Rules of Thumb for Selecting and Managing ERP Service Providers

Editors note: In February the parent company of TPI, Information Services Group Inc., acquired STA Consulting, a premier independent information technology advisor serving the public sector. This TPI Top 5 is co-authored by one of our STA Consulting colleagues.

Sourcing considerations in ERP environments are not that dissimilar from those of traditional Application Development & Maintenance (ADM) environments in many ways. Yet there are also unique challenges and nuances that are especially applicable when sourcing ERP service providers. Note these Top 5 rules of thumb for selecting and managing best-fit ERP service providers:

1. Determining the sourcing strategy: The business drivers for multimillion dollar investments in ERP systems vary by organization but generally include the need to: 1) reduce cost; 2) mitigate risk of aging, often poorly documented, legacy systems; 3) increase efficiency in business processes; 4) introduce new functionality to obtain a strategic advantage; or 5) any combination of the preceding factors. The blend of these drivers will ultimately drive the IT sourcing strategy that an organization pursues.

2. Selecting service providers: When deciding to implement an ERP package organizations will inevitably bring in external parties at some stage of the process. Selection of the appropriate service providers is a key decision that should be supported by a qualified sourcing advisor. Organizations should weigh their evaluations based on the relative importance of price and quality. Key components of the quality attributes of service providers that should be evaluated include: 1) their experience with newer modules and relevant industry solutions; 2) the account team; and 3) the implementation methodology. Subcategories of the implementation methodology that should be considered include their approach to: 1) data migration; 2) training; 3) stakeholder communication; 4) change management; and 5) benefits realization.

3. Defining pricing methodology for ERP sourcing agreements: The most common mechanisms that ERP service providers use for projects are: 1) fixed fee; 2) time and materials; or 3) a creative combination of the two. Although at first glance these mechanisms appear to be very different, experience shows that service providers use similar methodologies in their pricing. ERP providers tend to build their price quotes from the “bottom up” and include a risk premium. In a fixed fee proposal, the premium is included in the base quote. In a time and materials proposal, it is either included in the base hours or as a contingency line item. A useful technique in negotiating ERP projects is to isolate this risk premium and attempt to minimize it. In most instances, application maintenance and support for ERPs should be contracted as a managed service. There are a variety of methods for pricing ERP support contracts, but much like other managed service transactions, pricing should be based on applicable resource units.

4. Managing the quality of implementation deliverables: Managing the key quality aspects that were indentified in selecting the service provider is instrumental in determining whether or not an organization achieves the goals of its ERP projects. In general, the established ERP service providers all possess the necessary technical competency and capacity to meet customer needs for ERP implementation maintenance and support. The differentiator is often management of the other less technical aspects of the delivery model described in bullet 2.

5. Evaluating the incumbent maintenance and support ERP service providers: Not surprisingly, proper sourcing management is a critical success factor in effective relationships with ERP service providers. The relationship between an ERP provider and its customer is often termed a “partnership” and is sometimes even compared to a marriage. Although the marriage analogy has some merit, it is often over-used. ERP customers need to recognize that the effectiveness of their service providers should be routinely and formally evaluated and that contractual agreements should be structured that reference these evaluations. Service providers should also understand that if they fail to meet predetermined expectations, the customer has a formal evaluation process that could lead to a change.

For more information on selecting and managing ERP service providers, or on any aspect of ERP-related decision making, contact us.

Please share your thoughts about this post in the comments section. Do you feel that you got the best value possible from your ERP contract negotiation? Have you had an ERP project go off the rails? What would you do differently if you could do it over again?

About the author

Bob has helped an impressive list of clients extract and optimize greater value from their business process operations. He has an extensive “hands-on” background in information technology, business process optimization and organizational design and execution, including the direct oversight of numerous outsourcing contract negotiations. He has led strategy development and execution engagements across several industry sectors, specializing in healthcare. Bob has presented his innovative methods at various industry conferences. As Partner and Healthcare Practice Lead at ISG, Bob is responsible for all business development and deliveries in ISG’s healthcare practice.