The truth about Salesforce Enterprise License Agreements (SELA)...is it right for you?

We’ve found that the average savings potential for a company switching from a Salesforce Enterprise License Agreement (SELA) to a standard Salesforce Subscription Agreement is 41.3%. Yet many large enterprises still honor their SELA agreements simply “because we’ve always had one.” Subsequently, these companies have a difficult time benchmarking the value they’re extracting from a SELA vs any other contracting method.

While Salesforce will present these agreements in a way that may seem extremely advantageous to the customer, the truth is they’re rarely a good fit.In this article we are going to explain:

What is a SELA Agreement?
How SELA’s looked in the early days of Salesforce
How present day SELA’s have changed
Why SELA Agreements are a bad idea for most companies
- Problem 1: SELA caps are built off of your current needs
- Problem 2: SELA agreements are manipulated by Salesforce’s changing product line
- Problem 3: You are paying 41.3% more than you should be with a SELA Agreement
When SELA’s work
When SELA’s don’t work
Why “you don’t have to manage it” rarely justifies a SELA
What to do if you have a SELA

What is a SELA Agreement?

A SELA Agreement is a Salesforce Enterprise License Agreement.

What is the difference between a Salesforce Enterprise License Agreement (SELA) and a Salesforce Subscription agreement?

A Salesforce Enterprise License Agreement (SELA) agreement is different from a Salesforce Subscription Agreement in one key way. A SELA is meant to provide “Unlimited Access” to the platform, while a standard Salesforce Subscription Agreement includes set prices for a set number of products.

Yet while SELA began as an “Unlimited Access” promise, that is not quite what SELA agreements look like today.

To understand SELA’s and why your company probably doesn’t need one, it’s helpful to understand the history of SELA’s and how they may have looked when your company originally signed one.

How SELA’s looked in the early days of Salesforce

In the early days of Salesforce, there was a massive focus on market penetration. Like any typical SaaS company, all they cared about was volume.

In the early days of Salesforce, the CRM market was extremely fragmented with small players and disparate homegrown solutions. Arguably, at the beginning, the largest competitor to Salesforce was Microsoft Excel. As a result, Salesforce hit the market precisely at the right time and acquired new customers relatively easily.

But given that Salesforce was in such a high-growth mode, they wanted to leverage their existing client base to grow organically both internally and externally at the client organization. In other words, they wanted to pursue any strategy that enabled new endpoints whenever, and wherever, possible.

Under this premise, they created the first SELA which conceptually provided unlimited access to the platform. This would ensure that Salesforce could land and expand as fast as possible within a new account without any barriers, paperwork, governance, or red tape.

The MO of an early SELA deal summarized would be:

Your contract with Salesforce is $10M per year over a 5 year contract term. It is a $50M relationship, and you can use the entire Salesforce platform however you see fit, no restrictions. Use our support as you need it. Our goal is to help you grow.

This unlimited access approach was the foundation for Salesforce’s growth by 100x in the early years. By signing one of these deals, and then expanding into a large enterprise organization, they were able to show massive growth rates on all of the SaaS growth metrics such as users, retention, growth rate, turnover rate, etc.

Because they were signing customers onto SELA’s, their growth metrics went through the roof which gave all of the signals for additional funding, press, and market share.

The goal of SELA in the early days was simple. Achieve as much penetration as possible into the corporate world.

How present day SELA’s have changed

While SELA’s once provided “Unlimited Access” to the platform, that isn’t always the case today. Present day SELA agreements look quite different.

Today’s SELA Agreements are full of floors and caps on the quantity of specific product sets that you can use. While old agreements were “Unlimited”, the new agreements come with added restrictions, usage ceilings, and massive financial growth commitments.

Salesforce’s objective with SELA’s is to give you an agreement that fits your current needs, but has the potential to break if you’re not careful negotiating both the commercial and legal terms and conditions.

When your organization grows/declines past the commercially allowed threshold within your specific SELA, there will be significant financial consequences. Subsequently, without the proper legal terms and conditions protecting you from changes within your business, you are setting yourself up for significant financial and legal risk.

Why a SELA is a bad idea for most companies

A floor/cap on your product usage initially may not sound like a large risk for your company, especially if you are comfortably within the allowed threshold at the time of contract execution. That being said, there are 3 major problems that commonly arise from this scenario. Here we are going to dive into the three fundamental problems:

Problem 1: SELA caps are built based on your current needs

A SELA agreement will often be on a 3-5 year term, and the caps are negotiated based on the needs of your organization at the signing of the contract. This may not sound like a major risk, but for high volatility (growth and/or decline) companies, or anyone in an active M&A industry, this can be a major issue.

When you break the caps of your SELA Agreement, it’s not as simple as “buying extra licenses” to make up the gap. Instead, it will trigger an entire sales event with Salesforce that is going to have them coming back to you for more money.

Additionally, you may only trigger your cap in one single product category (Ex. Pardot), but if you break your SELA caps in that space, they can use that as grounds to raise prices across the board.

These caps are dangerous because as soon as you break one, it puts the power of the contract back into Salesforce’s hands.

Problem 2: SELA Agreements are manipulated by Salesforce’s changing product line

The second problem with a modern day SELA is the ever-changing product line from Salesforce.

Salesforce is a master of releasing and repackaging products. They are constantly rolling out new products into the market, as well as repackaging existing products, while retiring old products.

While innovation at Salesforce is great, the new products and services that are organically (or inorganically) created are rarely contemplated as part of your organization’s SELA. If your organization wants to use those new products and/or services, they will likely need to be paid for separately as an additional expense.

Additionally, some products may “retire” or become a “carveout” of an existing product. Continued usage of these products may actually trigger a contractual breach of your SELA.

This sounds ridiculous, but Salesforce does it all of the time, and it’s very expensive for the client. Naturally, most Salesforce clients are not aware of these inherent risks until they’re sent an invoice for this incremental out of compliance usage.

Here is a recent practical example of how they pull this off...

Repackaging Example: Sales & Service Cloud

Up until recently, Sales Cloud & Service Cloud were two separate products from Salesforce.

Sales Cloud was for Sales Reps while Service Cloud was for service department technicians. These two products came at two different price points. Sales Cloud was cheaper, and Service Cloud was more expensive.

Eventually, Salesforce decided to roll these into “Sales and Service Cloud” as a single commercial product even though they technically operate as separate infrastructures (clouds). This provided Salesforce a commercial opportunity to financially uplift those existing clients that had both products (Sales and Service Cloud), historically with two different price points, now as a single price point that matched the more expensive line item as part of Customer 360. The logic being that both clouds are integrated harmoniously whereas the entire client organization is able to review all of its omnichannel touchpoints with their customers. This “additional value” was largely the basis for this product and price convergence.

The targeted outcome is typically around a 30% revenue boost within the existing customer base. This revenue boost was predicated by a simple repackaging of services.

Problem 3: You are likely paying 41.3% more than you should be with SELA

We renegotiate a lot of SELA deals at The Negotiator Guru (TNG), and on average, we identify a 41.3% cost reduction opportunity when switching to a standard Salesforce Subscription Agreement.

The reason behind this is that most SELA’s are priced extremely high (on a price per unit, per month basis) and commit the client to much higher usage (products & quantities) than is actually being used, creating conceptual shelfware.

At TNG, we leverage a proprietary Right Size, Right Price approach to drive efficient and long lasting savings for our clients.

We first understand what your organization actually needs and build a roadmap to support you based on your specific global business. Instead of buying everything through a SELA Agreement, we leverage our Right Size framework to ensure you’re leveraging the appropriate products and services at the Right Price.

We are able to easily identify Right Price information based on our industry leading price benchmarking database that is minimally rationalized based on your Annual Contract Value, Industry, and Company Size. We say “minimally” because there are other factors that determine product pricing such as product mix, your roadmap, Salesforce quarterly interests, etc.

Then, we leverage our unmatched expertise negotiating with Salesforce either as a covert silent advisor, or an overt legal agent, to extract maximum value for you at the lowest possible cost.

Those two simple components alone have generated our SELA Agreement customers 41.3% in savings.

We’ve worked with Fortune 100 companies paying $25M+ per year to Salesforce whose actual contract value should have only been $10M.

The savings potential is real and worth the time to renegotiate.

When a SELA is a good idea

Most of this article is spent sharing why SELA’s are a bad idea for most clients. That being said, there are a few select cases where they may be temporarily beneficial to a client.

Every year, we speak with hundreds of Salesforce Customers. Since the inception of TNG in 2015, we have only had one customer where a SELA was actually a good fit for their needs.

While we always keep our clients confidential, this specific company was a high-growth IT firm with rapid-growth aspirations (500x), large amounts of equity funding, minimal IT resources, and a technical architecture that required Salesforce to act as the backbone for their outreach strategy. They were in a very unique situation.

Here are the required conditions to even consider a SELA:

High-Growth Environment of 10x-500x per year;
High-amounts of capital investment;
A large volume of customers with varying interaction levels across multiple channels; or,
A clear architectural roadmap from a digital capability and functionality perspective.

When a SELA is a bad idea

99% of the time, a modern day SELA Agreement is a bad idea. In almost all cases, it just doesn’t make sense.

Here are (only some of) the conditions where a SELA does not work:

You signed a SELA 4+ years ago;
Your company has predictable needs in both products and quantities;
Your company is spending less than $10.75M/year on Salesforce;
You have less than 5,000 API connections per day;
Your IT department’s strategy is to leverage native (vs. custom) functionality wherever possible;
You have less than 3,500 Sales and/or Service Cloud licenses; or,
You’re not sure where your business is going in the next 3-5 years.

Why “you don’t have to manage it” rarely justifies a SELA

Yet, even with everything we shared, many companies still sign up for new, or keep renewing their existing, SELAs. Perhaps that’s because they haven’t read this article!

The most common reason we hear from our clients on why they have a SELA is that “We don’t have to manage it. There are no order forms, compliance, or governance. We just signed the deal and originally, didn’t have to worry about it.”

While that is great in theory, you can achieve nearly the same benefits with a standard Salesforce Subscription Agreement by negotiating specific terms and conditions into your Order Forms. We will share two of these terms below for your awareness and utilization:

M&A Language

Request language be added to your Order Forms that protects you in the event of an extraordinary corporate event like Merger and Acquisition (M&A) Activity. Adding in the appropriate language for M&A activity can provide huge benefits to your organization. Specifically, ensuring that an acquisition or divestiture can be brought in or taken out of your environment without commercial recourse will proactively avoid painful legal headaches and financial synergy slippage.

Product Swap Language

As we discussed, Salesforce likes to change up their product line to create disruption in the marketplace and in your contract. Introducing product swap language that enables you to swap products and services freely as long as you maintain the same annual contract value provides a huge value that is similar to that of a SELA.

FAQ’s

What happens if I exceed the caps on a product in my SELA Agreement?

Salesforce will use this overage as leverage against you in your upcoming negotiation. They will either charge you an overage fee or push a net new product on you in exchange for waving your overage fee. This net new product helps them achieve additional revenue, new products, and a larger footprint inside of your organization.

When you exceed the caps on a product in your SELA Agreement you are naturally placing yourself in a vulnerable position with Salesforce.

Many organizations who have an active SELA Agreement with Salesforce don’t have an internal software asset management (SAM) team. As such, these organizations won’t know they have exceeded their cap limit until Salesforce informs them. Even with an active SAM team inside multinational organizations it can be very easy to exceed your caps.

In general, 6 months prior to your contract renewal, Salesforce will conduct an audit on your account to look for any overages. If your organization is not already aware of these overages you’re naturally going to be on your heels trying to fact check information internally. Either way, Salesforce will use these overages as leverage against you in the upcoming renewal negotiation.

There are two scenarios that commonly play out within this situation:

First, if you notice you have exceeded the cap limit, you can take corrective action to decrease your quantities of specific products so that you are back in compliance. Your organization will technically be obligated to pay overage fees for the time those overages were occurring within your environment. The standard language within Salesforce agreements indicates you will be liable to pay the “published retail rate.” In other words, the rate that Salesforce publicly publishes on their website without your organization’s discount.

Second, if Salesforce notices that you have exceeded the cap limit, then you will be hit with a heavy overage fee in a similar manner as discussed above. However, Salesforce will likely use this opportunity to push new products within your environment in exchange for some of the overage fee. The net outcome, if not properly negotiated, will be a higher total cost of ownership over the term of your new contract than paying the overage fee by itself.

It’s important we state this again: Standard Salesforce MSA and SELA Agreements (aka all agreements) include a standard clause that any license overage will be charged at the then current retail price. That means instead of paying for additional seats at your discounted rate, they will charge you the retail price for the product that is currently listed on their website.

This is a very dangerous situation as the retail price can often be 2 -3x your standard rate.

We recommend negotiating specific contractual language that limits your financial liability to that of your organization’s reduced rate vs. retail.

How do you approach negotiating an existing SELA Agreement?

When renegotiating a SELA Agreement, we leverage our best-in-class and proprietary approach that we always use when Negotiating with Salesforce.

Mastering Your Salesforce Spend: Why Ditching the SELA Can Save You Millions

Create a Salesforce Roadmap

The first step in controlling your Salesforce spend is to build a roadmap of specific products and services you will need from Salesforce over the next 5 years. Create a list of both your needs and your wants.

With a Salesforce Enterprise License Agreement (SELA), it is very important that you build a 5-year game plan instead of a 1-3 year plan. The reason is that the 5-year roadmap will help you decide if a SELA agreement is right for you. If you are forecasting rapid growth or large M&A activity, then a SELA may make sense, assuming the proper legal terms and conditions are in place. But without either of those two components, a SELA rarely provides the differentiated and intrinsic value one would expect from its large price tag.

In most situations, a SELA Agreement will not make sense for most organizations. Putting together a Salesforce Roadmap will help you see this clearly. When you have a clear roadmap of what products you need, in what quantities, then you can use that as a benchmark on price.

Benchmark Your SELA Spend with Right Price Data

Once you have your roadmap, the next step is to gather Right Price Data for what rates you should be paying for each product on your roadmap.

At The Negotiator Guru, we have the largest database of Salesforce rates as a result of reviewing hundreds of Salesforce contracts for organizations that span literally every industry. We can tell you what you should be paying for each product or service.

While firms out there like Gartner can provide directionally correct information, they are not able to provide prescriptive insights for your specific situation. To access our Right Price Data for your account, contact us at info@thenegotiator.guru.

When you take this Right Price Data and line it up against your roadmap, you can see an estimation of what your Salesforce spend should be in a total cost of ownership view. Now simply take that total number and compare it to the annual spend of your SELA Agreement to see just how much of a savings potential is available for your organization.

Based on our real client data, we find there is typically a 41.3% opportunity available when switching from a SELA to a standard MSA & Order Form contract and pricing structure.

Examples of SELA Negotiation Success

Through our work at The Negotiator Guru, we have helped hundreds of organizations reduce their Salesforce expenses. Our firm is the industry-leading expert in negotiating with Salesforce.

Here are two recent examples of SELA negotiations we have completed with, and for, our clients (all company information has been redacted for client confidentiality).

Negotiating a $75M SELA Agreement down to $32M (57% savings)

One of our clients came to us with a 3-year term on a SELA Agreement valued at $25M per year. This was a total contract value of $75M over a 3-year period.

We worked with the client to create a Salesforce Roadmap and shift the organization over to an MSA & Order form contract and pricing structure. This simple shift produced a material reduction of their annual spend down to $10.7M per year for a 3-year term.

That is over 57% in savings and $43M in cost savings over a 3-year period. This example shows just how much SELA Agreements can be overpriced.

$30.5M in savings by negotiating a SELA Agreement that no longer made sense post-M&A

This particular organization was on a 5-year SELA Agreement. The SELA was designed based on the company footprint at the execution of the SELA Agreement.

There was one major problem—this specific organization was in the telecommunication industry which was experiencing heavy disruption. As a result of this disruption, the company divested several business units for financial and regulatory reasons. When these business units were divested, everyone assumed that their Salesforce contract would adjust accordingly… but that was not the case.

The response that came back from Salesforce was essentially, “It won’t be possible to reduce your spend because you have committed to this agreement for a total of 5 years.”

This meant that the telecom organization was now paying for products and services that were used by companies they divested, and they were committed to continuing to pay for those products for an additional 3.5 years. In total, this would be $36M in wasted expense over a 3.5-year period.

Through negotiations with Salesforce, we were able to reduce that down to a $5.5M breakup fee for a total savings of $30.5M over a 3-year period. This example shows just how important it is to structure in proper M&A language into your SELA and all Salesforce Agreements.

SELA Agreement Logistics and Strategy

What is the typical SELA annual spend?

The typical customer on a SELA agreement is a multinational organization doing over $10B in annual revenue with a total spend of $15M+ per year with Salesforce.

How long does the process take to renegotiate a SELA Agreement?

The process to renegotiate a SELA Agreement typically takes 2.5 months. That being said, to properly prepare for the negotiation, we engage our clients a minimum of 6 months prior to your natural renewal date. Remember, 80% of negotiation is done through thoughtful and intentional planning. In a best-case scenario, you want to plan for your SELA renewal 1 year in advance.

Who is involved in a SELA Agreement negotiation?

On your organization’s side, the following individuals should be involved in your core negotiation team:

Head of IT Sourcing
IT Leadership in charge of the Salesforce Platform
IT Finance Representative
CIO (Optional)

From The Negotiator Guru, the following individuals are involved:

Lead Negotiator
IT Architect
Legal Representative

Do I need to switch off a SELA or just negotiate a lower price?

In most cases, it will make sense for you to switch from a SELA Agreement to a standard MSA & Order form agreement with Salesforce. While you do not have to switch, it is often the most advantageous for you as a customer of Salesforce.

There are several material reasons for this, however, the most prominent being that it’s very difficult to proactively measure the value you’re receiving from Salesforce when everything is bundled into an annual fee. This lack of transparency is by design from Salesforce, allowing your account team to do some creative accounting.

When you convert to an MSA & Order Form contract structure, you can compare your specific needs with Salesforce directly with our Right Price Data to understand exactly what you should be paying.

My company’s workflow is seasonal, and a SELA allows us to adjust licenses as needed. How do we accomplish this with a Salesforce Subscription Agreement?

You can achieve the same flexibility of a SELA by adding in Seasonal Worker Licenses within your subscription agreement. These licenses largely produce the same flexibility as they are intended to be used for seasonal contingent workers that increase and decrease throughout the year. Another common use for these licenses would be for college interns or factory workers.

In some cases, Salesforce will tell their customers that this product option does not exist. This is simply not the truth.

Recently, one of our customers did not believe that a “seasonal worker license” actually existed. Through multiple conversations with Salesforce, he was told this simply was not an option. We pulled up a screenshot of another client’s invoice, redacted all of the confidential information, and shared the invoice with “Seasonal Worker License” as a line item. The client was blown away. You can achieve a Seasonal Worker License... you just have to ask... perhaps more than once.

More resources

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

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.

A 3-Step Process to Reduce Your IT Spend 25% Or More

In the latest meeting with your company’s executives, the ultimate goal was the same as ever - increase revenue, decrease spend. Do more, with less.

Your directive is to find a 10% cost savings in the next year and you are looking for some quick, streamlined ways to achieve that goal.

Have you taken a good look at your current contract situation? Where can you find savings in the software and products you’re already paying for?In this article, I’m going to share how you can create a system to manage and optimize your current (and future) IT contracts. By taking these steps, you'll achieve the best cost savings (often upwards of 25%) for your company.

How do you manage & optimize your current IT contracts?

To optimize your IT spending, you need to get organized. Tons of contracts are flying around and you have to know where you’re starting from today to be able to optimize for the future. You have multiple contracts with each supplier you work with. Each product you buy from them throughout the year has its own legal commitments: Master Service Agreements (MSA), Statements of Work (SOW), order forms, etc. Each supplier has a number of IT contracts they use with their clients. Any of these types of contractual documents probably have different commercial language. And they all add up to time and money obligations for you.The worst part? Almost none of these contracts will be co-termed. Regardless of the company they’re with, each contract will have a different term period. Some of them will be for six months, a year, eighteen months, what have you. This creates mass chaos and it’s all by design. In order to get out of that chaos, you need to get above it - get a bird’s eye view of the landscape of your IT contracts. This can be a very arduous process but the payoff is huge. Take the time to align each of the contracts so you can properly optimize around them.

Step 1: Create an Asset Inventory List

If you don’t have a contract management system - and most companies don’t, even the biggest ones out there - you need to create an Asset Inventory List.Basically, list out all your suppliers and all the IT contracts. You need to be clear on what contracts you have with a specific supplier. You can do this with a fancy Excel spreadsheet like the one I’ve created below. You can download this template for your own use.

Essentially, this list will have the vendor name, contract type, contract term, and price. Consultant groups charge millions for this fancy spreadsheet but you can create one yourself from my free template. Through this process, you’ll identify 2 things:

How much you’re spending every year.
How many IT contracts you have with each supplier.

With this information, you can tackle the next step. You now know what contracts are coming up for renewal and when. You know the negotiation period and can bring in extra help in advance to work through that process. And finally, you can now work on co-terming all the order forms and SOWs. These adjustments create more administrative ease versus the chaotic burden they’re designed to be. Once you’ve got a survey on your IT contract landscape, you can move on to Step 2.

Step 2: Analyze Each Supplier Against a Right Size/Right Price Matrix

Start with the suppliers that are your biggest spend items. These will most likely be your ERP provider, your Microsoft Office contract, and your CRM software. Do an internal assessment of these suppliers and determine:

How much you’re spending;
When you’re going to renew; and,
What you’re planning to do in the future.

This will help you determine that you are, in fact, only paying for the items that you need versus those that you don’t. All too often companies are paying for products that they aren’t even using because they don’t have a handle on their contracts. The second thing you’ll be able to keep an eye out for is whether you’re paying for the right license types or not. Challenge your company to look at ways you can downgrade your subscriptions. The third piece of knowledge you’ll gain from this process is figuring out which business capabilities each supplier is supporting. You’ll be able to see which suppliers are overlapping functionalities. This overlap is common in decentralized organizations. Each business stakeholder wants to use the software they’re familiar with even though three other companies provide the same capabilities. Your corporation is likely spending way too much on overlapping suppliers that provide the same digital capability. Paying for software you’re not using is called shelfware. Don’t make the mistake of paying for shelfware. You need to start this internal assessment process six months before your next contract renewal. If you don’t, you’re going to be playing catch up to these large suppliers because they know more about you than you do.

Step 3: Preparing for negotiation

Create your negotiation team

Your negotiation team should consist of 3 different roles: a business stakeholder, an IT stakeholder, and a negotiator. Sometimes this last role is procurement and sometimes it involves an outside advisor.

Gather benchmark data

In addition to your negotiation team, you’ll need some hard-to-find information. One of the biggest pieces of leverage you can get is benchmark data. This data gives you the prices other firms are paying for the same service. There’s no way your company can know what other businesses are paying unless you bring in an external advisor like The Negotiator Guru.

Create an opportunity analysis

You can analyze your rates against the benchmark to find out how competitive your prices are compared to your industry peers. Similarly, you can analyze your supplier performance metrics, Service Level Agreements, governance process (etc.) against benchmark data to find out how well your suppliers are performing. And finally, you can analyze your Innovation Quadrant against the benchmark .How is the supplier driving new ideas, new concepts, process improvements, etc? How are they incentivized to drive cost savings for YOUR company through their relationship with you? For example: If you’re using a company like Accenture to run your help desk, there should be a clause in the contract for a 10% target cost savings over the contract term for the services they provide. They do this through process improvements and through automation. This ensures they are actively working toward providing your company with cost savings to make your business more efficient.

Create a Roadmap of Initiatives

This roadmap has the intent of prioritizing your initiatives to ensure you’re targeting the greatest impact that will take you the least amount of time. Of course, not all initiatives will be easy to achieve but taking a systematic approach to what you work on first is paramount to your success. To assist with this approach, we suggest categorizing your initiatives so that you can easily sort and isolate the opportunities in front of you. Categories you might consider using include “Quick Win, Strategic Sourcing, and Business Transformational.” Naturally, the progression of cost savings usually increases in scope and impact as you move from Quick Win opportunities to that of Business Transformation. After you perform your opportunity analysis, get your benchmarks, and create your roadmap of initiatives, you can then pull together a Heat Map. This entails creating a visual graph that clearly identifies the sequencing opportunities. Here is an example of one of these Heat Maps:

Being proactive with IT contracts can save 25% annually

A stellar negotiation team together with your benchmark data and forward-looking road map will give you a clear direction during the renegotiation process. Centralizing, and subsequently renegotiating, your contracts with this approach generates on an average 25% P/L cost savings for your company (industry agnostic).

A decentralized company can cost you extra money

If a company has multiple business units and/or sites that are responsible for their own procurement you will undoubtedly have an unstructured supply base. The downstream effects of this situation is that you will have overlap in your supply base, duplicative digital capabilities, and a rats nest of contracts causing incredible inefficiencies and unleveraged spend. For example, if one branch is using DocuSign for e-signatures and another is using Panda, this is a digital capability overlap that can easily be eliminated.After your company streamlines your digital capabilities, your company should be able to easily consolidate spend, processes, and contracts. Once you remove the redundancy and get everyone on the same software, you can also negotiate a single contract for your company that drives immediate cost savings and long-term cost avoidance.

IT Contracts create both opportunity and risk in Merger & Acquisition transactions

When combining companies, it’s important to do both a top-down and bottoms-up approach to identifying synergy opportunities within your IT spend. Top-down approaches involve a lot of financial synergy assumptions based on similar transactions within your industry. These approaches largely identify duplicative roles, processes, etc. and identify a financial target for savings. This approach naturally takes a high-level approach but doesn’t consider the unique needs of your business. To accurately forecast synergy opportunities it should not be the only synergy view to consider. Bottoms-up approaches, on the other hand, allow you to co-create opportunities with your l business stakeholders that consider business risk, culture, and ease to achieve. I’ll provide more insight on how to properly prepare for a merger in a future article.

Wrapping It All Up

Follow these steps to properly optimize your current contracts:

Identify your current state situation.
Identify your high-spend suppliers.
Gather benchmark data to see how your contracts stack up.
Run an Opportunity Analysis to determine overlap and shelfware.
Create a negotiation team.
Optimize each contract as its renewal period approaches.