Renegotiating Mid-Term Agreements

Three weeks ago, I wrote about identifying cost savings in your mid-term agreements.

These agreements are in term and "technically" not ready to be negotiated.

I received so many replies and feedback (even from a vendor) that I am rereleasing this newsletter edition. And adding the LinkedIn post where a sales rep agrees that mid-term agreement renegotiation is good for both the vendor and the hospital. {And advice to use your data and not vendor data.}

Here it is:

THE GREATEST COST SAVINGS OPPORTUNITIES FOR HOSPITALS ARE IN RENEGOTIATING THEIR MID-TERM AGREEMENTS

The best possible savings in hospitals is the most challenging place to find.

One thing that surprises many of our clients (and initially, they don't think it's true) is that vendors are willing to renegotiate contracts mid-term.

The natural expectation (and I understand why) is that a vendor would never agree to cost savings for you (and less revenue for them) if you have an agreement where you're locked into a specific price structure for several more years.

After working in this space for several decades, here's what we've learned, and it is often surprising to the client:

Having the conversation backed with data?wins?more often than not.??

Most plan their cost savings roadmaps with contracts coming due for renewal. In our experience, the data is surprising:

• Over 65% of the costs we take out in a hospital typically come from reevaluating mid terms agreements.
• The most significant opportunity for savings is the ones you already have mid-term.

There is a core economic understanding in play (as I see it) that is constantly reliable but more intuitive than our conversations about business. Yes, people will act in their own self-interest (Vendors and hospitals alike), but the more profound question is:?what is in a hospital's, or a vendor's, self-interest?

And that when both parties realize that a hospital that goes out of business or loses excess money is not a net win for the vendor. The vendor and the hospital are in a relationship not to enrich each other but to serve each other in the service of patients.

When we look at the economics that way, there is a great incentive for a vendor and a hospital to renegotiate agreements that have fallen out of expected parameters (when benchmarks move, or when anticipated growth didn't happen, or a series of other common things). It becomes in the economic self-interest of both parties to recognize when the agreements are out of alignment with current realities.

When we look at cost savings from that perspective, we end up with more efficient hospitals, greater patient experiences, and-- as counterintuitive as it seems, over the long - haul, more prosperous and satisfied vendors.

There could be several reasons why a supplier or service provider might consider renegotiating a contract already in the mid-term with their client.?

Here are some key reasons:

1.?Changing Market Conditions:?If there have been significant changes in the market or industry since the contract was initially signed, the supplier may seek to adjust the contract terms to reflect the new realities. This could be done to remain competitive.

2.?Relationship Building: The supplier might be interested in fostering a long-term relationship with the client and improving customer satisfaction. By renegotiating the contract, they can address any issues, improve service levels, or offer additional benefits, thereby strengthening the partnership and securing future business.

3.?Operational Efficiency:?The supplier may have identified opportunities to enhance their operational efficiency or reduce costs by modifying certain aspects of the contract. By renegotiating, they can propose changes that streamline processes, optimize resource allocation, or introduce new technologies, ultimately benefiting both parties.

4.?Performance or Quality Concerns:?If the supplier is struggling to meet the client's expectations regarding performance, quality, or delivery timelines, they may proactively initiate contract renegotiation. They can salvage the relationship and prevent potential contract termination by addressing the concerns and finding mutually agreeable solutions.

5.?Regulatory or Legal Factors:?Changes in regulations, laws, or compliance requirements may necessitate contract adjustments. If the existing contract does not align with new legal obligations, the supplier might seek to renegotiate to ensure compliance and mitigate potential risks.

6.?Changes in Scope or Requirements:?Over time, the client's needs and requirements may evolve, leading to a misalignment with the existing contract. The supplier may be open to renegotiation to accommodate these changes and provide a better fit for the client's current needs.

7.?Strategic Priorities:?The supplier's strategic goals or priorities might have shifted since the contract was initially signed. They may seek to realign the contract to better align with their new business objectives, market positioning, or expansion plans.

8.?Competitive Pressures:?If the supplier faces increased competition or the threat of losing the client to a competitor, they might proactively propose contract renegotiation to retain the business. This could involve offering improved terms, enhanced services, or additional incentives to incentivize the client to stay.

9.?Force Majeure Events:?Unforeseen circumstances such as natural disasters, political instability, or global crises (like the COVID-19 pandemic) can significantly impact business operations and the ability to fulfill contractual obligations. Both parties may be willing to renegotiate the contract to address the impacts and find mutually beneficial solutions.

10.?Strategic Partnership Development:?The supplier may view the client as a key strategic partner and want to deepen the relationship. By renegotiating the contract, they can explore opportunities for collaboration, joint ventures, or new initiatives that can benefit both parties in the long term.

It's essential to remember that every situation is unique.

It's important to note that renegotiating a contract in the mid-term is a complex process that requires cooperation and agreement from both parties involved. The motivations and reasons for renegotiation can vary based on the circumstances and the unique dynamics of the client-supplier relationship.

When a hospital wants to communicate its desire to renegotiate a mid-term agreement with a supplier, it's essential to approach the situation professionally and openly.?

Here are some steps your hospital can take to initiate the renegotiation process effectively:

1.?Review the Existing Contract:?Thoroughly review the current contract to understand the specific terms, obligations, and any provisions related to contract modification or renegotiation.

2.?Conduct Research:?Gather relevant information and data to support your renegotiation request. This could include market trends, industry benchmarks, competitor offerings, or any other relevant information demonstrating the need for adjustment or improvement in the current agreement.

3.?Seek Input from Key Stakeholders: Consult with internal stakeholders for their insights and perspectives. This can help refine your negotiation strategy and ensure the proposed changes align with the broader organizational goals and requirements.

4.?Identify Specific Areas of Concern or Desired Changes:?Determine the key areas or aspects of the contract that you would like to address or modify. It could be related to pricing, scope, delivery timelines, service levels, or any other contractual terms causing challenges or no longer meeting your requirements.

5.?Prepare a Proposal:?Develop a well-structured proposal outlining the changes or modifications you want to discuss with the supplier. Clearly articulate the reasons for the requested renegotiation and how the proposed changes would benefit both parties. To strengthen your case, be prepared to provide supporting evidence, such as market data, industry trends, or financial considerations.

6.?Negotiate in Good Faith:?Engage in open and transparent negotiations, maintaining a collaborative and respectful approach. Be prepared for some back-and-forth as both parties work towards finding a middle ground that satisfies their interests.

7.?Document the Changes:?Once an agreement is reached, ensure that the agreed-upon changes are appropriately documented and incorporated into an amended contract or addendum. This will help avoid any misunderstandings or disputes in the future.

Remember, effective communication is crucial when initiating contract renegotiation. By employing a thoughtful and proactive approach, you can set the stage for a productive discussion with your supplier and increase the likelihood of achieving a favorable outcome.

One final note - is that most agreements over their term have fundamental issues that need correcting. There could be a very large gap in the pricing of the products or services, adherence to the agreement terms, off-contract spending, and a different utilization pattern.

This is why your vendor agreements must be examined in the present state, and all opportunities to reduce costs should be pursued.

Why wait until your renewal? Think of all of the missed cost savings opportunities that can never be recouped with waiting.....

Let?SpendMend?help your hospital or health system:?Review, Reset, and Renegotiate?Your Mid-Term Agreements.

Three Ways to Work with SpendMend:

1. To benchmark a vendor contract – either a mid-term agreement or a new agreement and provide a comprehensive cost savings opportunity and effective strategy to achieve the savings identified.
2. We can support your team with their cost savings initiatives to add resources and expertise. We set a bold cost savings goal and work together to achieve it.
3. SpendMend can perform a cost savings opportunity assessment. We dig deep into your spending and uncover unique cost savings areas.

Email?Lisa Miller?at [email protected] to schedule a call.

#hospitalmanagement #healthcareleadership #hospitalsupplychain