Orthotics/Prosthetics

The negotiation of contracts can be an intricate and complicated process under the best of circumstances. In a depressed and stagnant economy, the negotiating process can become even more intimidating and daunting. Being armed with some basic strategies can help O&P companies succeed in all types of contract negotiations in today’s difficult marketplace.

Gather information

Before showing up at the negotiation table, one of the most basic negotiating strategies is to be prepared and learn about the other party, regardless of whether that party is a vendor, hospital, physician group or third party payer.

“You have got to do your homework,” Joyce Perrone, director of business development for De La Torre Orthotics and Prosthetics and consulting partner with Promise Consulting, said. “You have to know before you walk into that room who they are, what they do, what their capabilities are, and what they have offered other people. The more information you have, the better.”

© 2012 iStockphoto.com/Grinko

Before meeting with a supplier, companies should determine how much they purchased from that supplier, how much was paid to that supplier, and what that supplier’s capabilities are, as well as how much was purchased from other suppliers. Perrone also has used the Internet to obtain information that can help when negotiating.

“I have found that I have been able to get things that they are selling on Amazon cheaper than what a supplier who is walking in my door wants to sell it to me,” Perrone said. “I want to be able to point to that and say are you aware I can get this on Amazon for half of what you are proposing.”

Similarly, before approaching negotiations with a hospital system, some basic information such as the number of patient beds as well as the number and types of procedures performed at the hospital can be found on the Internet. Perrone noted that the hospital’s purchasing agents or front office people may be willing to share information or they may be able to provide the name of someone else in the hospital who can. In some cases, such as in negotiations with the US Department of Veterans Affairs, freedom of information can come into play and allow access to data regarding how much the contract is truly worth.

Identify goals

Another key negotiating strategy is to identify and develop goals beforehand. Determining a bottom threshold before entering negotiations can aid in recognizing a good deal from a bad deal.

Jon Shreter

“The important thing for me is what are your goals and what are you willing to give up to achieve those goals?” Jon Shreter, CPO, executive director of Prosthetic and Orthotic Management Associates Corporation (POMAC), said. “Between those two parameters, you can pretty much narrow it down to what you want and how badly you want it.”

Shreter noted that if the other party is giving strong hints that their company is in distress or conversely is doing well, then it may necessitate a change in your goals. The more intelligence both sides have of the other’s condition is better for both parties.

“For example, an employee is negotiating with a boss over more wages. If he knows the company is doing well, then that is a stronger position to hopefully achieve an increase in salary,” Shreter said. “But if he knows the company is not doing well, then he actually is running a risk of not getting what he wants and he is setting himself up for disappointment.”

Develop relationships

Another basic negotiating strategy is to foster an ongoing relationship with the other party. Establishing, building, and maintaining relationships with key individuals at different organizations and businesses can help stop negotiations from becoming adversarial.

“Negotiation is, I have found, a relationship. If you cannot develop relationships with organizations, then it makes negotiations a lot more difficult,” Perrone said. “Your number one priority has to be having a really good relationship with that organization, and then negotiations have the potential to be more civil and effectively more productive. You are going to get something better at the other end of the machine when you are done with negotiating a deal.”

Michael Burton

When building relationships and negotiating, Perrone recommends always following the Golden Rule: do unto others as you would have them do unto you. “You want to treat others as you would like to be treated, and that is with respect and dignity,” Perrone said.

She also noted that employees working in hospital systems, doctor’s offices, and other types of businesses that O&P providers encounter regularly can leave one job and take a job at a similar facility. Maintaining a good working relationship with these contacts often can open doors and aid in negotiations.

“Someone who is a purchasing agent for one hospital this year may move over to another hospital next year, so you want to be sure that they remember you, that they know you and that you had a good relationship with them,” Perrone said.

Seek long-term contracts

Negotiating for long-term rather than short-term contracts can prove beneficial. In negotiations with suppliers, looking to the long-term typically will yield more favorable rates.

“Suppliers are looking for a profit over a long period of time, and they are going to be willing to offer better rates, better pricing, and better terms, be that discount terms, longer payment terms or better shipping terms,” Michael Burton, president of Burton Business Services, said. “They are going to be much more flexible if you are willing to commit to them over a long period to do as high a volume as you can.”

Burton noted that by seeking long-term rather than short-term contracts, an O&P business is not only building a stronger relationship but also demonstrating loyalty, a quality that he feels is the most important aspect of negotiating.

“That [loyalty] is the one thing that seems to have disappeared in a lot of cases from the business place, and when you are negotiating, whether it is with an employee or whether it is a supplier, that is the one thing everybody is looking for: are you going to be loyal to me or are you going to jump ship on us at the first opportunity?” Burton said.

Make concessions

Another important successful negotiating strategy is to be prepared to make concessions. In most types of negotiations, both parties will find it necessary to offer up something in return for receiving something of importance to them.

Brad Mattear

“When I get asked, ‘Can I get a couple more points as a discount?,’ it is really hard for a distributor to agree without bringing some kind of concession to the conversation For instance, is there a product line that you are buying elsewhere that you can be buying from me?” Brad Mattear, CFO, central US and national strategic account manager for Cascade Orthopedic Supply Inc, said.

Perrone cautioned against making negotiation talks all about price.

“I have gone into some hideous meetings where I have seen negotiations with suppliers that are almost embarrassing, and I have been a supplier at the hospitals and been treated that way on the other end of the table.”

Instead, Perrone recommended continuing to build a relationship and working in partnership with the other party rather than just insisting on cutting prices. She suggested meeting with the other party to share goals and then explore options that would be mutually beneficial.

“Bring them in and talk about the product line, what is going on with it and where you are at this point,” Perrone said. “Here are our budgetary goals and here is our current spend on this. Where are items that we could get better pricing?”

It also is important to recognize that in some cases, the lowest price will not necessarily be the best price. Additional costs may be associated with the lower price, and when those extra costs are factored in, any savings may evaporate.

“If you are placing one order and getting three shipments and paying three UPS charges, the additional UPS charges may eat up the additional savings that you thought you had,” Burton said. “If one company is offering a 12% discount rather than a 10%, you may think that is a better deal but in the end if you added up the same number of items from two suppliers, you may find out that a 12% discount cost more than a 10% discount.”

Be creative

Searching for creative ways to reduce costs also can aid in negotiations. For example, rather than paying shipping charges to suppliers on their terms, companies can pay for shipping costs using their own accounts.

“Instead of all of these companies charging us shipping on their term, where were able to say, ‘if you use our Fed Ex number, now we do not pay you shipping,’” Perrone said. “We are getting more volume with Fed Ex under our number, Fed Ex gives us better pricing, and we ended up saving money on shipping due to volume. Incremental small savings like that can help you get more creative in your negotiations.”

Mattear noted that especially in today’s economic climate, businesses are more cognizant of their dollar and are looking for ways to maximize their purchasing power.

“I think we see more people wanting to be creative, and more people are wanting to dial in their cost of goods and dictate or fixate on a cost so that they can proactively run their profit and loss statements,” Mattear said. “Everybody wants to be careful. They want to spend wisely but they also now give it more attention than they ever have before.”

Consolidating the number of suppliers and vendors can reduce not only costs but also decrease the number of contracts a company must negotiate. In addition, higher volume with one or two suppliers also will increase volume, translating into better pricing. Added bonuses to consolidating are that tracking inventory will be easier and fewer checks will need to be written, further lowering a company’s overall costs.

“One thing that a lot of people overlook, particularly in a large practice, is what it costs them every time they write a check. If you get three invoices vs. one invoice, your cost may be significantly higher,” Burton said. “We did a study more than 10 years ago and found out it was costing us about $45 per check to process any checks for the company. Most people do not think about that and when you discuss it, they do not understand what their actual costs are until you do a break out.”

Another creative strategy that may be overlooked when negotiating is asking for a longer turnaround time to pay invoices.

“You want to look at what the terms are to pay – are they going to want you to pay in 15 days of invoice, 30 days, or 45 days? Those are other things to negotiate,” Perrone said. “If we do not have to pay an invoice for 45 days, that is better for us than if we have to pay it in 15 days. However, you have to ask for it; they are not going to offer it.”

Involving staff and getting their input before entering into the negotiation process also can generate creative strategies to take into negotiations or even identify areas that can be consolidated and help streamline processes.

Read the contract

The final step in the negotiating process is to read the entire contract. All of the fine print needs to be reviewed and understood before signing it.

“You have got to read that contract and understand it. You have to read the fine print, and so often that sadly does not happen,” Perrone said. “If you are not a detail person, then give the contract to someone who is for review. If you do not read your contract, something could be hidden in there that you have agreed to without even realizing it.”

In cases in which the contract is large, intricate, or even complicated, having an attorney review either parts of the contract or the entire contract may be prudent.

Finally, Burton noted that while O&P practitioners are highly educated in what they do best — how to treat their patients — they also must need to focus on running their business.

“We are still stuck on the thought that if you provide the best care for your patient and you always put your patient first, your business will be fine,” Burton said. “People forget that if you do not put your business first and take care of it, you will not be able to take care of any patients because your doors will not be open.” — Mary L. Jerrell, ELS

Disclosure: Burton, Mattear, Perrone and Shreter have no relevant financial disclosures.