The Contract Trap

contractHave you ever tried to figure out how to say good-bye to an underperforming vendor and thought to yourself “how did I get to this point?” Recently I had a client, who wanted to terminate his outsourcing contract before term and was staring at an unexpected cost of over $30,000 to do so.  .  This was a jaw dropping moment for him as he was managing the reality of an underperformer potentially costing him additional dollars. This is something that happens more than you would think! As we interview these unfortunate victims, it boils down to one of two reasons:

  1. The client simply didn’t fully understand what he was signing when the contract was implemented.
  2. Or they was convinced that certain language in the contract wasn’t negotiable.

The reality is, that in the outsourcing world, it’s the vendor sales team’s job to build a relationship with the client and leverage that relationship during the decision making process. It’s their responsibility to get a contract that includes language that favors their company and implement barriers for early contract cancellations. For the hospital, we often find administrators that need the contract in place quickly without the knowledge needed to protect themselves from facing a $30,000 cancellation fee. The reality is we sometimes see a department decide to move to outsourcing because it’s in turmoil negatively impacting patient satisfaction, employee engagement and regulatory issues and the leadership is under extreme pressure to make quick changes. With all their other responsibilities and perhaps lack of experience, they accept standard language in the vendor’s contract and don’t attempt to or know to negotiate the unfavorable language out. It happens more often than you think.; more times than not, the hospital official thinks “this sales manager is a really great guy” and assume that he is looking out for you and your facility. Chances are he is a great guy, but he has a specific job to do which includes following company guidelines to include key contract language that give his company sole decision making authority in some areas. No offense to the sales manager, he or she is only doing their job.

So how do you avoid these traps?  Here are a few hints in getting better contract terms:

  • Recognize that everything is negotiable! Although the sales manager tells you that “corporate won’t allow that language to be taken out” At Soriant we often successfully take out or modify language to have less or no impact.
  • Watch out for language that gives complete control to the vendor. Phrases like …in the “vendor’s” opinion or …at the sole discretion of “vendor” are examples.
  • Strongly reconsider allowing for automatic contract extensions and automatic increases. Make sure there is language that gives you the ability to end the contract and control future costs.
  • Make sure you fully understand the language around capital and what happens if you terminate early. Ask specific questions related to this such as “If we terminate in year two will the interest be prorated or will we have to pay from inception?”
  • Watch for any other penalties within the contract
  • Watch out for too many exceptions and conditions that free the vendor from their obligation(s).
  • Get help with your contract if you need it. Experts such as the consultants at Soriant Healthcare can save you a lot more money than they cost and more importantly prevent you from signing a contract that you will later regret!
  • Before signing the contract have the contact information for the divisional president so you are prepared to reach out to him before things go too awry and have the ability for an open line of communication with their leadership.

Don’t be alarmed, outsourcing can be a very good solution for many facilities. Their intent is to do a great job for you once the contract is signed but sometimes things go awry. Unfortunately if that happens, it is at that time you want to make sure that you have the control and the ability to cancel without suffering large penalty fees.

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