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Let’s Make A Deal
February 1, 2008
Unlike haggling over the price of a car, negotiating a software contract involves far more than just bickering about the list price, consultants who broker such deals say.
“Both sides have to approach the deal as the start of a long-term relationship,” stresses Ralph Fargnoli, president and CEO of Beacon Partners, a Weymouth, Mass.-based consulting firm. “You’re not here to win; you are entering a partnership. The vendor needs to make a profit. And the vendor needs to realize that the client is making a significant investment and expects good service.”
Although hospitals and clinics investing millions of dollars in a new application can certainly negotiate discounts on the licensing fees, they must consider the total cost of ownership, says Becky Quammen, founder and CEO of the Quammen Group, an Orlando, Fla.-based consulting firm. The cost and details of the professional services agreement—the services the vendor will provide when implementing the software—are just as important as the licensing fee, she contends.
“A $9 million contract is probably 300 pages long and single-spaced,” she notes. “You really have to look at every word and every phrase.”
Quammen reminds health care organizations that every word in the contract “has a dollar value” to the vendor. “It’s not just about the software. It’s how many times they’ll come to your site and how much of a relationship you want to have with the vendor.”
Nevertheless, software buyers have plenty of leverage when it comes to negotiating the licensing fee, says Vincent Ciotti, principal at H.I.S. Professionals LLC, a Santa Fe, N.M.-based consulting firm.
“A hospital can easily get 5 percent to 10 percent off just for asking for a discount,” he contends. “But you can easily do better than that if you’re persistent. Only fools pay list price, and my gosh, we have plenty of foolish hospitals out there.”
Getting Help
Too many software buyers make the mistake of trying to negotiate multi-million dollar deals themselves, Quammen contends. “An organization may do a deal of this kind once every seven years, whereas a consultant negotiates deals for a living.”
She likens a hospital negotiating its own deal to a home buyer serving as general contractor for the building project. “It’s very dangerous.”
Phyllis Schuck, CIO at Pinehurst (N.C.) Surgical Clinic, a 36-physician group practice, hired an independent consultant to negotiate a recent electronic records deal with Allscripts LLC because she lacked the time to devote to negotiations.
“A consultant can be as tough as you need him to be and it doesn’t ruin your relationship with the vendor,” she says. “You want someone who has the time it takes for all the meetings,” she adds, because that’s the best way to get the best deal.
When diving into contract negotiations, executives should devote a great deal of time and effort to sorting out the details of implementation assistance, Quammen says. “I come at it with a perspective of making sure all the necessary tasks will be done.”
Negotiating a contract, she says, is about far more than the licensing fee. “It’s more about what all of this is going to do for me once I buy it.”
Software vendors generally earn smaller margins on professional services, such as implementation assistance, than they do on licensing fees and maintenance, Quammen says. “They don’t want to slow down the signing of the contract” by negotiating services fees, which are only booked as services are delivered, she adds. “And they don’t want you to go deep into discovery about what the product will look like when it gets deployed.”
The ideal contract includes a detailed implementation plan spelling out who will do what tasks when, advises Fargnoli of Beacon Partners. “This is often overlooked,” he says. “Vendors are in a hurry to get the deal closed, and the client figures that they’ve picked the vendor and they want to get started, so they forget to delineate responsibilities.”
Today’s advanced clinical information systems require substantial implementation support from the vendor, Fargnoli says.
When 25-bed Grande Ronde Hospital negotiated a software contract with McKesson with the help of Ciotti, “we asked to pick the implementation team,” says Parhez Sattar, director of information technology at the La Grande, Ore.-based hospital. “We put into the contract that we could reject any implementers we weren’t comfortable with upfront or later on.”
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