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Contracts Need Penalties: Sullying the Honeymoon Bed with a Vendor Prenup

December 5, 2007 Editorials 12 Comments

Inside Healthcare Computing has graciously agreed to make previous Mr. HIStalk editorials available from its newsletter as a weekly “Best Of” series for HIStalk. This editorial originally appeared in the newsletter in February 2007. Inside Healthcare Computing subscribers receive a new editorial every week in their Electronic Update.

As a hospital IT person, I would never sign a vendor’s software contract without protecting my organization with a variety of specific and severe contractual penalties. From recent Inside Healthcare Computing articles, many or most hospitals sign penalty-free contracts. I’m shocked. I like vendors, but money makes people (and companies) behave badly.

Vendors (software or otherwise) can tell you anything they want about their product’s performance and reliability. That can have one of three possible outcomes:

  • If the company is both knowledgeable and honest, you will be pleasantly unsurprised when their product works as advertised, but at least you won’t be caught unaware by a major meltdown. That’s the best outcome.
  • If the company is honest but doesn’t have broad enough experience with their product in a setting like yours, you’ll probably be miserable together, hoping they’re as responsive as they are honest. That’s bad. Sometimes you hit architecture or design flaws that can’t be fixed.
  • If the company is lying or has wildly oversold their wares, nothing else matters because you’ve been suckered into a long-term, expensive, and contentious relationship with a company that has already demonstrated its willingness to take your money under false pretenses. That’s the worst.

For all three outcomes, your first line of defense is due diligence. Don’t whip out your checkbook until you’ve taken extensive site visits (of your choosing, not the vendor’s), performed acceptance testing, and documented every promise and important capability in a binding contract. Buying from a demo is just plain stupid.

The biggest mistake hospitals make is finding problems with previous implementations, but then buying the product anyway. The most common rationalization: “We’re smarter than those rubes who couldn’t make it work, plus we really like the product and the salesperson.” That combination of naiveté and misplaced bravado has lined many a sales rep’s pocket. It often benefits an executive recruiter, too, since the CIO who ignores a product’s well-known, spotty history often has plenty of free time to reflect after he or she has been shown the door.

Vendors may not be thrilled to see the list of penalties you want, but they’re not your best buddies. They’ve got their best possible price and terms. So do you. You both have the same job: to meet somewhere in that middle ground after fighting over what’s left between those numbers.

You can be chums when selecting a product and again after buying it, but not while the deal’s on the table. If the vendor doesn’t hate you during that time, you’re not pushing them hard enough.

Contracts without penalties are binding only to the customer. If the software fails to provide value, crashes constantly, or can’t be used like you were told, you still pay unless you were smart enough to write in penalties. Your want their skin in the game with yours.

The most important eventualities to cover with penalties:

  • If the software doesn’t do what you were promised in a way that makes it unusable.
  • If you have problems that will cause you the most harm: downtime, poor response time, or cancelled development plans.
  • If the software or vendor has weak areas that sound like trouble. If the vendor’s teeth clench up when you lay out penalty terms for failing to deliver a richly functional ED package or a CPOE-to-pharmacy interface, maybe they don’t really plan to.

Penalties and payments go hand-in-hand. Your contract should require lots of the former and none of the latter if performance slips. Without penalties, you have no leverage. Vendors know you won’t yank a CPOE system if they have a major bug that could cause patient harm. A hard-hitting, predefined penalty is your best hope for getting their undivided attention to fix it. The cash won’t be much consolation, but it’s a hammer to hit the vendor over the head with.

I know we all like to throw harmless little love words around like “partner” and “shared vision.” Vendors pretend to be wounded when you sully the honeymoon bed with legal assurances. Take a lesson from Paul McCartney – maybe the vendor is a wonderful partner who loves you for something other than your money, but make them sign an air-tight prenuptial agreement just in case. Secretly, they’ll admire you for it.

This editorial is copyright-protected by Algonquin Professional Publishing, LLC., publishers of Inside Healthcare Computing. Please do not copy, forward, or reproduce this material without prior permission.  To obtain permission or for more information about Inside Healthcare Computing’s reprint policy, please contact the Customer Service Department at 877-690-1871 or go to http://insidehealth.com/ihcwebsite/reprints.html.

Mr. HIStalk’s editorials appear each Thursday morning in the subscribers-only version of Inside Healthcare Computing’s E-News Update.  To subscribe, please go to:  https://insidehealth.com/ihcwebsite/subscribe.html or call 877-690-1871.

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Currently there are "12 comments" on this Article:

  1. Great item about contracts…I’ve said the same for years. But riddle me this…why do so many hospitals sign Epic contracts when they NEVER have any of these clause in them???
    Is it just a bunch of ‘dumb’ CIOs, or.must be Judy has some pretty potent coffee she shares at contract negotiation time..??
    Any other ideas?

  2. I was reading Justen Deal’s latest blog and it sure *seems* like he uncovered some serious stuff about George Halvorson. What is really going on here? Is this real dirt? Is the stuff he alleges just regular “good ol boy” stuff that every nonprofit ceo engages in, or has he really found out some stuff that could hurt the Kaiser CEO?

    I know you dont want to traffic in rumormongering and all that, but given Justen’s history as the “most influential” of 2006 I Beleive it was, maybe you should write an article about this and explain it to us plebe’s who cant seem to work it all out entirely by ourselves?

    Just a thought.

    Keep up the good work!

  3. re: why do so many hospitals sign Epic contracts when they NEVER have any of these clause? —

    Maybe because they have a real system that is what it is. They aren’t selling futures. I don’t think CIOs are one bit dumb. They are intelligent people making reasonable decisions. Why insult them? Epic does warrantee their system, they do have payment milestones right through go live, and they guarantee their scalability. CIOs don’t end up getting burned because Epic doesn’t deliver or work.

    And, why do we care so darn much about Epic in this blog anyways? Epic, Epic, Epic, Epic, Epic, Epic, Epic, Epic, Epic, Epic, Epic, Epic, Epic, Epic, Epic, Epic – – there, have we had enough Epic mentions to meet our quota for this week?

  4. “Hammers” are extremely motivating, but they are only half of the performance-based contracting methodology. The other half are incentives to do things like beat agreed timelines, exceed SLAs or over-perform in other ways.

    Any good psychologist will tell you that rewards motivate more than penalties. With penalties, the vendor is only motivated to the point of not getting hit with the hammer. With rewards, the results can be greater.

    Large purchasers often forget about the positive incentives, but they can be as effective, if not more effective, than “hammers.”

  5. Regarding “AnswerMan’s” response to the comment on Epic contracts…

    It seems the question is why have these hospitals contracted with Epic without putting more protection in the contract in case of failure to deliver. Epic has done an excellent job of putting the burden to deliver on the client and other third parties.

    If it were me an I was making a multi-million dollar decision that would that could have huge ramifications for my job, I would ask whatever vendor to commit to certain gaurantees on delivery.

    As for as talking about Epic “all of the time”…that is part of what comes with a market leadership position. They have been successful and now everyone wants to understand why and what it means. No big suprise here.

  6. Penalties create a CYA environment which is really NOT CONDUSIVE to getting through an already tough project.

    Would the vendor and the customer basically spend alot of time and good will documenting each others mistakes, misteps and general misses to be able to prove their case later if someone tried to invoke a penalty?

    Anyone who’s been through this in the trenches would probably agree that if you make a good basic choice and buy a real product that does what it says it does, then using penalties is actually detrimental to success.

  7. “Why insult them?”

    Um, why should the vendor be insulted if the penalties are only based on their own promises? In other words, if they do what they have said they will do, they will never be subject to a penalty.

    I can think of two other reasons for contractual incentives: First, the EHR vendor market is volatile, and the vendor you buy it from is likely to be bought by someone else: Make sure your contract terms carry provisions that will survive mergers and acquisitions. Second, as I overheard at a recent conference, “I told the doctor, ‘The average relationship with an EHR vendor is longer than the average physician’s marriage.'”

  8. I think the “Why insult them” was about the CIO comment –

    “Is it just a bunch of ‘dumb’ CIOs?”.

    Don’t think it was in reference the vendor.

  9. Right you are. AnswerMan was saying why insult the CIOs who take vendors at their word about everything that’s in the contract (plus promises made at trade shows, demos, and conference happy hours and countless pre-signing emails)?

    I’m thinking maybe I was actually answering that question. ;o)


  10. No, I think the suggestion was that most of the CIOs who go with Epic don’t actually follow your plan – because they aren’t gullible. That was the original assertion and the comment was that it was insulting to CIOs who went with Epic to accuse them of such naivete. Most of them probably did careful homework and in general they have a good outcome to show for it. But, even for those who struggle, it wasn’t due to a “delivery” problem. They didn’t get duped because they were dumb.

    Anyways… I understand your point when it comes to dealing with newer vendors who are building a product from scratch. Not a bad idea to have a parachute if something goes south. Sometimes that happens.

  11. You’re no Jack Welch Vernie Boy! Panama Dan’s scoop on Vern’s management wisdom nearly emptied my bladder during laughter. Can you see Vern staring in the mirror every morning and saying, “I’m good enough. I’m smart enough! And…..boy howdy fun is earned!” I think I heard that line on an ole Kung Fu rerun from the 70’s ..”Grasshopper, all enjoyment and pleasures come after discipline and hard work.” I think what he really meant to say is “fun must be paid for.” Holy Moses it is true! The decline of American management is here.

  12. OK, let’s re-visit my note (question).
    First off, I was using the term ‘CIO’ generically…like any responsible C level person in the place who can sign a contract.
    I was asking a question….not saying they were dumb…but since some of the reaction was so defensive and strong, maybe..?
    Anyway I’ll ask it again, and again throw out some more possible answers, now I’m not stating any of them as fact, you folks tell me…
    They (hospitals) sign ‘very vendor friendly’ contracts as opposed to the one outlined in the IHC article, because:

    1) They are too naïve…?(see there it is again, but a little more tactful!)
    2) They are SO eager to install the new system…they can’t wait to start?
    3) The vendor has them over a barrel (like your hospital may not be good enough to be our client)? The corollary is: our sales people did a heck of a job!
    4) No other vendor would sign with such a poorly run place?
    5) Or the old…if you don’t sign by next Tuesday…there goes the BIG discount?
    6) We can’t afford a good lawyer…after committing $5mill for your system.
    7) We are such friendly accepting folks out here in the prairie we trust all…
    8) We REALLY believe you when you say you want us as a Partner!

    Have I missed any?

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