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

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.

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