettered access to your ERP environment with the intent of auditing the usage of their software.

The most common areas of audit risk are:

License compliance (Using more seats/volume/etc than you are paying for)
Architecture compliance (Too many API connections, etc.)
M&A compliance (Acquisitions, divestiture, subsidiary utilization)

It’s important to know there is intentional ambiguity by the software providers in how one could interpret contract language related to permissible use. Furthermore, we find that clients have no intention of noncompliance within any area but find it most difficult to monitor and govern the area of architecture compliance.

A common example of noncompliance is when a client links their ERP system to both development and production environments. Similarly, if an ERP is connected (in any way) to a client’s CRM system, it may also trigger a non-compliance event.

Providers are inserting audit right language within clients’ contracts (both new and old) providing the legal authority to conduct random audits of a client’s environment. They deploy both human and technical tools. The technical tools include running scripts that “listen” to your environment and create a report identifying potential non-compliance, which automatically places the client in a defensive position. Architecture-based non-compliance is most often the most profitable audit for a provider.

Another risk area is when your ERP is connected to other systems outside of your current infrastructure. Every time you make a connection between your ERP and another outside platform (often through APIs), the ERP provider may identify this as a missed charge and will charge you retroactively since the connection was initiated. This can easily develop into millions of dollars of new revenue.

The provider may also push value-based pricing by arguing that the API connections help you go to market faster, justifying an increase in your fee based on the perceived increase in value. Value-based pricing is risky because these providers can charge for new API connections, new acquisitions, product launches, and/or the output of the tool.

Don’t let a provider run a script inside your environment. If they don’t have access to your information, you’re in control of it and you remain in the driver’s seat.

Have Clear Merger & Acquisition Language

Put specific clauses in the contract that make it very clear what happens if you are acquired or if you acquire someone else. More often, it is the provider who offers this language, using very loose terms to say ‘if this happens, we will talk about it’ which leaves a lot of area for ambiguity.

To best prepare yourself for any situation, we recommend you place specific and measurable language in your contract that outlines the cause and effect for the most common situations. From a commercial perspective, this means having specific pricing thresholds.

If you are acquired, you take the better of two prices. You take the best price of both until you, as the newly combined customer, want to renegotiate.
If you are acquiring a company, insert legal language allowing you to renegotiate the contract immediately or simply adding the newly acquired entity into your existing contract with only a reasonable increase in fees.

You want to eliminate ambiguity. From a pricing standpoint, you want to make this as clear as possible.

Set Expectations About Subsidiaries

You also want to know the specific parties of the agreement. A common hiccup for companies is that they don’t have subsidiary language in their ERP contracts. A company like Coca-Cola, where each product line acts as its own subsidiary, could be in default of the contract by letting that subsidiary use your system without proper language.

This is something people don’t think about until your provider comes to you and says, ‘Hey, by the way, your other subsidiaries are using this ERP software. Happy you are doing it, but that is not part of your contract so here is a bill for another million dollars.’

Third parties—suppliers, vendors, non-employees—need to be defined in the contract as well. If third parties are allowed to act on your behalf, there shouldn’t be any additional fees for them to use your system.

Be Sure to Outline Price Protection

Another thing you need to consider when negotiating your contract is price protection. Generally speaking, companies don’t write in any sort of price protection year-over-year. What that means is that over the contract term, your ERP provider could change the price points of your unit costs at any given time.

It is not just about being clear about locking in your price at contract term, it is also putting a cap on the amount of increase that can happen at the next contract renewal, which needs to be aligned to the Consumer Price Index (CPI). A general rule of thumb is that the increase shouldn't exceed 3-5% at renewal.

Include Clear Terms Around Your Service Level Agreement (SLA)

An ERP is a critical piece of software for any corporation and yet we often don’t negotiate Service Level Agreements (SLAs). If ERP systems go down, it can shut down governments and grids.

Make sure that you have the best service level agreements and governance agreements by specifically outlining them in your contract.
There needs to be penalties for an ERP provider not meeting or exceeding the Service Levels you agreed upon. Hundreds of thousands of dollars are left out there because companies don't track failure.
You should put the onus on the ERP provider to send you reports of the performance versus making your employees have to monitor if it was working correctly. Make it the obligation of the ERP provider to know that there has been a breach in the SLA.

Don’t Forget Cybersecurity and Intrusion Detection

You need to be careful that if you get hacked, you don’t owe your ERP provider or are legally obligated in any other way to pay a hacking fee. This is called indemnification.

In matters of cybersecurity and hacking, your contract should stipulate that the ERP provider should be accountable, if possible. There should be financial and legal obligations, and your ERP software provider should be responsible for any sort of intrusion into the system—especially if it’s located in the cloud.

The concept being that if someone hacks your environment, the source code from the ERP could be opened to the black market for rip off and resell. People don’t look out for this enough and hackers are getting more sophisticated every day.

Know the Rules About Implementation Partners

Implementation partners are third parties that will help develop custom code on top of the ERP system for your business.

Most of the time, your contract states that any implementation partners have to be registered as “Preferred Providers” for your specific ERP software. It is a contractual risk to your company if your contractors are not certified by your ERP provider.

Your E-Commerce System Needs to Play Nice

If your company is in e-commerce, you need to make sure that there is an active and working connection between your ERP provider and your e-commerce provider.

Many ERPs will tell you “Don’t worry, we will make a connection.” What they won’t tell you is that the connection they make will cost YOU more money. Your contract needs to dictate who is accountable for paying for any connections that are required for your e-commerce platform and your ERP system to play nicely together.

We always make the new piece of software that is connected to the ERP system pay for the API. It is the third party’s cost. That basic API connection should not be your cost to maintain and pay for—stipulate in the contract who is responsible (ideally the third party) ahead of time so you aren’t stuck with a huge bill.

Make Sure You Have Coterminous Contracts

Another big thing to look out for is coterminous contracts. In most large companies, each department will have separate contracts with an ERP provider and these contracts won’t align on the same termination date.

This is the biggest trick in the book. It creates massive chaos because you can’t get everyone on the same page and forces the client to align internally at multiple times throughout the year. Clients typically lose 10 - 20% when they are in a non-coterminous environment.

If you are subject to a non-coterminous environment, the ERP provider is in the driver’s seat. They will divide and conquer you, negotiating at a business unit level versus an enterprise level. At the enterprise level, you have the volume and leverage to get better terms which typically drives an additional 10-20% in value.

In Conclusion

Whether you’re negotiating an initial contract or a renewal, make sure you develop and maintain a total cost of ownership view. First, make sure you understand how your business will be growing over the next 10 years. Then, dissect the contract so that you better understand the unit cost and connection fees.

In the contract, lay out all potential possibilities early as opposed to being forced to react to them as they come along. The more prepared you are, the better you’ll be able to handle surprises, pivots, and conflicts. Make sure that in the contract, each of the specific points outlined above are detailed with zero ambiguity. Hit all these points as a minimum.

The truth of the situation is that the sales representatives at these ERP providers know you aren’t negotiating an ERP contract everyday. It’s important to understand how to protect your company. Keeping these points in mind will help you to protect yourself and your company.