Case 1: Design, Build, Implementation and Global Roll-Out of an ERP Solution
Our client operates worldwide through a large number of local entities. The company intends to consolidate its ERP systems globally. Not least due to inorganic growth in emerging markets, the existing ERP landscape is highly fragmented and characterized by diverse local, non-standardized stand-alone solutions, reflecting globally fragmented business processes. This results not only in high operating and maintenance costs regarding the various IT solutions in place, but also in considerable loss in the company-wide flow of information. But even the ERP solutions in use in the core countries are based on non-standardised "bespoke" solutions, which, according to the company's digital agenda, should be converted to a single standardized solution, wherever possible.
The client intends to identify suitable solution providers by inviting potential bidders to participate in a tender procedure with multiple rounds of discussions. Following a down-selection to two bidders, the client intends to enter into negotiations with the two most suitable providers in parallel, in order to achieve a direct comparability of the proposals, and a maximum competitive situation among bidders.
The planned ERP solution is to be implemented in certain phases typical for such projects, i.e.
- the planning of the overall global template for the solution ("design" phase of the global template),
- the programming of the global template ("build" phase of the template), and
- an initial pilot installation in a smaller country (“pilot phase”);
- The subsequent global roll-out in defined, country- or continent-specific "waves", over a period of several years (“roll-out phase”), following the adaption of the global template to the specific needs and local laws of the respective region.
The company has earmarked a period of seven years for the global implementation of the future ERP solution and has allocated a total budget of up to EUR 80 million. The intended amortization through saved expenses requires strict adherence to the overall budget.
Challenges in consulting and contract development
Certain (typical) risks are associated with the intended ERP project, to be minimized through the contract with the awarded bidder:
- The final scope of the project will be derived from the user requirements identified during the first portion of the design phase, in more details through the creation and verification of user requirements (URS). The decision which core business processes will be suitable for using a standard off-the shelf solution, and which will remain to require individual bespoke programming, will be possible in many areas only following the conclusion of the contract and may be subject to changes. Furthermore, changes and additions of any kind are to be expected during the course of the multi-year project, nevertheless, the given overall budget should not be exceeded.
- The client must be highly committed to participate in various phases of the project (especially in determining the requirements during the design phase, but also in the subsequent roll-out phases), and to cooperate closely with the supplier; this means not only a considerable commitment of own resources and planning requirements, but also a dependency of the project success on the quality and availability of the customer's own contributions. Nevertheless, the overall responsibility for the successful design, build and implementation of the solution shall be imposed on the supplier.
- The successful bidder might claim during the contract negotiations that he assumed to provide a mere service when making his offer, without any responsibility for the successful implementation or without any subsequent warranty phase attached, and might argue that the previous commercial terms and conditions of his offer would no longer apply if the contract was designed differently with respect to the overall responsibilities.
- The close cooperation of large teams from both sides for months and maybe even years raises various questions of labor law to be dealt with in the contract.
Our Approach and Implementation
LLP Law I Patent supports both providers of ERP and other IT Solution and their customers on how to
- determine the appropriate type of contract for the project or define hybrid forms (agile procedures);
- define remuneration models that provide both budget certainty, the necessary transparency and project motivation for both parties; and
- to gain sufficient clarity about the client's necessary involvement and to ensure that this involvement is contractually clearly reflected;
- define the processes and mechanisms necessary for a successful cooperation, on the basis of the concrete needs of the parties; and
- put such projects out to tender or to participate in a call for tenders;
- gain optimal use of ERP software through country-specific legally optimized template design.
In this case, the following approach and concept was implemented based on our advice:
- As early on already with the RFP for the tender procedures, the bidders were given essential contractual key points for enabling fully comparable offers, and asked to base their commercial proposals thereupon. Such were for instance the type of contract, the allocation of the legal responsibility for the successful implementation of the project and consequences of failure, liabilities and indemnity obligations, etc. This meant that all participating bidders were already able to take those requirements into account when structuring their bids. This also prevented the winning bidder being able to claim higher costs due to changes in the supplier's basic assumptions about key contractual points in the course of the negotiations.
- The contract provided for subsequent call-offs of the successive phases, in order to suit accounting requirements, while at the same time maintaining a high degree of commitment on the part of the supplier to his pricing commitments.
- The contract detailed the responsibility of each side for individual tasks during all project phases, but the overall responsibility was incumbent on the supplier, in particular by assigning to supplier the responsibility for all activities of the critical path. The supplier was also made responsible for effectively controlling and monitoring the client’s contributions. In order to safeguard this responsibility, he was referred to clearly described escalation processes and defined legal consequences in the event of non-compliance with its controlling obligations.
- Underlying assumptions for calculating the maximum price were mutually collected and detailed out, which left it possible to adjust the price through Change Requests in the event of failing to meet the agreed basic assumptions or later changes thereto. In this context however, when raising such Change Requests, all downstream effects on the pricing in later phases had to be identified, aiming at a far-reaching cost control and preventing downstream CRs due to the same reason in later phases. Price increases due to Change Request procedures were only possible if substantial deviations from contractually defined basic assumptions on the subject matter and scope were proven, and only within a fixed time frame after such change became apparent.
- The pricing model provided for a mixed distribution of risks, by enabling the supplier to achieve several additional incentives in the event of short falling under the maximum cap, together with additional incentives for the achievement of certain targets; however, when certain caps were exceeded, the supplier’s remuneration was reduced, until an overall cap was met.
- This framework and the implemented mechanisms achieved a balanced distribution of risks and the greatest possible transparency on both sides, which enabled both parties to plan ahead with certainty. Ongoing support by LLP Law I Patent in applying the mechanisms during the project phase helped to identify and remedy emerging conflicts at an early stage.
- We were able to convince our client that, in her own interest to ensure the success of the project, despite the supplier’s legal responsibility for a successful completion of the project, a stringent project management, risk management, as well as sustainable change management to secure the transition to the new processes was mandatory. Based on our experience that last but not least, own omissions in cooperating with the supplier, together with considerable resistance on the part of the client's employees against leaving the trodden path, unfortunately lead often to project failures.
- With the cooperation of our labour law experts, we made sure to avoid any issues with labour law, in particular legal complications attributable to providing contingency workers. This was particularly important when designing the composition and internal decision-making processes of various bodies (steering committees, advisory boards, etc.) as well when determining escalation procedures.
- In close cooperation of our data protection experts and the internal data protection officers of both partners, we have created the necessary conditions for offshore programming and ticketing systems, as well as the joint use of project management tools.
- For a possible change of supplier during the project duration (Exit Management), we insisted on negotiating the scope of such transition services and know how transfer, and any additional remuneration for the such finalization and transfer tasks prior to the start of the project. This is particularly recommendable, as experience has shown that no price restraint is to be expected in the event of an imbalance occurring later in the project, considering the dependence of the customer from its supplier.
- We accompanied the project on an ongoing basis by providing legal project management, in particular where adjustments became necessary in subsequent phases, and where the implementation and documentation of escalation and decision-making processes were required, also in order to identify imminent imbalances at an early stage.
Lawyers: Arno Lohmanns, Sebastian Helmschrott, LLM. Eur., Certified Specialist for IT Law, Julia Steinle (Lead Labour Law), Richard Metz