Five tips for negotiating IT contracts

When acquiring new IT products healthcare businesses need to keep their eye on the ball.

In this trying economy, businesses in the healthcare field are under pressure to increase performance while reducing staff and overhead. Additionally, the American Recovery and Reinvestment Act of 2009 provides for the payment of billions of dollars in Medicare and Medicaid incentive payments to healthcare providers and hospitals that engage in “meaningful use” of certified EHR technology.

The market has responded to this demand with a plethora of software, ASP, SaaS and cloud computing products (“IT products”). Below are five tips to help companies keep their eye on the ball when acquiring new IT products.

1. Articulate Goals and Then Research. Step one in the technology acquisition process is to clearly outline the goals of the company and the desired functionality of the IT product. This requires input from both the IT staff and the personnel who will make use of the IT product. Failure to have clear guidelines can cause the company to fall prey to up selling, overselling and paralysis due to too many choices.

Step two is to conduct all the research you can on any prospective IT product and its provider. Participate in all product demonstrations and trial licenses. Find other users and have frank discussions with them about how they feel about the product. There are sometimes helpful blogs on the internet where prior users have discussed why they are no longer using the product, or better yet, if you can talk to a former user in person, you can possibly learn from another company’s mistakes.

2. Negotiate Pricing First. Negotiate pricing first, because if you can’t reach an agreement on price, there is no point in spending time negotiating the rest of the contract. Use CPI or other mechanisms to limit cost increases for support, maintenance and other ongoing services. Do not pay in full upfront. You want to make sure that you have leverage to better ensure prompt and attentive service throughout the term of the contract.

3. A List of Core Functionality Must be Provided and Made a Part of the Contract. One of the most common disputes between IT providers and their customers arises out of miscommunications and misunderstandings about the functionality, capability and scalability of the IT product. To avoid this pitfall, the IT contract should contain a list of core functionality and the list should be meaningful and not just consist of a recitation of features using provider lingo.

Carefully review all IT product specifications and documentation in advance of purchase, and if the price tag for the IT product is significant, insist on a testing and acceptance period following installation and implementation of the product.

4. The Contract Must Provide for Reasonable Warranties for the IT Product. With expensive IT products, your contract should contain, at a minimum, a representation that the IT product will perform in accordance with agreed upon specifications or functionality and that it will be free from frequent and material defects. You should also receive a warranty that the IT product does not infringe the rights of third parties.

Finally, all services should be provided in a professional manner, consistent with the policies of the healthcare company, if services are provided on site, and otherwise in accordance with a reasonable service level agreement. These are minimum warranties and others may be appropriate depending on the particular needs of the healthcare company.

5. Reasonable Limitations on Damages. Some IT agreements do not limit risk; they try to eliminate all risk and to shift all risk to the healthcare company. A transaction of any kind must benefit both parties and must fairly allocate risk between them.

While it is a customary and acceptable business practice to agree to waive indirect and consequential damages (i.e., those damages that are not directly related to a contract breach), it is not customary and usually not reasonable to eliminate all damages. Each party must bear enough at risk to give that party an incentive to perform under the contract. Risk in technology contracts is best managed by limiting the dollar amount of damages, with the limit typically equal to the value of the contract or a multiple of the same. This enables a provider to quantify and insure against the risk of something going wrong under the contract, but also enables the customer to recover something to help make it whole.

A cooperative and mutually beneficial relationship between a customer and its provider creates the optimal end result for both parties. If one party obtains too much of an advantage over the other, there is risk that the disadvantaged party will lose the incentive to perform or that it will not be financially capable of performing.

Cynthia L. Stewart is a member of Frost Brown Todd LLC in Louisville, Ky.

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