Avoiding costly ERP and cloud systems implementation failures: A perspective from the deal room

ERP and complex cloud system implementations are notorious for their high rates of failure and costly disputes. There was a time in our practice when deals were in the overwhelming majority, and disputes were a rare occurrence. These days, the demand for deals and dispute engagements is converging in number. While I would generally say that “dispute” is not a dirty word in technology transactions, that disputes are a natural part of the technology deployment and tech-enabled services lifecycle, many of these disputes follow failures that have significant financial and operational ramifications for both parties. How did we get here? 

As organizations have shifted from bespoke solutions to mass-market cloud offerings and from waterfall to agile and hybrid deployment frameworks, the risks and challenges have evolved. Understanding the root causes behind these failures — and how to address them — is critical for CIOs and technology leaders.

The ‘timing imperative’ and its impact on solution validation

The first thing to understand is how changes in technology have impacted how deals are done. What I am talking about here is the almost two-decades-old shift from bespoke infrastructure and applications to the cloud and mass market applications and the parallel shift from Waterfall to Agile and hybrid development frameworks. These two shifts caused technology to be deployed more rapidly and, more importantly, created the expectation that technology would be deployed more rapidly. This “timing imperative” puts more pressure on deal and negotiation timelines. 

At the same time, the shift from bespoke applications (purpose-built to meet a company’s own business processes and requirements) to accepting mass market solutions has put more pressure on solution due diligence. Said differently, the onus is now on the purchaser of cloud services to confirm not only that the solution they are buying meets their requirements, but also that the documentation of that solution, as referenced in the contract, matches what has been sold and promised. While the former often occurs on the surface level during the sales process, the latter occurs less often because the amount of time available to do that due diligence is being compressed due to the timing imperative. 

The result is that, in many deals, this due diligence is not occurring, or does not occur until after the customer has signed a contract for a non-cancellable, non-refundable multi-year financial commitment with very limited exit rights — and absolutely no exit right for fit-gap issues that should have been identified in pre-contracting due diligence and solution validation. I should point out here that, in some deals, this is a “known known” inasmuch as the client fully acknowledges that solution due diligence will not be done until after subscription signing. Those clients are taking a calculated risk and making a bet that what is good enough for the mass market will be good enough for their company and that their business processes can be realigned with the capabilities of the mass market solution. Those deals are not the subject of this article. 

With regard to the remainder, any good sourcing and legal team early on in the deal process will ask the business and technical leads if they have validated the documentation for the services to confirm that it aligns with expectations for performance, capabilities, etc. Often, the answer is a somewhat sheepish yes. If there is not an implementation partner or independent consultant engaged to assist with that process, we can be fairly certain that solution validation is only occurring on a limited basis, if at all. Why?

• Solution validation is not a core competency of the company’s resources that are responsible for making the purchase decision.
• Even if it were, the internal resources assigned to the project have other roles that primarily fill their time. 

This deficiency most often comes to light when we start to dig into subscription order forms and assess things like usage limitations, usage definitions and service level commitments. When we make inquiries about how downtime might impact operations or whether the permitted usage quantities and usage definitions are sufficient for the organization’s intended usage, it is then that the gaps start to become more real to the client. And more often than not, we can work through and resolve those deficiencies. 

Case in point: We helped a client recently with a global tier 1 ERP subscription and implementation arrangement. The client was integrating a strategic acquisition (and converting the acquired company’s ERP system from another tier 1 provider) and could only roughly approximate its needs for the anticipated ERP services. The client was signing up for a 5-year subscription for tens of millions of dollars with no ability to reduce quantities. These two realities would normally be problematic, but the fact that we knew the challenges on the front end enabled us to negotiate for the right to reallocate subscription quantities at various points over the implementation lifecycle, giving the client the flexibility it needed to assess solution needs as integration and deployment ran in parallel. 

However, the often layered, complex and difficult to find documentation that underpins the services commitments in the contract and whether that was sufficiently reviewed to vet other material requirements and expectations, is often a lingering question at the end of many of these deals.

Implementation statements of work: A (not so) hidden source of disputes 

The same challenges exist with implementation statements of work. It is this component of these transactions (implementation scope, fees and terms) that generates the overwhelming majority of disputes, with implementations coming in at multiples of the originally estimated cost not being uncommon. Many of the reasons for this outcome mirror those described on the subscription side of the deal. However, there are other less obvious challenges here too. 

The sales pressure to complete the subscription contract before some mysterious pricing expiration is often effective, despite the fact that any customer who pushes back is usually successful in staving off price increases beyond the artificial “pricing cliff.” Where that tactic is successful, though, it often means the subscription contract is signed before the implementation statement of work is finalized, leaving the customer with very little negotiation leverage and with real dollars ticking away on the subscription for every day of statement of work negotiation that goes by without the implementation having commenced. 

That pressure further accelerates (and diminishes) statement of work review, and these statements of work are extremely detailed and put together in a way that appears innocuous, but often is quite the opposite. For example, many of these statements of work describe an “assist” model where the customer is primarily responsible for outcomes, and the implementation partner is only “assisting” or “supporting” the customer in executing the implementation. It is this very language that we see providers relying upon in disputes over performance and price increases in these implementations to support their arguments that:

• They are not liable for poor performance so long as they met their obligation to provide resources to support the customer implementation
• If the customer wants an outcome-based model, that is a different (higher price).

Any effectively negotiated statement of work will replace this noncommittal language with a framework that establishes a clear delineation of each party’s responsibilities for the implementation. 

However, the responsibilities that the client takes on also frequently exceed the client’s expectations of the level of effort required and/or the client’s ability to execute. The most frequent offender in this regard is data cleansing and data migration, which is almost always the subject of the first change order we see in complex systems implementation transactions. The complexity and effort required for most data migrations are usually more than customers can handle without outside help. Nonetheless, customers sign up for this obligation regularly without understanding what will be required to execute because of the pressure to get the deal done. 

Comparing and contrasting the description of data migration obligations in statements of work where retained by a customer (usually a few bullets) to an outsourced data migration scope of work (pages of assumptions, scope limiting statements and exclusions) provides a useful illustration. Where the implementation partner is expecting the customer to take on data migration responsibility, it is given short contractual shrift, but where the implementation partner is contractually obligated to perform data migration, much more rigor is applied to protect and limit scope. Whether accidental or intentional, there is no question that this reality has the effect of causing many customers to underestimate the effort associated with data migration.

Other areas where we see clients taking on more responsibility than they perhaps initially understand include user acceptance testing (UAT) and organizational change management. Companies with large, sophisticated IT organizations often can effectively manage UAT, but many companies with smaller operations find themselves ill-equipped to effectively define test cases and execute UAT, and often end up either having to expand their implementation partner’s scope for assistance or find themselves without recourse if the solution does not meet expectations.

Similarly, organizational change management is not often an inherent capability. Accordingly, when the need arises to manage through business process redesign needed to align with the capabilities of the purchased solution, clients find themselves ill-equipped to navigate those changes across stakeholder groups with competing priorities and interests. The result is lost time on the implementation, which translates into failed assumptions and, ultimately, increased cost.

Market tactics and negotiation pressures: How customers get boxed in 

The market has taken advantage of the mass market, one-to-many, good for most/good for all aspects of cloud solutions, alongside the iterative nature of agile/hybrid deployments to move contractual terms to the provider-friendly end of the spectrum and to downplay the need for contractual rigor and deal due diligence. The result is that cloud subscription terms have been normalized in a way that for most customers feels one-sided and insufficient to manage foreseeable issues with critical applications and deployments, and many companies get talked into time and materials implementation engagements on the basis that fixed fee engagements are not workable in the agile/hybrid context or into illusory fixed fee engagements that end up being time and materials on a de facto basis. 

The risk of cost overruns in insufficiently scoped and vetted T&M engagements and illusory fixed fee engagements should not be overlooked, as the financial exposure is significant. Cases in point: We recently helped a client with a $14M change order against what was originally a $17M T&M ERP implementation statement of work. The fact that the change order was almost identical in amount to a last-minute price concession to win the deal was eerily coincidental. In parallel, we were helping another client with the renegotiation of a fixed fee ERP implementation with a systems integrator where the amended pricing was an additional $54M against a $23M original scope.

In both cases, from the client’s perspective, nothing had changed to warrant the cost increases. But the nature of the T&M engagement inherently permitted the change, and the “fixed fee” engagement had qualifications to the fixed fee, the ramifications of which were not fully vetted against foreseeable contingencies. 

Neither of these realities is or has to be true. Effectively negotiated subscription agreements and their related implementation services terms or agreements can and often do effectively mitigate foreseeable cloud solution risk and the inevitable cost overruns that many customers encounter in cloud systems implementation arrangements. A key differentiating factor is whether or not the arrangement is properly vetted and fully negotiated, and that is where market realities sometimes get in the way. The market has become more effective at sales and negotiation tactics that exploit both the timing imperative described above and the “wedge technique” to divide decision makers and their sourcing and legal teams. The combination of these two tactics and the reality of the Timing Imperative often leaves deal teams with little time to negotiate suitable terms and divided on what is truly important. 

The most critical differentiator in negotiation outcomes and combating these market forces is competitive leverage. Wherever possible, we advise clients to maintain competitive solution and implementation partner leverage (i.e., multiple engaged contenders) and to avoid any sole-source down-selection until all critical deal objectives have been achieved. However, deal sequencing sometimes gets in the way of this outcome inasmuch as many companies’ sourcing processes do not call for sourcing or legal team involvement until a selection decision has been both made and communicated. Correcting this sequencing issue for many clients might be the simplest, yet most impactful change on deal outcomes and success.

The critical role of stakeholder involvement and alignment 

Another recurring theme in failed implementations is the lack of early and ongoing involvement from all key stakeholders — business, technical, sourcing and legal teams. Too often, executive sponsors are disengaged from the negotiation process, or sourcing and legal teams are handed contracts to negotiate without sufficient input from those who understand the business and technical requirements. The most successful deals are those where executive sponsors help define objectives, set priorities and support negotiations, ensuring the organization speaks with one voice and resists sales pressure. 

Many executive deal sponsors rely on trust that reputable providers will do the right thing as a suitable proxy for protective terms that enable effective dispute mitigation and management. And sometimes, executive deal sponsors do not get involved in the review or negotiation of the contract terms at all, or will become involved late in the game to negotiate issues, sometimes with no briefing or background or without speaking to the sourcing team that is charged with understanding those details and how they might impact outcomes or costs. 

We generally see two ends of the spectrum in terms of deal team alignment. On one end of the spectrum, you have the ideal state, where the executive sponsor is involved in defining objectives and requirements, setting priorities on negotiated terms and outcomes, and providing support where negotiations reach an impasse. The most effectively negotiated deals with protected outcomes result from this paradigm. On the other end of the spectrum, you have the paradigm where the sourcing and legal team (or sometimes just the legal team) are handed a contract and asked to simply negotiate it without necessary stakeholder input and involvement. Challenged deals often result from this paradigm. 

Many deals end up somewhere in the middle. For instance, some negotiations start on the positive end of the spectrum, but when tested against the timing imperative and sales pressure and tactics, simply reach an unnatural conclusion. So, we end up asking ourselves why is it that when more deals in the market are challenged (failing, coming in significantly over budget or going into dispute), we are spending less time on deal terms? Why is it that terms that receive scrutiny and hindsight analysis when they are insufficient to enable positive outcomes in a dispute do not receive the same level of attention when the deal is being negotiated? And, more importantly, what do we do about it? 

We start these client engagements seeking to understand any timing imperative and assessing what our engagement model will look like as a result. Where we have a receptive audience, ideally we work to define and prioritize deal outcomes on the front end. From there, we set a cadence and communication plan to ensure that all stakeholders are up-to-date as the project progresses toward those outcomes, with escalation paths for roadblocks and unexpected issues that may arise along the way. 

A key component of that process is education on

• The reality of the terms being presented as compared to what has been marketed and sold
• What outcomes are reasonably attainable in light of the players involved, the solution in question and the timing imperative.

With engaged stakeholders, we can overlay those two components with the client’s objectives and set a realistic list of deal objectives, priorities and tradeoffs. Where clients succeed is when they speak with one voice (across executive leadership, business and technical and sourcing and legal stakeholders) in support of these defined objectives and resist the pressures that will be coming through a well-executed sales and negotiation process.

Summarizing recommendations for success 

To improve outcomes and reduce the risk of failure, organizations should: 

• Prioritize solution due diligence. Allocate sufficient time and resources for thorough solution validation and contract negotiation before signing. Do not let artificial deadlines dictate your process. 
• Engage independent experts. Bring in independent consultants or experienced implementation partners to assist with solution validation and to help assess documentation, usage definitions and limitations and service level commitments. 
• Ensure executive sponsor engagement. Executive sponsors should be actively involved in defining objectives, setting priorities and supporting negotiations, not just signing off or stepping in at the end to resolve issues. 
• Introduce and maintain competitive leverage. Involve multiple cloud solution partners and implementation partners to compete for both the subscription and implementation solutions and wait to down-select to a single partner in either area until critical deal objectives have been realized. 
• Negotiate clear SOWs. Insist on statements of work that clearly delineate responsibilities, avoid ambiguous “assist” language and realistically assess your ability to execute critical tasks like data migration, UAT and organizational change management, and bring in partners where needed. 
• Establish communication and escalation plans. Set regular communication cadences and clear escalation paths for resolving roadblocks and unexpected issues. 
• Educate stakeholders. Make sure all stakeholders understand the realities of contract terms versus sales promises, and the risks of insufficient due diligence or sub-par contractual terms. 
• Resist sales pressure. Push back on artificial pricing deadlines and provider-friendly terms. Well-negotiated agreements can and should mitigate foreseeable risks and cost overruns. 

As the pace of cloud deployments accelerates, the import of technology to our businesses only continues to increase and costs overruns continue to soar. Organizations can no longer afford expectations that are misaligned with outcomes. Success comes to the well-prepared and well-negotiated.

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