The Risky Business Of Third-Party Vendors

Jorge Grillo, CIO, Canton-Potsdam Hospital

In a free-market economy, supply and demand drive pricing, availability, and a host of other economic trends. I have been in the healthcare IT business for over 20 years now, and generally, that free-market model has worked well.

It has also allowed for win-win pricing structure and contractual payment terms. For instance, I have regularly used 25 percent of payment on signing, 25 percent on software delivery, 25 percent on completion of installation, and the final 25 percent 30 days post-first productive use or installation acceptance. While negotiations were sometimes rough, a fair and equitable set of terms was usually reached.

Now under Meaningful Use — especially stage 2 requirements, many customers have become a captured audience due to their primary HIS vendor using third party products to fill their MU gaps. Often they are an organization’s only option to keep moving forward and achieving the next phase of MU. In my dealings with some vendors that know I have limited options, the supply side of economics has shifted greatly and I am seeing a lack of willingness to share risk or seek win-win solutions. Without naming vendors, at least two vendors I have dealt with over the past three months have set terms of 50 percent on signing and 50 percent on software delivery.

Such a model leaves the risk totally on the customer side. Often they accompany other clauses like a forfeit of the original 50 percent signing payment if you back out or try to cancel the contract, even if the vendor is not delivering on their promises or has not met resource commitments. Once CIO I spoke with still has no vendor resource commitments six months after the project was supposed to have started.

As a captured audience though, what can you do? You can try senior leadership discussions, you can try and go back to the host HIS vendor and hope they can assist, and you can threaten breach of contract. But ultimately, all you can really do is wait and hope that there is a competitive entry into the market place shifting the supply side economics back in favor of the customer.

It is interesting that the vendor expectation is that we pay 50 percent upfront and another 50 percent on delivery, and are supposed to be grateful for their time and product. Yet if any of them were buying a car and had to put 50 percent down for a radio and another 50 percent on delivery (not including installation) no matter how long the delivery took, would they do so? No. Then why should we just because as consumers, we currently have no choice?

The real question is, if a core HIS vendor uses a third party to achieve MU goals or functionality, why is the contract not with that HIS vendor? There has been a lot of press in the New York Times and other mainstream media outlets saying that we are in an “era of not my responsibility.” Is placing your customers into a situation where their options are limited and relationships can get strained just another case of that? How does having to deal with challenging third-party vendors effect the customers view, relationship, and experience with the core vendor?

More importantly, what kind of relationship is formed when one party is accepting all the risk and is at the mercy of the other? Sooner or later, competition will likely find its way into the market, so why risk a successful long-term relationship and future business when you don’t have to?

While these challenges may just be a reflection on societal norms or regulatory drivers, let us hope it does not signal a shift in the software industry. As Ronald Shapiro wrote in his book The Power of Nice, “the negotiation doesn’t end when the contract is signed. If the other is crippled by the deal, they will have every incentive to break the terms, literally nothing to lose… a first and last deal, instead of the first of many in a long relationship.” Should the hospitals find themselves in that situation any more than they already are, it could lead to vendor consolidation or other major shifts. Also, just because the customer does not have a choice today, it does not mean that tomorrow is not another day.