Technology Transactions

GOOD POINT

GOOD POINT

GOOD POINT

Purchasing Patient Care SystemsMay 16, 2003

Lawrence A. Schultis, P.C.

Partner

202.663.8782

Larry.Schultis@ShawPittman.com

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Background

Our Client: A Midwest charitable institution owning 13 hospitals, as well as other clinics and facilities

The overall Goal – Replace an existing patient care system that is sun setting after 20 years in operation

Success Criteria – Getting the new system in on time, on budget and with caregiver buy-in

Greatest Fear - Poor or late implementation of the first hospital - the largest in the system

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The Situation When Shaw Pittman Joined the Team

The client had already gone through a two year selection process and had decided on a solution – McKesson’s Horizon system

Implementation of the solution required a replacement of a substantial amount of computer hardware and software in the IT environment

The scale of the implementation was very large– 7 year time line– $15mm in software– $58mm in services– $13mm in hardware

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The Vendor’s Approach

McKesson’s contract was very aggressive and vendor oriented

The statement of work (Contract Supplement in McKesson parlance) was poorly drafted, disorganized, inconsistent with the business deal and self contradictory

McKesson fought very hard to maintain document control; at first McKesson refused to provide an editable document

McKesson’s negotiating position, at least at the outset, was very narrow

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The Vendor’s Tactics

McKesson’s negotiation approach was very aggressive, and at times abusive to the legal team and condescending towards the business people

McKesson attempted to drive a wedge between the lawyers and the business people

The negotiating tactics were distasteful to the client and ultimately resulted in communications at the highest organizational levels in order to improve the methods of communication

What worked – “Improve your approach or you are gone”

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Lessons Learned

Include contracts/legal in the RFP process Terms and conditions should be part of the RFP and the

response to them should be part of the evaluation process Do not down select prior to contractual negotiation Ensure that the business people and the contracts/legal

team present a unified front

The problems we experienced with McKesson could have been minimized by following standard procurement rules that should be applied to any major purchase:

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Lessons Learned

During the proposal process, the vendor’s marketing team is often driving; better terms will be put forward in response to the RFP

The client can require use of its contract terms If a vendor will hold to harsh terms in any event, this will be

brought to the surface before a decision is made

Include contracts/legal in the RFP process; Terms and conditions should be part of the RFP and the response to them should be part of the evaluation process

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Lessons Learned

Competition is the key to our economy for a reason – competition forces vendors to do their best

If the vendor knows that you have selected them, the vendor has too much leverage

If the vendor refuses to be reasonable after they have been chosen, you must step backwards and re-evaluate a previously eliminated vendor (who will now know it has more leverage than when it was eliminated before – the tables have turned)

Do not down select prior to contractual negotiation

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Lessons Learned

McKesson tried to make difficult issues appear to be raised by outside counsel

If this tactic had been successful, Shaw Pittman’s ability to negotiate effectively would have been nil

We turned this tactic back on the vendor; our business people discussed the reasonableness of the client’s position with McKesson business people – the business people overruled legal

Ensure that the business people and the contracts/legal team present a unified front

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Implementation Issues

McKesson only supports one back version of its software; any multi-site implementation plan must envisage the possibility of software upgrade(s) during the implementation schedule (three in this deal)

Any multi-site implementation must address “site acceptance” as well as “system acceptance”

What impact will a failure to implement at a subsequent site have on already implemented sites? This issue is important to both the hospital and the vendor -- as long as there is a risk of refund, no revenue can be recognized

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Key Negotiation Points

McKesson was very resistant to having set dates for deliverables and events– Get these commitments up front through the RFP process

McKesson’s drafts of the statement of work played the partnership card, everything was a joint commitment (e.g., Customer and Vendor working together will install the software)– Demand a clear delineation of the vendor’s responsibilities and your

responsibilities The client demanded clear responsibilities and several key dates in the

contract– If these dates are not met due to McKesson’s fault, McKesson will be

in breach– If the breach is not cured, the client can terminate for cause– This was the hardest concession to get from McKesson

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Legal Notes

McKesson is not willing to defend against third party personal injury claims relating to its systems, but it will agree to be implead and to provide a comparative fault indemnity

McKesson will indemnify against most third party claims of infringement, but you have to fight hard to get it

McKesson did not require sole and exclusive remedies for breach or limit warranty periods; however, maintenance starts on installation