Business is built on the back of technology. As business organizations become more sophisticated in their operations, so too do their information technology systems. To match the growing scope and complexity of business operations, software systems have been developed to ensure the smooth operation of an entire enterprise. Enterprise resource planning systems, or ERPs, function as an organizational backbone, governing everything from data integration and financial reporting to supply chain and human resources.
But while ERP platforms promise operational cohesion and scalability, their implementation is notoriously fraught. The process of designing, customizing, and installing these systems can be lengthy, costly, and complex. If the implementation stalls, or worse, fails, then the business itself may lose the ability to operate altogether, posing a threat to its very existence.
Studies from top consulting firms show that there is a statistically better-than-even chance that an ERP implementation will fail in some respect. According to McKinsey, three-fourths of ERP implementations “fail to stay on schedule or within budget,” and two-thirds have a negative return on investment. 1 RubinBrown, an ERP consultancy, estimates that anywhere between 55%-75% of ERP implementations fail.2 Deloitte has estimated that implementations fail at a rate as high as 90%. 3
For in-house counsel, these statistics should serve as alarm bells, signifying very real legal exposure. A failed implementation can easily trigger bet-the-company litigation over lost revenue, reputational harm, or contractual breaches. As such, in-house counsel must be attuned to the possibility of failure. They must also play a proactive role in positioning their organization to address the failure, particularly in the event that litigation becomes necessary.
Drawing from firsthand litigation experience, this article outlines specific contractual landmines embedded in most ERP implementation agreements, particularly master services agreements (MSAs) and statements of work (SOWs). It highlights provisions like waivers of consequential damages, reliance disclaimers, limitations on liability, and unfavorable forum selection clauses, all of which can drastically limit an enterprise’s ability to recover damages. In-house counsel are urged to scrutinize these terms early and negotiate protections wherever possible, especially in light of the high failure rate of ERP projects. By embedding legal oversight into the implementation process, companies can better position themselves to avoid litigation—or, at the very least, improve their odds of prevailing when it becomes unavoidable.
What is an ERP implementation platform?
At their core, ERP platforms govern how a company accesses, integrates, and leverages its data. They handle core business functions at the highest levels, including compliance, sales, salary, human resources, tax, and inventory. But because these platforms are so generic in nature, they must be customized, or “implemented,” often by consultancies, to fit the specific needs of a business organization.
Depending on the organization’s size, these implementations can take months, if not years. The implementation process itself is a complicated one, usually rolled out in phases. Typically, the consultant responsible for the implementation will assess and analyze the organization’s needs and IT infrastructure, then customize the ERP platform according to these needs. To start, they will roll out the platform at a specific location and begin assessing its performance. Troubleshooting and error correction will then be conducted over the span of several months. Once the platform is shown to be viable, enterprise-wide rollout will occur.
Why are ERP implementations necessary?
ERP implementations are often necessitated by structural business changes. For example, mergers and acquisitions may require the buyer to integrate the seller’s data into its own systems. This often involves mapping and migrating legacy data into a shared ERP environment.
Similarly, enterprises relying on outdated platforms—such as COBOL systems or on-premises custom solutions—must upgrade to remain operationally viable. Natural growth and expansion also drive ERP adoption. As new business lines or geographic locations are added, they generate new data silos. An ERP system helps unify these disparate sources into a single integrated platform.
A lack of integration across departments can also be a compelling reason for ERP deployment. As business units expand, the absence of cross-functional visibility can cripple decision-making and impede efficiency. ERP platforms solve this by consolidating and centralizing operations.
In addition, regulatory requirements often necessitate ERP adoption. Publicly traded or heavily regulated entities must ensure accurate and auditable reporting. ERP platforms support these requirements through standardized financial and operational modules, making compliance more manageable and reliable.
How do failed ERP implementations impact an organization?
Sometimes, implementation issues are relatively minor—a hiccup in the overall process that can be fixed. Other times, however, the failures can be catastrophic, impeding the ability of the business to function for long periods of time. Recent lawsuits show the magnitude of the consequences from a failed ERP implementation:
- Sunshine Mills v. Ross Systems: $61.4 million jury verdict
- Hawaii Department of Transportation v. Ciber: $31.8 million recovery
- Copart v. Sparta: $20 million jury award
How are ERP implementation contracts structured?
The contractual process governing an ERP implementation is fairly standard. Common across all implementations are Master Services Agreement (MSA) paired with multiple Statements of Work (SOWs), phasing the project over time on a scope-by-scope basis
When working with these contracts, in-house counsel must: (1) understand the provisions that may later limit recovery and (2) negotiate MSAs and SOWs to best situate the organization should litigation ensue.
What are key provisions that in-house counsel must address?
ERP implementation contracts are often stacked against the customer unless vigilantly negotiated. Notably, in-house counsel should be aware that MSAs often contain boilerplate provisions that severely limit the enterprise’s ability to obtain a full recovery in litigation. Below, we describe key contractual provisions that may function as roadblocks to recovery.
Consequential Damages
Waivers of consequential damages are one of the most significant risks. These provisions can eliminate claims for lost profits and other indirect damages. In the context of ERP failure, this could mean no recovery for business disruption, reputational harm, or even third-party claims arising from the platform’s malfunction. These are potentially high-dollar claims, as enterprises can lose significant amounts of revenue should they be unable to operate for a given length of time.
Moreover, the trickle-down effect of being unable to meet contractual obligations to third parties—and the liabilities that this inability might create—could result in extremely significant claims being filed against the business. All of this would take place without any recourse against the consultancy responsible for the failed implementation.
Disclaimers of Reliance
Reliance disclaimers are another critical area. These clauses typically assert that the customer is not relying on any pre-contractual representations. The practical effect is that they may bar fraud claims, especially those seeking rescission. Whether such provisions are enforceable often depends on the jurisdiction, making it essential for in-house counsel to analyze the precise language and applicable legal standards. This is a particularly important consideration, given that the laws of a jurisdiction like Texas significantly differ from other states when it comes to the language required for an enforceable waiver. The significance of entire agreement and merger clauses is an important related concern. To successfully navigate these types of contractual provisions, counsel must have a deep understanding of what the applicable law requires for a disclaimer to be enforceable.
Warranties
Warranty provisions also require close scrutiny. Representations regarding the platform’s performance may provide a foundation for asserting breach claims. However, if the agreement contains broad disclaimers of implied warranties, statutory protections may be lost. Compounding the risk, limitations on liability clauses often cap recoverable damages to the fees paid under a specific SOW. This can render litigation economically unviable, even when the failure is catastrophic.
Attorneys’ Fees
Attorneys’ fees provisions can heavily influence the decision to litigate. Some MSAs preclude fee recovery altogether, while others permit only the prevailing party to recover. In either case, the enterprise must consider whether the financial burden of litigation is justified in light of these constraints.
Choice of Law/Choice of Forum
Forum selection and choice of law provisions can also introduce complications. Many MSAs designate the law and venue of the consultant’s home jurisdiction, which may be less favorable to the enterprise. The intricacies of an unfamiliar legal system can materially affect the outcome and viability of any legal action.
What should in-house counsel do now to prepare?
ERP implementations are high-risk, high-reward projects. For in-house counsel, protecting the enterprise starts with scrutinizing and negotiating the MSA. Business teams may view these contracts as routine IT matters, but history shows that a poorly implemented ERP can become a bet-the-company problem.
These are the key takeaways for in-house counsel:
- Always review boilerplate provisions, particularly those limiting liability and disclaiming reliance.
- Push for reasonable warranties, fee recovery, and venue clauses.
- Stay close to the implementation process. If red flags appear, act quickly—termination and mitigation are sometimes the most prudent legal strategies.
By engaging early and proactively, in-house counsel can position the enterprise not only to succeed in its ERP rollout, but to withstand the consequences if it doesn’t.
Download a PDF of this article.
Endnotes
1 https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/agile-in-enterprise-resource-planning-a-myth-no-more
2 https://kpcteam.com/kpposts/unveiling-the-erp-conundrum-why-55-75-of-erp-projects-fail?utm_source=chatgpt.com
3 https://www.deloitte.com/mt/en/Industries/technology/perspectives/erp-critical-factors-for-implementations.html
