As appearing in Healthcare Purchasing News
Skilled negotiators are like musical virtuosos. They have an extensive repertoire of instruments from which to draw upon, and they know when and how to make them a part of their performance. But negotiating healthcare contracts for capital, purchased services and IT services can test the artistry of even the most masterful negotiator.
As a seasoned contract negotiator, there are five tactics I recommend finance and operations departments learn to gain the confidence and skill needed to tilt every contract negotiation in their favor.
1. Don’t be afraid to ask. Expressing your expectations can be a surprisingly powerful negotiating tactic — especially when used as an opening move. When I started negotiating purchased services and IT contracts, I found that most people never asked for discounts. The reasons for this are complex, but often the issue came down to one of trust, or lack thereof.
Providers either put too much faith in the vendor’s willingness to offer a fair price, or their own lack of conclusive benchmarks left them feeling less than confident about securing a better deal. In other words, “it costs what it costs.” It’s no wonder that in the world of healthcare contracting, purchased services and IT solutions are often viewed as some combination of immovable object and unstoppable force. If you never ask the question, the answer is always “no.” Rather, focus on the opposite assumption— there is always money on the table.
2. Follow the 10-percent method. Good data provides excellent leverage. But incomplete data, or data that does not completely validate your desired outcomes, provides no leverage whatsoever. There are many times that the contract value does not meet the dollar threshold to send in for benchmarks.
Consider, for example, benchmarks for items $100K or more in annual value. Rather than shrugging your shoulders at contracts that don’t meet the threshold, ask the vendor for a 10-percent discount. You may be surprised at the response. Even if you only received a five-percent discount, it’s better than nothing. If you have additional leverage (i.e. seeking a multiyear agreement or end user dissatisfaction), open by asking for a 20-percent discount. While it’s rare to obtain such a discount without data to back it up, an additional 10 to 15 percent in savings is more common than you may think. In fact, a 10-percent discount hits a sweet spot with many healthcare vendors. This tactic saves time and effort, especially if the contract value is questionable.
3. Go above and beyond benchmarks. Whenever I received benchmarks, I assessed my leverage within the context of this question: “Do I want to target the competitive rate, or the aggressive rate?” More often than not, I wanted the aggressive rate. But to get there, I didn’t ask the vendor to meet me at the aggressive rate right away. Instead, I proposed we start at a point beyond the benchmarked rate.
Imagine this scenario. My contract management system identified that the aggressive rate I should target is $15 per test. My current rate is $20 per test. My first move is to ask the vendor to drop the rate to $12 per test. My hope is that by making an “unreasonable” request, the vendor will be happy to give me that $15 rate, or something close to it. The lesson here, ask for more than you plan to get.
The same method applies to the competitive rate. Even when I thought I didn’t have enough leverage to achieve the aggressive rate, I would start negotiations there. In 95 percent of those cases, I got the vendor to agree to the competitive rate — my actual goal — or a price point within its ballpark.
4. Consider the C-suite card. This negotiating tactic is particularly well-suited to “rush orders” (i.e., contracts that need to be closed before the end of a fiscal period), as well as cases in which the vendor will not budge on pricing or terms. The success of this strategy depends on the effectiveness of your messaging. In my experience, the following is very persuasive:
“I have to show the benchmarks to my CFO and CEO. If you haven’t budged on your pricing, we’re going to be at a stalemate, and they might want to look elsewhere. But I’ve worked hard on this deal and want to get it done and off my plate, so throw me a bone.”
Why does messaging like this frequently work? Why should my problem — a bottlenecked decision — concern the vendor? Because every negotiation hinges on the establishment of desired outcomes.
Remind the vendor you’re “on their side.” Convey you want to win this business too. And that time is money for both parties. But if negotiations get bogged down and leadership gets involved, the potential losses start piling up. The vendor will lose your ability to advocate for them — which is very valuable. In short, remind the vendor that you’ll be playing hardball if they don’t abide by the rules of the game. In most cases, vendors will step up to the plate and offer a discount.
This last resort tactic can be risky as the benchmarks likely don’t exist. To make it work, determine whether the contract terms you are negotiating align with your C-suite’s strategic priorities. If they don’t — if you’re focused on cost savings and they’re concerned with securing services that will keep your health system’s physicians happy — it’s unlikely that leadership will step in. You don’t want to be the negotiator who cried wolf. That can cause lasting damage to your credibility, both with vendors and with your C-suite.
5. Play good cop, bad cop. While this tactic may sound cliché, it actually works. It requires great deal of coordination, communication and contingency planning, along with the combined power of two skilled negotiators.
In the context of healthcare-contracting negotiations, the “bad cop” can play the part of the stickler: “To get this deal done, we’re going to need you to go through this grueling RFP process.” Or the penny-pincher: “We can’t spend one cent more than we’ve spent in the past for these services.” Or the critic: “Here’s everything I don’t like about your proposal.” The bad cop refuses to break, but the good cop bends in the interests of keeping the partnership intact, telling the vendor, “Hey, let’s just meet in the middle where everyone can be happy.”
The best use of the “good cop, bad cop” routine I’ve made was during negotiations over a service desk contract renewal. I informed the vendor that unless they could meet a specific, much lower price point, our client would be dropping them. I then informed the business owner that they should expect a call from the vendor. After arming them with the savings I thought we could achieve, together we scripted what the business owner should say during that call. The business owner gave a great “good cop” performance, and the very next day the vendor came to my office and closed a deal that generated $80,000 in year-over-year savings. Teamwork and planning can help negotiators triangulate the right price point.
Successful contract negotiations require confidence, style and hard data. Evidence-based research, strategic sourcing, and contract lifecycle management solutions play a key role in delivering detailed insight into healthcare spending, expense management, payer reimbursement, contractual obligations and potential liability. By focusing on proven techniques that encourage optimism, long-term partnerships and a focus on the bigger picture, contract negotiators can avoid investing unnecessary time and effort in unproductive relationships, and tilt every negotiation in their favor.