Massive and costly failures of corporate ERP software system installations and integrations are becoming legendary. Nearly every week comes news of another train wreck. But as the public sector adopts ERP to serve a variety of purposes ever-more frequently, digital transformations are carrying a growing number of risks for government entities.

In June 2019, we wrote about Maryland’s lawsuit against IBM. While the matter involved a website that the state needed built so state residents could enroll for benefits under the Affordable Care Act, we noted that it stemmed from an IBM subsidiary overpromising and under-delivering on its capabilities.

A government department or agency faces the same risks in selecting, implementing and integrating an ERP software system as does a business, While the procurement process differs, the underlying issues – and need for caution – are the same that every business must confront.

Not Just Another RFP

Public procurement relies heavily on responses to a RFP. Yet the sales teams from SAP, Oracle, Microsoft and other industry players approach the first level of approval as they would any other potential user. While answering the detailed questions in the RFP, because if they aren’t, the proposal is discarded, inevitably marketing material is included.

When a problem arises in the public sector, it becomes a matter for scrutiny by reporters and politicians.

As a result, government units need to modify their typical procurement process. An ERP software system is totally unlike anything the government buys, with the possible exception of military hardware and systems used by intelligence agencies. Senior career officials and possibly even political appointees need to be involved from the outset rather than coming in when a final decision is about to be made.

There are two reasons for this.

First, the buying decision involves two steps: Selecting the vendor and then an integrator, followed by negotiating a contract with each one.

Second, there are numerous related issues that must be addressed at the outset, such as customizing the software to the specific requirements of the agency, who will be on the project team for both the suppliers and the government, and the process by which quality will be assured and the contract specifications met.

As attorneys whose entire careers have been focused on negotiating and drafting contracts for ERP software systems, we have seen the downstream impact of what happens when a public entity doesn’t deal with these up-front. In the event of a lawsuit because of defects, delays or cost overruns, when we litigate a dispute often we find the user did not address potential internal or supplier issues that were created long before the contract was signed.

Avoiding Public Sector ERP Problems

Beyond modifying the typical procurement process, there are some specific steps the public sector should borrow from private companies. They might need to be adapted somewhat to fit the specific situation bureaucrats face but, in general, we would provide the same advice to a government entity as we would to a private sector client.

The lessons for the public sector are applicable from the all-too-often bad experiences private companies have endured:

1 – The sales material you’re given will overstate the promises and underestimate the risks – The vendors aren’t necessarily lying to you but they are financially motivated to put the best face on what they claim to be able to provide. The goal of every vendor is to make it to the final selection process so you’re likely to be told what the suppliers think the agency or department wants to hear about the capability of the software, their experience in your specific area, the expertise of the team that will work on your project and how they’ll be able to meet all of the requirements of the RFP.

2 – Use an experienced ERP consultant – It’s unusual for a public entity to use a third-party advisor at this stage of any proposal review. But it’s money well-spent because a neutral consultant will know, for example, if vague language in marketing material or the proposal is there to fudge their lack of direct, hands-on experience doing what you are trying to accomplish.

3 – Ask tough, probing questions – As important, an experienced ERP consultant will know what questions to ask and whether the answers make sense. Given it is unlikely that a potential user in the public sector has ever dealt with this complex of a situation, it’s wise to have somebody who’s been there before working with you.

4 – Don’t Sign the Contracts You’ll be Handed – These contracts are written to benefit the service suppliers, not the user. If you are unfamiliar with an ERP software system contract or that of the integrators, seek outside help. The impact on your budget will be far less than the impact of a one-sided agreement in the event of a problem down the road.

5 – Make sure the contract details the responsibilities of the software vendor and integrator – The template contract is going to fudge who is responsible for what and when. As the user, it’s your job and duty to your stakeholders to ensure both sides of the agreement understand what they will do and specify remedies in the event there is a problem down the road with the software supplier – as well as the integrator who will make the system work.

6 – Watch for the responsibilities a vendor will try assigning to the user – Nearly every ERP contract we’ve seen places an obligation on the user to assign a sufficient number of its staff to the project. It’s a standard clause. But in the public sector, this can create an undue burden because of budget restraints and union work rules, among other things, that are very different than in private business. Ensure that the contract does not place unreasonable demands on the resources of an agency or department.

7 – Check the liability limitations – Generally, the standard contract limits the liability of a vendor for direct damages to fees paid. Effectively, this limits you to simply being reimbursed for any fees you paid for work or software products that were not as warranted. Yet in the public sector, an ERP failure can have far-reaching consequences with actual damages in the tens or hundreds of millions of dollars – just ask Maryland. Negotiating a limitation of liability provision that provides for meaningful recovery is critical.

If your state, county or municipal government department or agency sees a need for an ERP software system or any other digital transformation, feel free to reach out to us as you begin the selection process.