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The CFO's Role in I.T. Negotiations
Health Data Management Magazine, June 2006
But many chief financial officers, like Howard Tepper, play an important role in the process.
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For some projects, Tepper is "just crunching the numbers," he says. But if an I.T. purchase could have a considerable impact on revenue, he's heavily involved in negotiations, he says. Tepper also sits on the I.T. steering committee, which chooses Mount Sinai's technology vendors.
CFOs often find themselves playing a supporting role in I.T. contract negotiations. However, it's usually a significant role, experts say.
CFO approval at many organizations is required before any large-scale contract can be signed. But many CIOs seek CFO involvement because of their unique understanding of enterprise financial and corporate strategy, and their experience with contract negotiations, including the mind-numbing task of combing through contract minutiae.
Number crunching
When I.T. negotiations get down to the dollar amounts, CFOs typically are at the table to go line-by-line through the contract, says Deborah Kohn, a 20-year contracting veteran and principal at Dak Systems Consulting, San Mateo, Calif.
But during negotiations on software functionality, most CFOs are part of the supporting cast, she adds. "Negotiations are a team effort, but the CFO typically is one of the signers of the contract."
One of the important skills CFOs do bring to the table is political savvy, Kohn says. Every organization has its politics. The CFO knows the various issues and players, and most in the organization respect the CFO.
Internal politics can make it tough for leaders of a hospital to reach consensus on issues that will land on the negotiating table. A CFO, for instance, knows how to mollify an influential but stringent physician, Kohn says.
Or, a team member may have difficulty understanding an issue and the CFO often is the best one to explain it. "Their answers and suggestions are listened to," Kohn says.
At CRC Health, a Cupertino, Calif.-based operator of 90 drug and alcohol treatment centers and residential facilities, Chief Technical Officer Jay Raimondi leads contract negotiations with the aid of corporate counsel.
But he often relies on the organization's CFO for his industry contacts and institutional knowledge, he says.
For instance, CRC Health recently bought the CareLogic practice management and electronic medical records software from Qualifacts Systems Inc., Nashville, Tenn.
At the time, the organization didn't have a corporate counsel, and the CFO recommended a law firm he used at a previous organization to assist in final negotiations.
More than anyone else in a hospital, a CFO understands the financial position of the organization. So sometimes it's the job of the CFO to make sure additional items don't get put into a project that had been financially manageable and blow the budget.
When Lakeview Center in Pensacola, Fla., bought Qualifacts' practice management and records software, CFO Allison Hill was significantly involved from the start.
That's because the software and related technology represents the largest I.T. investment ever for Lakeview's behavioral health unit. Its 900 employees provide mental health and drug/alcohol treatment services to more than 25,000 patients each year. The center, part of Baptist Health Care, also offers vocational and adult/child welfare services.
While Lakeview's director of I.T. handled the bulk of contract negotiations and now leads the 12- to 18-month implementation, Hill set many of the guidelines and terms for the negotiations.
The guidelines primarily were finance-related. "I prioritize what to dedicate dollars to, to make sure we don't have 'scope creep,'" she explains.
Scope creep happens when a project expands after the contract is signed and implementation work starts.
For instance, the idea of using document imaging to digitize paper forms and get them in the EMR became an attractive option, but would have added cost to the existing contract.
Hill pushed to wait on imaging until after records implementation to better manage dollars and resources for the EMR and other projects. "We're also rolling out a time and attendance system," she says. "You just have to prioritize what you want to tackle now and what you can do later."
Setting clear expectations of the vendor implementation team and the degree of attention the vendor will give to the project also can reduce the risk of scope creep, Hill says.
Controlling scope creep helps prevent a contracted implementation from financially spiraling of control. But it's also important to make sure vendor payments are tied to realistic implementation timetables, Hill notes. "If you miss a milestone, other milestones are pushed back and that affects cash flow and resources not just for that project, but other projects as well."
Negotiating the contract with Qualifacts brought up an issue Hill had never dealt with.
The vendor will remotely host the software, but Lakeview wanted its I.T. staff to be able to perform some maintenance and make periodic changes to the software. "We needed to balance our resources with theirs because when they do the work, it costs money," Hill says. "We were trying to manage future cost of ownership."
The result was one of the longest talks she can remember to nail down a particular clause in a contract. "It was a different way of working for us and the vendor, and we had to find a middle ground."
A good partnership with the CFO can bring additional benefits to CIOs when negotiating deals. CFOs can give CIOs the financial flexibility they sometimes need to close a deal, or help them find funds if they're convinced a purchase will be beneficial for the organization.
CFOs routinely monitor negotiations to make sure contract payments coincide with the organization's cash flow cycles. But vendors also have cash flow issues. When Sunnybrook Health Sciences Centre in Toronto bought a surgical information system, the vendor pressed for more cash upfront to meet its cash flow needs.
Sam Marafioti, CIO and vice president for corporate strategy and development at Sunnybrook, got CFO approval to spend more money upfront. Both sides benefited from the arrangement, he says. "I put 75% upfront in return for a major reduction in price."
Still, getting a sign-off from the CFO isn't a rubberstamp. Marafioti doesn't recall ever being totally denied what he was requesting, but sometimes he has to come back with a better case. And sometimes, timing and a little luck helps.
For instance, Marafioti recently signed a contact for radio frequency identification technology. But the fiscal year was winding down and he didn't have available funds left in his budget.
On the last day of the fiscal year, the CFO gave him latitude to overspend and use leftover funds from another department. "But I had to show the CFO why RFID was strategically good for the hospital," he says. "The CFO expects due diligence from me and I expect to give it to him."
Sunnybrook outsourced some I.T. operations several years ago and Marafioti found the CFO's assistance very valuable. "These contracts are very different and I needed help on negotiating ongoing monthly fees," he recalls. "With outsourcing, you should get the CFO involved right from the get-go because there's more emphasis on financial provisions than in typical contracts."
Faith necessary
At USF Health in Tampa, Fla., part of the University of South Florida, CFO Joann Strobbe is a member of the steering committee and sits in on vendor I.T. demonstrations, but relies on the CIO's recommendations. "I have to trust the CIO and I do," she says. "Then, it's a matter of me selling it to the executive team to get resources."
But before Strobbe can sell a project, she has to be sold, and that's not guaranteed. USF Health this summer is putting in a wireless network, an initiative that some others in the organization have wanted for a while.
But Strobbe pushed for a delay to ensure the proper resources would be available when the time came. "The technology now is better and pricing is better," she says. "We waited a couple years and got a better bang. That's not always easy because everyone wants bells and whistles right away."
The ability of CFOs to manage fiscal restraint, as well as locate funds and cut checks, are important assets during negotiations. Equally important, however, is their expertise in looking at the big picture when it comes to I.T. purchases.
Even if a proposed I.T. buy is purely clinical, CFOs are looking for financial benefits, such as whether use of the application will increase admissions, says Stephen Hau, vice president of marketing and business development at PatientKeeper Inc., a Newton, Mass.-based vendor of mobile computing software. "They stand above the fray and look at deals from a business perspective."
CFOs also are particularly interested in the total cost of ownership when I.T. systems are being considered."We give an upfront perpetual license, or subscription licenses on a monthly or annual basis," Hau explains. "The upfront costs are less for a subscription but the total cost of ownership is higher."
But a CFO looking for the best strategic value of an I.T. acquisition might be willing to take an upfront financial hit with a perpetual license. "Perpetual may be cheaper in the long term because the I.T. being bought is part of a larger initiative, such as patient safety or physician satisfaction," he adds.
PatientKeeper prefers CFO involvement in contract negotiations. "It can be disconcerting if you don't see them because you don't want surprises later," Hau says. "If the CFO is not participating, we may suggest involvement."
Further, because CFOs have experience with contracting for services across the organization, they bring that expertise to the table. "They know what is typically accepted by the organization and vendors," he adds. "The CFO comes to the table appreciating that the vendor has to make money and at some point, a contract can become untenable for a vendor."
Taking the long view
CIOs often complain that CFOs are reluctant to loosen the purse strings for information technology and demand returns on investments that are difficult, if not impossible, to quantify, especially for clinical technology. CFOs, for their part, often are reluctant to give their stamp of approval for technology that doesn't seem to fit into the broader financial strategy of the organization.
Bill Overbey, at Hays (Kan.) Medical Center, understands both sides of this coin. He serves as CFO and CIO at the 192-bed facility.
As Overbey sees it, a CFO should be both a number cruncher and a cheerleader during the I.T. negotiation process. "They should say, 'Get the most bang for your buck but also get the efficiencies you need,'" he notes. "You have to spend money to save money. Putting in the right solution rather than the cheapest absolutely saves money."
In his CIO role, he contends that with smart buying, it's easy for a CIO to show a return on investment if more money is spent upfront on the right vendor. The right product eliminates replacement costs five years down the road, he says.
But switching hats again, it is the role of the CFO to sell the notion of "spend money to save money" to other leaders, Overbey adds. "The challenge is you must convince the CEO and board to look that far into the future and recognize the savings from not replacing a system for a decade or more."
Being both CFO and CIO can be tricky, Overbey says, and he credits a strong team at the director level in both departments for helping him handle both roles. Still, Overbey's CEO sometimes gets confused when they are talking and has to ask Overbey if he's wearing his CIO or CFO hat.
From the CEO, Overbey learned the most important part of negotiating a contract-leaving yourself the ability to get out of it.
That's why he likes to limit contracts to two or three years, even though he hopes to have long, mutually beneficial relationships with the vendors.
The hospital is a host site for the hospital information systems of Medical Information Technology Inc., Westwood, Mass., and is open to being a host site for the time/attendance and scheduling applications of api Software, Hartford, Wis. "We want to be one of the best clients that vendors have," Overbey says. "That builds the relationship with the vendor so they will continue to pour resources into us and make us better."
Many of the terms in a vendor contract don't take long to hammer out because most business terms in the contracts are pretty straightforward. The longest parts of a contract to work out, CFOs and CIOs joke, are when the two attorneys get together.
But the issue of acceptance is a critical phase of negotiations. Vendors like to say the customer has accepted the system and the work the vendor has done when it is in place and turned on.
CFOs should try to amend contract language pertaining to acceptance to protect the organization from paying for software that is not performing to expectations, Overbey says.
For instance, they should try to put specific performance criteria in the contract that spell out when a system truly is accepted. "You could be using the system but there still are 45 things wrong," he says.
But while Overbey believed acceptance of the time and attendance system should be defined as when 100% of users can successfully use it, he had to settle on the vendor's criteria.
He concedes that CFOs often won't get the wording they want on acceptance. That's OK, as long as they have done their due diligence and trust the vendor will rectify problems after the system has been formally accepted.
"Many times I have to end up being comfortable with the vendor's wording on acceptance," Overbey notes. "I can do it because I've talked to other clients. Doing your homework is the key to taking a big gulp and saying, 'OK.'"
Of course, Overbey believes he has a trump card of his own-refusing to make payments until problems are resolved-that he hasn't yet used but wouldn't rule out. "The only recourse for the vendor is to take you to court; they don't want to do that because they want you to be a good customer."
The chief financial and I.T. leaders of an organization have distinct jobs and agendas. Overbey believes if the facility's previous CIO still was around, conflict would have been unavoidable.
Organizational dynamics
When Overbey came in as CFO five years ago, the I.T. department had a staff of 45 to handle a variety of disparate legacy systems. Maintenance costs were high and Overbey started advocating newer systems, which included swapping out the core hospital information system.
The CIO wanted to upgrade with the existing vendor and Overbey thought the vendor's product and the substantial integration work it would entail were cost-prohibitive. The CIO soon left and Overbey assumed dual roles.
"If it had not been me in both roles, that would have caused conflict," Overbey believes. "The CIO would be going down one road and the CFO would be saying, 'This is too expensive.' The CIO would be saying, 'Wait a minute, I know what I'm doing.'"
To minimize conflict, CFOs have to let CIOs and other leaders understand they aren't opposed to spending money, they just want it spent well, Overbey says. "CFOs will support going fully integrated because it will support efficiencies in a lot of areas."
For instance, Hays Medical Center has more I.T. today than five years ago and the I.T. staff is down to 18 from 45.
CIOs who report to the CFO are more often on the same page with the CFO, contends Kohn, at Dak Systems Consulting. "If the CIO does not report to the CFO, you might find more controversy, but mostly it's just healthy debate," she notes.
An organizational structure where the CIO reports to the CFO does not necessarily mean the CFO will take a stronger role in vendor selection and negotiations, says Strobbe at USF Health.
In addition, it doesn't mean the CIO won't win his or her share of battles when views diverge. "I'm not a I.T. expert and really have to rely on his expertise," she says. "If he and his team feel strongly, I'm usually not going to go against them because they have to make it work."
One area of divergence has been the accessibility of data, as the CIO is more conservative than Strobbe. "Sometimes I have to be reminded that we can't give open access."
Still, being the I.T. leader's reporting superior does change the dynamics of the relationship, acknowledges CFO Hill of Lakeview Center.
"But that doesn't mean conflicts don't arise," she adds. "What he needs as director of I.T. still have to be balanced with the rest of the organization."
She does not believe the balancing of needs would be different if the organization had a C-level I.T. head.
Because CFOs have an organizationwide view of issues, they often are open to changing their minds about an I.T. initiative, Strobbe of USF Health says.
In some vendor selection processes, she has changed her mind because the nursing staff wants another product.
The nursing school has representation on the I.T. steering committee and the dean has been heavily involved in some I.T. decisions, Strobbe notes.
Nursing I.T. is getting more priority at USF Health because the technology can help retain nurses and get funding if a project meets state initiatives to combat the nursing shortage.
"Being able to say the nurses prefer a particular product and the state will fund it is a relatively easy sell," she says.
Sidebar
Splitting Contracts Enables a Network Buy
Sunnybrook Health Sciences Centre in Toronto recently implemented a wireless network across its 10-facility, 1,300-bed campus. Despite the size of the project, it was done with virtually no involvement from CFO Michael Young. That's because corporate policy gives the CIO some degree of autonomy over I.T. spending.
At Sunnybrook, Sam Marafioti, CIO and vice president for corporate strategy and development, has authority to spend up to $300,000 for an individual I.T. purchase on his signature alone.
Because the wireless network from Montreal-based Bell Canada with PDAs from Holtsville, N.Y.-based Symbol Technologies was done in phases, each phase fell within Marafioti's spending authority. He declined to give a total cost for the network project.
At Sunnybrook, the CFO's approval is required for projects valued from $300,000 to $1,000,000; the CEO and board must sign off on larger deals.
The wireless network actually was small compared with previous projects on the sprawling campus. In 1998, for example, Sunnybrook spent $20 million implementing an electronic medical records system.
In that case, the CFO was heavily involved from start to finish, Marafioti says. It was the CFO's job to figure out where the money was going to come from and how it would be accounted for, he recalls.
Sunnybrook couldn't afford to buy the records technology with operating funds and the CFO had to call in auditors and seek a ruling that generally accepted accounting principles permitted the use of capital funds.
But CFO Young's biggest role in vendor selection and negotiation is that of a cheerleader and partner for the CIO, Marafioti says.
Hospitals are under constant pressure to cut costs while improving and expanding care, he notes. Consequently, the I.T. budget is always under severe threat from the needs of general acute care.
That threat was even more pronounced when the electronic records project was being hatched. "In 1998, we were looking at a $22 million deficit while getting set to spend $5 million to $6 million annually for four years for an EMR. The CFO had to assure others that while cutting elsewhere, the EMR was needed for long-term benefit. Without him, quite frankly, that deal would never have happened."
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