Startup CEOs and Investors: Niko Skievaski

Selling to a Health System Is Like Breaking Your Arm
By Niko Skievaski

"Selling to a health system is like breaking your arm." I’m speaking with J. Simpson over a Chick-fil-A in the sticky mist of the three-story fountain at MD Anderson in Houston. Many things purchased for UT System’s health campuses come across her desk at the UT System Supply Chain Alliance, MD Anderson Cancer Center included.

"When you break an arm, the cast will be on for six weeks. There are plenty of things you can do to aggravate it and extend the pain, but there’s really nothing you can do to get rid of it faster. Sometimes you never really recover."

She’s referring to the notoriously crippling 12-18 month sales cycles in healthcare enterprise sales. You crack your ulna on the way into the sales meeting. If you’re lucky, you’ll get a purchase order in 12 months. However, most of the time you’ll be looking at up to 18+ months, if you get through at all. The problem is rooted in one thing that startups know very little about: budgets.

The budget for an upcoming fiscal year is approved about a month before that prior year ends. A month before that, department managers submit their budgets up the chain. And another tick before is when they start making "first cuts," where they generate a wish list of expenses for the next year, rank, then start hacking away. This process highlights the opportunity costs. If you want that toy, you’ll have to put down the others.

What this means for us is that if we haven’t already gotten a resilient thumbs up by first cuts, we’re not going to get allocated in that budget cycle. Hence, 12-18 months. Operational budgets are negotiated by employees at every level, and contrary to entrepreneurial optimism, there is no extra play money in the budget. For the most part, we’re talking about businesses that run an extremely tight ship with increasingly small margins. So what can we do?

1. Ride the cycle. It’s pretty easy to find out the fiscal year of most of these organizations. Check out Guidestar.org. Most hospital systems operate as non-profits, hence the razor-thin budgets. Search for the hospital, click the “financials tab,” and voilà! Fiscal year-end minus three months gives you your target close date. Use this knowledge to allocate your time effectively as you work your pipeline. If you just missed a lead’s cycle, change your flight and drop in on someone else.
2. Avoid the cycle. I’ve been describing the operational budget process. Things like that sweet software licensing contract you’re selling end up here. The other way they spend money is in the capital budget. These are one-off, large purchases of equipment or buildings (and the things that go inside them). If you can package up your offering as a one-time expense, you might be able to dodge the cycle. Otherwise, if you can get the purchase under $5K, you can bypass budgets all together. Those purchases can typically get swiped, invoice-free, on the department head’s corporate card. However, those cards are a one-shot-deal, so don’t count on using this for recurring revenue.
3. The pilot close. The idea is to sell a free pilot, contingent on being written into the budget next time. This is a slight variation on the usual pilots we see pitched. Try to time your pilot so that your evaluated in time to get into the upcoming cycle. The most important part here is that your pilot has a definitive close date (the “initial term” in contract lingo), a point when you can ask them to shit or get off the pot. Identify the metrics, date of measure, and what it will cost you to give it away for free for a while. Negotiate this up front with the pilot terms. This smooths the process along and makes it much more likely to be included next go-round.
4. Stop selling to enterprise health systems. Think of another revenue model that won’t be fraught with such dire peril. For instance, Lily Truong has an amazing gadget that you shove in your ear to (gently) drill out your ear wax. It’s 100 times better than a Q-Tip and less invasive than the normal saline flushes that pediatricians frequently push on terrified toddlers (and I’m not going to mention that weird candle thing). Wouldn’t all the clinics and children’s hospitals want to get their hands on one? Maybe, but Truong’s business will likely fail before she could get through the sale. Rather, she’ll ditch the cycle and bring her gadget into patients hands directly through sales off her site and consumer retailers. It’s a shame that the best tools won’t be used for the job in the doc’s office, but at least you can pick one up at the corner drug store and the innovation wasn’t wasted. Maybe that was an easy example, but I’ve seen people spend months trying to close enterprise deals when there’s a better buyer just around the river bend.

Hopefully some of these strategies will help. I’d like to thank Jess for dropping some knowledge on us youngsters. And to pad her resume, she’s likely one of the only people in any purchasing department who has actually done sales for a startup. It’s a breath of fresh air knowing there’s at least one out there, right?

Niko Skievaski is co-founder of Redox.