September 4 , 2007

Handshake Heroics: The Art of Vendor Negotiations
By Laura Gater
For The Record
Vol. 19 No. 18 P. 12

Preparation and vigilance on the part of a healthcare organization can lead to a “win-win” situation for both parties.

The vendor negotiation process is not one particularly relished by either side. Nevertheless, it’s one of those potentially long, drawn-out processes that can lead to great results for all parties, sort of like buying a car.

However, if things go awry, a bad contract can cost a hospital thousands of dollars, saddle it with unnecessary equipment, or lock it into a relationship with an unresponsive vendor.

Bad deals happen every day, but healthcare organizations can avoid many of them by being properly prepared. Many hospitals forgo the negotiation process and sign standard contracts, which are often written to the vendor’s advantage. Most standard contracts from vendors do not include service-level agreements and firm maintenance procedures or policies, nor do they contain help if the vendor neglects to perform its duties. A hospital must demand that these issues and solutions be included in a contract; otherwise, it has no recourse in these situations.

Preparation
Many experts believe the most important part of the vendor negotiation process occurs prior to the negotiation. Preparation includes determining what you absolutely need to be included in the contract and what is negotiable (ie, what you can do without). The preparation process can proceed more smoothly if there is a copy of the vendor’s standard contract to review upfront.

Communication is also an issue that must be handled before the negotiation. Make sure everyone on your team understands what is in the contract and what changes need to be made before sitting down with the vendor.

Knowledge of the vendor’s market position, pricing model, and reputation, as well as the current market conditions, is essential to success, according to James A. Browning.1 By learning all this before negotiations begin, healthcare organizations will know what to expect and may help locate opportunities to gain contract concessions.

Browning also notes that it is valuable for your team to confront the vendor regarding any deficiencies in product capabilities and service and work to resolve them upfront. He advises “keeping a runner-up in the wings in case the negotiation falls through” to make the process competitive.

Typical negotiation topics are price, payment milestones and terms, flexibility, schedule, features, deliverables, scope of service, factors for design and deployment of service, transition issues, service levels, security, warranties, confidentiality, licensing, limitation of liability, use of subcontractors, and termination provisions.2

Winning All Around
The goal is to negotiate a “win-win” contract, one in which you “align your objectives and expectations with the vendor’s,” says Kenneth Clarke, FHIMSS, who handles business consulting services for IBM Healthlink Solutions in Morgantown, W.Va. A “win-win” contract includes a shared risk/reward, which reflects that both parties have the same goal in mind. The vendor is focused on the sale, while the hospital, or customer, is focused on the results. “We have to focus on how we can work together to ensure your success as the customer and our success as the vendor in order to attain a mutually successful contract,” says Clarke.

A win-win contract takes into account all aspects of an agreement. It contains pricing, service levels, risk/reward components, and contract terms that provide the hospital or health system with a comprehensive service offering that meets the hospital’s overall business, technical, and clinical objectives, according to Scott Kizer, Esq, MIS, of Kizer Law, P.A. in Orlando, Fla.

A fair price is a huge goal of a win-win contract, acknowledges Clarke, who also recommends providing incentives for multiyear projects to prevent the vendor and the hospital from losing interest.

“Negotiating a win-win contract with meaningful risk/reward components provides the hospital or health system with a dynamic vendor management tool that will help ensure the success of the hospital’s overall project and not merely a stack of papers to collect dust on a shelf,” explains Kizer.

No Need for Losers
A “win-lose” contract, in which one party comes out ahead in the negotiation process, could be one where the vendor makes the sale and runs out the door.

“You’re paying based on a speculated time frame and cost based on what the vendor says,” says Clarke. “The hospital is not able to hold the vendor accountable for the implementation or delivery of the product. You’re paying the down payment and time payment, and you may be required to pay before the equipment or the product is up and running. That’s where the vendor wins and the client loses. It’s just as bad when the vendor loses and the client wins. The vendor doesn’t gain anything by an outstanding performance or by completing the sale. There’s no incentive for good work.”

Kizer acknowledges that a win-lose contract focuses on certain aspects of an engagement at the expense of other equally important components. “For example, a hospital may successfully negotiate with a vendor to a virtually zero margin contract but not have any performance measurements or mechanisms to ensure that the vendor is able to perform on such an agreement,” he explains. “The hospital needs to take a holistic view of the engagement to ensure the overall success of the project.”

Taking a Chance
Risk/reward concepts vary. Financial incentives and penalties are probably the most common and perhaps the most effective strategies for a vendor.

Kizer notes that some risk/reward concepts are basic service level penalties with rights to “win back” withheld amounts, sliding hourly rate scales with variations based on achieving performance benchmarks (eg, poor performance equals $125 per hour, standard performance equals $150 per hour, excellent performance equals $175 per hour), 50/50 splits on cost overruns, and risk/reward pools for achieving certain implementation benchmarks at predefined dates.

“Whether one particular risk/reward concept works or doesn’t work depends on a number of factors: the specific services/products being purchased; the culture of the hospital/health system; the relative bargaining position of the parties; and the overall working relationship of the parties. There is not a ‘one-size-fits-all’ approach, but one can always craft a risk/reward structure based upon the particular dynamics of the transaction,” he explains.

Clarke espouses the importance of financial incentives to maintain vendor interest in the project. “Build incentives in the arrangement to get the vendor’s attention in year two or year three,” he suggests. “That helps maintain the intensity and interest in the project. Establish bonuses for the vendor and for your staff for timeliness. You might ask, ‘Why should I pay a bonus if the project is done on time?’, but you want people to continue to perform above and beyond their usual job, which is difficult to do in an organization without incentive-based pay.”

Clarke also recommends rewarding the vendor and staff for the performance of the new product or technology. For example, if the product helps improve patient satisfaction, make sure those involved receive some sort of stipend; or the organization may share with the vendor a percentage of the profit increase resulting from the new product’s performance.

“The challenge is that you may be dealing with a public company,” he says. “They like to know how much is coming in and when, so it’s difficult in that case to tie in a payment to a performance deliverable. Public companies are beholden to their stockholders.”

Vendors often have arrangements with third parties, which customers have no control over in terms of rewards and incentives. For example, Clarke says customers can seldom make the vendor responsible for a third party or some other vendor’s hardware.

Negotiable Items
Kizer and Clarke agree that everything is negotiable in a contract. That’s not to say the customer will get everything on its list, but it’s worth a try, say the experts.

“There are certain components that traditionally are more contentious than others, such as limitations of liability, warranties, indemnification, service levels, etc, but everything is negotiable,” says Kizer. “As with risk/reward concepts, the ability of a hospital or health system to negotiate certain points will depend upon a number of diverse factors.”

Negotiating price, for example, can be tricky, so it’s essential for the hospital to do its homework. “First and foremost, the hospital must understand the vendor’s pricing methodology and truly understand what is driving the vendor’s pricing model,” says Kizer. “Is it licensed beds, CPUs, concurrent users, named users, etc? Then, the hospital must look at what it is purchasing and determine whether the vendor’s pricing model is able to accommodate its business model.”

Clarke recommends finding out what other organizations have paid for the same equipment and how that price was determined. Also, how did the vendor figure out how much to charge you? If necessary, the facility should have this information handy when rationalizing or requesting a price change.

Product support is another aspect of price negotiation. Some vendors only provide support eight hours per day, so if you need it around the clock, that needs to be written into the contract.

There’s also the matter of keeping on top of technology changes. “Some contracts don’t mention software upgrades,” says Clarke. “You want to ensure that you’ll get the latest upgrades. If it’s not in the contract, then you are not guaranteed you’ll get them. You don’t want to have to go back and forth arguing with the vendor over small stuff.”
Payment issues also need to be addressed in the contract. You don’t want the vendor to cut off support because of a late payment. Sometimes payments or invoices get lost. Clarke advises having a payment resolution statement in the contract and not to hold payments hostage. “Not paying for something is not a good way to solve a dispute over performance,” he says.

Clarke stresses the importance of ensuring the vendor’s liability if the product fails, which is particularly important in a healthcare organization.

“You need to impress on the vendor the impact that an adverse clinical event or loss of records can have on your business,” he says. “You need to be able to recover potential damages if your system goes down. The contract needs to contain appropriate acceptance clauses, performance warranties, acceptable performance clauses, and vendor liability provisions, which may be very difficult to get from the vendor.”

According to Clarke, a healthcare organization may also require the contract to contain breach of confidentiality and breach of liability clauses to ensure that if the vendor’s staff misuses personal information, it is liable.

Contracts Large and Small
“Be vigilant,” warns Clarke about contracts. Executive teams need to be onboard in negotiating contracts involving large sums of money to ensure a win-win situation. Smaller contracts are just as important and also require vigilance because they can be “as damaging as larger ones.”

“You don’t want to find out that a vendor can get out of a contract after one year and leave you stranded without support,” he says. “Determine up front how long you plan to use the system or product, and in your best interest, write a support agreement for that amount of time, whether it’s three years, five years, or whatever, and then write renewable support terms.”

According to Clarke and Kizer, preparation and vigilance are the keys when it comes to contract negotiations. Learn what you can about the vendor’s standard contract and determine what you need and what you can do without in the contract. Be prepared to provide leeway in some areas. Have your organization’s legal team review the contract carefully before signing anything. Don’t commit to anything verbally before you sign on the dotted line.

Despite the potential pitfalls of careless contract negotiations, Clarke points out that no one is in the business to promote failure. “Vendors are in business to ensure that you’re successful, so they want to make sure you succeed,” he says.

— Laura Gater’s medical and business trade articles have been published in Healthcare Traveler, Radiology Today, Corrections Forum, Credit Union BUSINESS, and other national and online publications.

References

1. Browning JA. Improving the IT vendor selection process — phase three: Negotation.” The Midmarket Report. October 2003. Available here.

2. Hired Gun Consulting. Property and vendor management services. Updated June 12, 2007. Available here.