The negotiation of contracts can be an intricate and complicated process
under the best of circumstances. In a depressed and stagnant economy, the
negotiating process can become even more intimidating and daunting. Being armed
with some basic strategies can help O&P companies succeed in all types of
contract negotiations in today’s difficult marketplace.
Gather information
Before showing up at the negotiation table, one of the most basic
negotiating strategies is to be prepared and learn about the other party,
regardless of whether that party is a vendor, hospital, physician group or
third party payer.
“You have got to do your homework,” Joyce Perrone,
director of business development for De La Torre Orthotics and Prosthetics and
consulting partner with Promise Consulting, said. “You have to know before
you walk into that room who they are, what they do, what their capabilities
are, and what they have offered other people. The more information you have,
the better.”
© 2012 iStockphoto.com/Grinko
Before meeting with a supplier, companies should determine how much they
purchased from that supplier, how much was paid to that supplier, and what that
supplier’s capabilities are, as well as how much was purchased from other
suppliers. Perrone also has used the Internet to obtain information that can
help when negotiating.
“I have found that I have been able to get things that they are
selling on Amazon cheaper than what a supplier who is walking in my door wants
to sell it to me,” Perrone said. “I want to be able to point to that
and say are you aware I can get this on Amazon for half of what you are
proposing.”
Similarly, before approaching negotiations with a hospital system, some
basic information such as the number of patient beds as well as the number and
types of procedures performed at the hospital can be found on the Internet.
Perrone noted that the hospital’s purchasing agents or front office people
may be willing to share information or they may be able to provide the name of
someone else in the hospital who can. In some cases, such as in negotiations
with the US Department of Veterans Affairs, freedom of information can come
into play and allow access to data regarding how much the contract is truly
worth.
Identify goals
Another key negotiating strategy is to identify and develop goals
beforehand. Determining a bottom threshold before entering negotiations can aid
in recognizing a good deal from a bad deal.
Jon Shreter
“The important thing for me is what are your goals and what are you
willing to give up to achieve those goals?” Jon Shreter, CPO,
executive director of Prosthetic and Orthotic Management Associates
Corporation (POMAC), said. “Between those two parameters, you can pretty
much narrow it down to what you want and how badly you want it.”
Shreter noted that if the other party is giving strong hints that their
company is in distress or conversely is doing well, then it may necessitate a
change in your goals. The more intelligence both sides have of the other’s
condition is better for both parties.
“For example, an employee is negotiating with a boss over more
wages. If he knows the company is doing well, then that is a stronger position
to hopefully achieve an increase in salary,” Shreter said. “But if he
knows the company is not doing well, then he actually is running a risk of not
getting what he wants and he is setting himself up for disappointment.”
Develop relationships
Another basic negotiating strategy is to foster an ongoing relationship
with the other party. Establishing, building, and maintaining relationships
with key individuals at different organizations and businesses can help stop
negotiations from becoming adversarial.
“Negotiation is, I have found, a relationship. If you cannot
develop relationships with organizations, then it makes negotiations a lot more
difficult,” Perrone said. “Your number one priority has to be having
a really good relationship with that organization, and then negotiations have
the potential to be more civil and effectively more productive. You are going
to get something better at the other end of the machine when you are done with
negotiating a deal.”
Michael Burton
When building relationships and negotiating, Perrone recommends always
following the Golden Rule: do unto others as you would have them do unto you.
“You want to treat others as you would like to be treated, and that is
with respect and dignity,” Perrone said.
She also noted that employees working in hospital systems, doctor’s
offices, and other types of businesses that O&P providers encounter
regularly can leave one job and take a job at a similar facility. Maintaining a
good working relationship with these contacts often can open doors and aid in
negotiations.
“Someone who is a purchasing agent for one hospital this year may
move over to another hospital next year, so you want to be sure that they
remember you, that they know you and that you had a good relationship with
them,” Perrone said.
Seek long-term contracts
Negotiating for long-term rather than short-term contracts can prove
beneficial. In negotiations with suppliers, looking to the long-term typically
will yield more favorable rates.
“Suppliers are looking for a profit over a long period of time, and
they are going to be willing to offer better rates, better pricing, and better
terms, be that discount terms, longer payment terms or better shipping
terms,” Michael Burton, president of Burton Business Services,
said. “They are going to be much more flexible if you are willing to
commit to them over a long period to do as high a volume as you can.”
Burton noted that by seeking long-term rather than short-term contracts,
an O&P business is not only building a stronger relationship but also
demonstrating loyalty, a quality that he feels is the most important aspect of
negotiating.
“That [loyalty] is the one thing that seems to have disappeared in
a lot of cases from the business place, and when you are negotiating, whether
it is with an employee or whether it is a supplier, that is the one thing
everybody is looking for: are you going to be loyal to me or are you going to
jump ship on us at the first opportunity?” Burton said.
Make concessions
Another important successful negotiating strategy is to be prepared to
make concessions. In most types of negotiations, both parties will find it
necessary to offer up something in return for receiving something of importance
to them.
Brad Mattear
“When I get asked, ‘Can I get a couple more points as a
discount?,’ it is really hard for a distributor to agree without bringing
some kind of concession to the conversation For instance, is there a product
line that you are buying elsewhere that you can be buying from me?”
Brad Mattear, CFO, central US and national strategic account manager for
Cascade Orthopedic Supply Inc, said.
Perrone cautioned against making negotiation talks all about price.
“I have gone into some hideous meetings where I have seen
negotiations with suppliers that are almost embarrassing, and I have been a
supplier at the hospitals and been treated that way on the other end of the
table.”
Instead, Perrone recommended continuing to build a relationship and
working in partnership with the other party rather than just insisting on
cutting prices. She suggested meeting with the other party to share goals and
then explore options that would be mutually beneficial.
“Bring them in and talk about the product line, what is going on
with it and where you are at this point,” Perrone said. “Here are our
budgetary goals and here is our current spend on this. Where are items that we
could get better pricing?”
It also is important to recognize that in some cases, the lowest price
will not necessarily be the best price. Additional costs may be associated with
the lower price, and when those extra costs are factored in, any savings may
evaporate.
“If you are placing one order and getting three shipments and
paying three UPS charges, the additional UPS charges may eat up the additional
savings that you thought you had,” Burton said. “If one company is
offering a 12% discount rather than a 10%, you may think that is a better deal
but in the end if you added up the same number of items from two suppliers, you
may find out that a 12% discount cost more than a 10% discount.”
Be creative
Searching for creative ways to reduce costs also can aid in
negotiations. For example, rather than paying shipping charges to suppliers on
their terms, companies can pay for shipping costs using their own accounts.
“Instead of all of these companies charging us shipping on their
term, where were able to say, ‘if you use our Fed Ex number, now we do not
pay you shipping,’” Perrone said. “We are getting more volume
with Fed Ex under our number, Fed Ex gives us better pricing, and we ended up
saving money on shipping due to volume. Incremental small savings like that can
help you get more creative in your negotiations.”
Mattear noted that especially in today’s economic climate,
businesses are more cognizant of their dollar and are looking for ways to
maximize their purchasing power.
“I think we see more people wanting to be creative, and more people
are wanting to dial in their cost of goods and dictate or fixate on a cost so
that they can proactively run their profit and loss statements,” Mattear
said. “Everybody wants to be careful. They want to spend wisely but they
also now give it more attention than they ever have before.”
Consolidating the number of suppliers and vendors can reduce not only
costs but also decrease the number of contracts a company must negotiate. In
addition, higher volume with one or two suppliers also will increase volume,
translating into better pricing. Added bonuses to consolidating are that
tracking inventory will be easier and fewer checks will need to be written,
further lowering a company’s overall costs.
“One thing that a lot of people overlook, particularly in a large
practice, is what it costs them every time they write a check. If you get three
invoices vs. one invoice, your cost may be significantly higher,” Burton
said. “We did a study more than 10 years ago and found out it was costing
us about $45 per check to process any checks for the company. Most people do
not think about that and when you discuss it, they do not understand what their
actual costs are until you do a break out.”
Another creative strategy that may be overlooked when negotiating is
asking for a longer turnaround time to pay invoices.
“You want to look at what the terms are to pay – are they
going to want you to pay in 15 days of invoice, 30 days, or 45 days? Those are
other things to negotiate,” Perrone said. “If we do not have to pay
an invoice for 45 days, that is better for us than if we have to pay it in 15
days. However, you have to ask for it; they are not going to offer it.”
Involving staff and getting their input before entering into the
negotiation process also can generate creative strategies to take into
negotiations or even identify areas that can be consolidated and help
streamline processes.
Read the contract
The final step in the negotiating process is to read the entire
contract. All of the fine print needs to be reviewed and understood before
signing it.
“You have got to read that contract and understand it. You have to
read the fine print, and so often that sadly does not happen,” Perrone
said. “If you are not a detail person, then give the contract to someone
who is for review. If you do not read your contract, something could be hidden
in there that you have agreed to without even realizing it.”
In cases in which the contract is large, intricate, or even complicated,
having an attorney review either parts of the contract or the entire contract
may be prudent.
Finally, Burton noted that while O&P practitioners are highly
educated in what they do best — how to treat their patients — they
also must need to focus on running their business.
“We are still stuck on the thought that if you provide the best
care for your patient and you always put your patient first, your business will
be fine,” Burton said. “People forget that if you do not put your
business first and take care of it, you will not be able to take care of any
patients because your doors will not be open.” — Mary L. Jerrell,
ELS
Disclosure: Burton, Mattear, Perrone and Shreter have no relevant
financial disclosures.
