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Time Capsule: What Paul McCartney Can Teach Providers about Contract Penalties

February 3, 2012 Time Capsule No Comments

I wrote weekly editorials for a boutique industry newsletter for several years, anxious for both audience and income. I learned a lot about coming up with ideas for the weekly grind, trying to be simultaneously opinionated and entertaining in a few hundred words, and not sleeping much because I was working all the time. They’re fun to read as a look back at what was important then (and often still important now).

I wrote this piece in February 2007.

What Paul McCartney Can Teach Providers about Contract Penalties
By Mr. HIStalk


This is top-secret provider stuff. If you work for a vendor, why not skip on down to the news items? I’m about to tell your prospects to take actions that you’ll dread.

As a hospital IT person, I would never sign a vendor’s software contract without including a variety of specific and severe performance penalties. From recent Inside Healthcare Computing articles, many or most hospitals will. I’m shocked. I like vendors, but money makes people (and companies) behave badly. Be friendly, but get everything in writing.

Vendors (software or otherwise) can say anything they want about their product’s performance and reliability. Those statements 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 (but not necessarily the most common) 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, in which case you’ll use resources to work around the problems.
  • 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 vendor that has already demonstrated its willingness to take your money under false pretenses. That’s the worst case.

The biggest mistake hospitals make is uncovering 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 aren’t your best buddies. They have their bottom line price and terms. You’ve got yours. Negotiation is meeting somewhere in that middle ground, fighting for the bigger chunk of the unclaimed territory on the table. If the vendor doesn’t visibly hate you during negotiations, you’re not pushing hard enough. Nice guys and gals don’t get good deals.

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 salesperson’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 you haven’t heard the truth.

A hard-hitting, predefined penalty is your best hope for getting undivided attention when a problem arises. The cash won’t be much consolation, but it does create an automatic escalation path respected by all.

I know we all like to throw harmless little love words around like “partner” and “shared vision,” at least until you’ve signed the deal. Vendors pretend to be wounded when you sully the honeymoon bed with legal requirements. 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.

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