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The Art of the Deal

March 30, 2007
by Vince Ciotti & Bob Alcaro
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When it comes to negotiating vendor contracts, the devil is in the details.

Many IT projects, such as strategic planning, system selections and implementation, have become a science in the sense that there is a well-defined, discrete number of steps one should go through to yield an optimum outcome:

· When planning, you must interview all stakeholders, issue a request for information (RFI) to potential vendors, align IT initiatives with the organization's overall business/marketing plans, budget IT capital and operating costs, etc.

· With system selections, you should first conduct demos (highest cost to the vendor), then call telephone references (using a scored checklist), and finally make site visits (without a vendor chaperone). As you narrow the field, each step will cost more time.

· Implementations, too, have a world of their own: planning, building, training, testing, go-live, post-live audit, and finally updating resumes and contacting head-hunters ...

Negotiating contracts, however, is much more of an art than a science: getting the right (lowest) price and best (fair) terms and conditions is a delicate matter. This is especially true in these post-Enron days, when the Sarbanes-Oxley (SOX) Law has given vendors an excuse to refuse many of the past contractual protections hospitals used to be able to insist on. It is ironic that the SOX law was passed to protect us from corporate greed and malfeasance, yet now vendors are invoking it during contract negotiations to refuse giving up any remedies or warranties that jeopardize their revenue stream.

Since the "art of the deal" has become much more challenging, here's a quick list of techniques that might help you negotiate a modicum of protection from non-delivery, cost overruns, and other IT risks. Using the old journalistic six questions, let's review the "who, what, when, where, why and how" of contract negotiating:

· Who should do the negotiating?
- Equal levels of the organizations: managers to managers, VPs to VPs, executives to executives. Don't give their low-level field reps access to your C-suite — insist on equals.
- Don't negotiate with sales reps who have little authority to discount prices or change terms, but only relay your requests back to corporate executives who have the real authority.
- Control users — physicians, nurses, and department heads often unwittingly serve as inside salesmen, telling vendors how they are doing and diluting your negotiating clout. Get everyone in a room and read them the riot act: "loose lips sink ships."

· What — contract issues to negotiate?
− Issue "mandatory contract terms" with your RFI or request for proposal (RFP), requiring vendors to concede up front "gimmees" like graduated payment terms and using your HIPAA Business Associate Agreement (not theirs).
− Draw up a list of every issue you have with their agreement, and create a list of all of the items missing in their contract such as response time guarantees, remedies/warranties or right of refusal for implementation personnel.
− Audit every new contract document they provide against this original issues list and keep score to show them how (poorly) they are doing at earning your business.
− Give them a specific target price to win the deal based on research at neighboring hospitals, experienced consultants who have negotiated with these vendors before, or commercial pricing services.

· When — to negotiate?
− During the selection process, when vendors still fear they might lose — not after you announce a "vendor of choice," which in essence ends any chance to negotiate favorable prices and terms.
− Use the vendor's answers to the mandatory contract terms in your RFI or RFP to help narrow the field if they won't concede. Be firm up front, when you have them worried about surviving the cut.
− Time negotiations for their fiscal year-end if possible (ask for each vendor's fiscal year-end in your RFI), or at least a quarter-end, when hungry stockholders are eager for good news.
− Calendar year-end is always good for marketing types whose commission checks are usually tied to W-2s. Will you be their Scrooge or Santa Claus?

· Where — to negotiate?
− Not at their corporate headquarters where Taj Mahal office buildings with towering Ficus trees in the lobby give them the psychological advantage of flaunting their successes.
− Plus, by investing your time and money to travel to their offices you tell them you are leaning their way and lower their fear you might take your business elsewhere.
− Make the vendors travel to your hospital to negotiate to get some of their skin in the game, especially vendor executives who might give away even more just to show local sales reps how they can "close the deal."