Over the last 25 years, through the development of effective group purchasing practices, health care organizations have made tremendous strides in gaining control of their supply cost. This same level of cost control has not been realized on the capital equipment side of the equation. In far too many cases, the chosen method of negotiating for capital equipment is to just bid it out with the award going to the lowest bidder. This is bidding, not negotiating, and it costs hospitals, imaging centers, and outpatient centers millions of dollars. If extensive prenegotiation preparation is not taking place, and if competition is not being created for your company’s business, large sums of money are being wasted. Radiology equipment manufacturers have big margins built into their list prices. Significant savings are available, but only to the buyer with the negotiating skills to get them.
What Is “Leverage”?
Leverage is the source of power in a negotiation. This is especially true when negotiating for capital equipment. To one degree or another, it is the power that drives the kind of deal you are able to negotiate. Although leverage takes many forms in a negotiation, in the end it comes down to one simple principle: the ability to walk away from the sale for whatever reason. Your ability or willingness to walk away automatically conveys significant leverage from the moment the buying process begins.
When sitting down at the negotiating table, always remember it’s your room, your timetable, your agenda, and you’ve got the money. Plus, since you don’t have to buy from just anybody, you get to decide if the money goes to the company you’re negotiating with. Even better, the vendors are trying to convince you that it is a good idea to buy their products or services. In other words, the vendor has to satisfy you. The only thing you must do is convince the vendor that you will buy from someone else if you can’t work out the deal you want.
A Deal Killer from Within
One situation can, and all-too frequently will, undercut your control and leverage during a negotiation: procurement policies that allow others in your organization to have control of all or parts of the buying process. These policies are killers. When your ability to control the negotiating process is compromised, all bets are off.
This happens when critical information concerning the negotiation you are conducting is relayed to a vendor outside the negotiating room. Selecting and controlling your negotiating team and controlling activities and strategies during the negotiation are critical.
Always remember: Leverage is created by your ability to walk away with strong options still available. This puts you in control of the negotiation.
There are hundreds of leverage tools available for use in negotiating capital equipment deals. The trick is to identify what tools are available for a given negotiation and then to develop them for strategic use during that negotiation. Given space limitations, let’s take a look at two leverage tools that are the most critical and effective for negotiating blockbuster deals on radiology equipment and systems.
Creating Viable Competition
Ultimately, competition is your best leverage tool. Never move into a negotiation without first examining every possibility of creating a competitive environment. But the vendors must honestly believe you might buy from one of the other companies. If a vendor doesn’t believe the competition is viable, you won’t get their best offer.
The easiest and most ethical way to create viable competition is to gain agreement from end users that any of the companies competing for the business could provide an equally acceptable product for their use. This consistently levels the playing field, and allows you to play a convincing viability card.
However, in many cases getting end users to declare that all products are created equal or that other products might be acceptable is difficult. In these situations, end-user agreement is paramount in case an appropriate deal cannot be made for the preferred product. Explain why an alternative product may be necessary if the preferred company won’t negotiate in good faith, and work with your end users to select viable alternatives before negotiations start.
A few years back, I was buying new radiology equipment for a hospital in Kansas City. The list price for a total package of equipment was more than $3.5 million. The bottom line set by our CEO was $2.3 million. After discussing alternative manufacturers with the radiology physician’s group, the list was narrowed to two. All but the chief radiologist agreed on one preferred manufacturer with a strong second. However, the chief radiologist insisted on only the preferred manufacturer.
After some intense negotiating where we utilized the preferred manufacturer to create competition, the second manufacturer conceded to sell the equipment at slightly below our $2.3 million target. The preferred manufacturer was standing firm at $2.8 million. Our chief radiologist was still insisting on the preferred manufacturer, but we didn’t have $2.8 million to spend. We moved to the next tier of leverage tactics we had planned before the negotiation started.
During our preparation for the negotiation, we had learned that 6 months earlier this manufacturer sold a similar package of equipment to another hospital in the city at a price similar to what we were asking. This provided us with two excellent leverage tools. The first was using the preferred vendor’s desire to get a better foothold in a new market and the second was confronting them with the fact that they had offered a better deal to a competing hospital. To our surprise, both of these negotiating techniques turned up dry and we were still looking at a proposed price of $2.8 million.
Finally, we played the higher-up-the ladder card and phoned their CEO, but we were turned down flat—with an explanation. The manufacturer’s CEO explained that 6 months earlier, his company had taken a loss to get a primary foothold in our market and he was simply not willing to take a second loss in such a short period of time for a secondary foothold. Once we shared this with our chief radiologist, he agreed to his group’s strong second choice.
The results illustrate the wisdom of enrolling end users in important parts of the negotiation process. Viable competition was created, and the chief radiologist realized that looking at viable options in the market created a win-win for his group and the hospital. Real competition got the deal done!
If you really want to turn up the competitive heat, look for situations where you can bring a vendor, new to the market, into play. Leverage is increased by the new vendor’s desire to gain entry into a new market and the other vendor’s desire to keep out new competition. Many times the new company is willing to lose money on the deal just to get into a new market area and the company dominating the area is willing to lose money on the deal just to keep the upstart competition out.
A few years ago, I was in the middle of a negotiation for a lab software system with a company that dominated the market in our part of the country. We created intense competition by bringing in a second company that was new to our market area.
The incumbent company had matched the new competitor on all points except one. The new company was willing to allow us to expand the utilization of their software for all future satellite locations without additional software license fees—something unheard of at this time for this type of software. Initially, the incumbent company would not concede us a similar deal, but once we convinced them that we would buy from the other company, they agreed to the concession.
In the end, the incumbent vendor was willing to sell at a loss to keep a new vendor out of its geographic market area. And I got better concessions on this deal than any other software deal I’ve ever cut.
Gaining as much information as possible from others on the kind of deals they are getting provides facts that can be used as leverage to get similar or better deals. Vendors normally don’t want to get a reputation for favoring one customer over another. Being confronted with the good deal given to another customer creates pressure to give you a similar deal.
Imagine walking into a negotiation with information on competitive deals that others have received. Now you have an immediate advantage, and with that knowledge, you can demand as good a deal or better.
An excellent way of obtaining this information is by networking with colleagues. Join purchasing organizations in the health care industry and get to know as many people as possible. Socialize with them, go to meetings they go to, serve on committees with them, and belong to the same professional organizations.
Another great way to get this information is through third-party databases. The health care industry spawned a company called MD Buyline, and the person who started it had a brilliant idea. By getting health care organizations to share their buying information, he could sort it into data-
bases and sell the aggregate data back to the same organizations so their negotiators could use it to determine the best deals on medical equipment from around the country. ECRI and some GPOs are also good sources for this type of data.
When you have critical information about deals others are getting, you can fashion your own blockbuster deals that otherwise wouldn’t have been available. I always utilize the benchmarking leverage tool on major capital equipment deals and often find it to be my most effective leverage tool.
Best Practices Save Money
Poor negotiating practices cost health care and medical research organizations millions of dollars each year. The problem cannot be isolated to just the purchasing department but exists throughout an organization. Effective negotiating for capital equipment requires an organization-wide team approach that is fully supported and endorsed by senior management. Team members have to understand and carry out their roles in a negotiation to ensure a positive outcome.
There are two solutions to this problem. The first is to make a commitment to adopting a proven capital equipment procurement and negotiating system and providing the necessary organization-wide training to ensure its effective integration. The second is to hire a professional medical equipment negotiator to do the negotiations for the organization. Either solution will work. Doing nothing can cost your organization millions.
Kris Kramer is president of Lifecycle Enterprises, which provides consulting services and negotiations for its clients. For more information, contact .