MAXIMIZING YOUR EQUIPMENT BUDGET. 7 Best Practices in Equipment Negotiations

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1 MAXIMIZING YOUR EQUIPMENT BUDGET 7 Best Practices in Equipment Negotiations

2 Rapid technology advances and an uncertain regulatory environment are challenging healthcare supply chain leaders to be more innovative. With this guide, OpenMarkets is pleased to share seven negotiation strategies that are directly applicable for stakeholders in the healthcare supply chain. Successfully deploying these best practices with modern technology is an efficient way for both suppliers and providers to improve the way healthcare equipment is bought and sold. Seven negotiation best practices to keep in mind through the procurement process for medical equipment include: 1. Anchoring 2. Establish Your BATNA (best alternative to negotiation agreement) 3. Negotiate in Bundles 4. Deploy Distributive and Integrative Negotiations 5. Ask for the Good Guy Discount 6. Bring a Third Party to the Table 7. Be Prepared Let s take a look at each of these to understand how they can help buyers and sellers of healthcare equipment sharpen negotiation skills to overcome the dearth of market intelligence and changing supplier-buyer relationships that describe today s healthcare marketplace, and maximize returns. We d like to thank contributing author Vijay Jayaraman for his research and work on this best practice research. 2

3 BEST PRACTICE #1 Anchoring Anchoring is a negotiation strategy based on the psychological phenomenon whereby initial exposure to a number serves as a starting reference point 1. Subsequent judgements on price and terms are then influenced by the initial anchor. For example, the price of the first house shown to us by a real estate agent may serve as an anchor and influence perceptions of houses subsequently presented to us (as relatively cheap or expensive). Research studies show that aggressive low-anchor firstoffers could floor the final price and thus guarantee better pricing outcomes in various industries 2, including healthcare. This can be applied to various aspects of a product: price, features, and even speed of a purchase order. In the healthcare equipment market, providers should be cognizant of aggressive anchoring by incumbent suppliers. If you are considering the purchase of high-end imaging equipment, suppliers may anchor a high price with the clinical stakeholder before the supply chain team gets involved. To counter this, supply chain teams need a simple, transparent way to get multiple quotes for the clinical stakeholders early in the evaluation process. 3

4 In discussions and quantitative surveys with over 300 healthcare supply chain leaders and suppliers, OpenMarkets found that most capital equipment purchasing is between providers and responsive, trusted suppliers 3. Put another way, providers evaluate only one equipment supplier in just under 50% of their purchases 4. In these instances, buyers are vulnerable to adverse impacts of anchoring. Understanding anchoring techniques is a best practice for sellers as well. Healthcare equipment suppliers need to be cognizant of the fact that innovative providers will be more likely to consider multiple suppliers early in an evaluation period. For non-incumbent suppliers, the ability to anchor a low-price or great terms can be your way into a formerly non-competitive opportunity. Even if this does not create an immediate sale, follow up on lost deals can built trust and reveal buyer preferences that may help with future negotiations. The OpenMarkets Advantage The OpenMarkets Exchange TM lets supply chain teams and clinical administrators the ability to receive multiple quotes for equipment at the touch of a button. This helps streamline anchoring practices, empowering buyers to get the best outcomes from negotiations. 4

5 BEST PRACTICE #2 Establish Your BATNA Another key component of an effective equipment sourcing process is understanding and your Best Alternative to a Negotiation Agreement (BATNA). Establishing your BATNA is one of the many pieces of information negotiators seek when formulating deal making and negotiation strategies. It is possibly the single biggest influencer of bargaining strength when walking into any contracting situation. Healthcare equipment buyers should consider this example: If you are offered a hospital bed for $100, and another distributor quotes an equivalent bed for $95, then your BATNA is $95. With this information, you are now in a compelling position to bargain and understand why the offer is greater than your BATNA. Knowing BATNA not only gives you the confidence to get the best possible price, but also leads you to asking probing questions to understand all the components involved in a sale: delivery costs, maintenance costs, warranty information, etc. 5

6 BATNA matters for equipment sellers as well. For the individual sales representatives in the example above, their BATNA may be to walk away if the buyer requires a price under $100. For experienced buyers and sellers, establishing a BATNA is routine and part of any negotiation preparation. The best practice lies in gaining empathy for the other side of the table, and figuring out their BATNA during negotiations. Identifying all potential BATNAs for your purchase/sale and researching the likely BATNA for the other side of the deal can be a daunting task. The key is opening an efficient research and communication channel to all involved parties. The OpenMarkets Advantage Identifying all potential BATNAs for your purchase/sale and anticipating the likely BATNA for the other side of the deal can be a daunting task. The OpenMarkets Exchange TM offers an easy and efficient platform to identify potential alternatives. This on-demand research helps put you in a better position to buy or sell equipment. 6

7 BEST PRACTICE #3 Negotiate in Bundles Do you ever wonder why Comcast is able to sell cable, phone, and internet for $99, but internet alone costs $69? Negotiators call this technique bundling. Bundling involves combining two or more products and services when pricing a deal. In our Comcast example, the seller wants to clearly signal its preference to sell the package vs. just the internet service. The buyer compares the two options and thinks the package is a better value. When he chooses the package, both parties win! Negotiating in bundles can lead to win-win situations in equipment purchasing decisions. The combination of multiple products and/or services brings in extra synergies in terms of value derived for both the seller through profits and buyer in terms of savings and value. For example, if a health system has both MRI s and patient care monitors on their capital budget, the opportunity exists for them to aggregate this spend with certain suppliers who can provide both products. The key is having good data ahead of time. 7

8 This method can also be a great way to augment a negotiation when a deal has reached an impasse. Many times, the seller can add extra services or products to sweeten the deal that may make it more attractive for the buyer and move forward. In equipment purchasing situations, the buyer could negotiate a favorable maintenance agreement and in return meet the asking price of the seller. Price is not the only variable to negotiate in bundles. Complementary products, added services like maintenance, and even delivery times could help arrive at a deal for the buyer and seller. From the buyer s perspective, bundling can often justify a purchase especially if the price seems to be on the high end of the benchmark. Bundling is also a useful tool to signal the seller that you are a serious buyer and you consider making more purchases, which may once again help with the total price. The possibilities are virtually endless, and imagination is the only limit once you bundle. The OpenMarkets Advantage 70% of all provider organizations use excel or paper-based processes to manage their capital equipment budgets. This makes organization-wide bundling extraordinarily difficult. If your organization struggles to get the data needed to negotiate in bundles, contact us to experience our CAP Connect solution, or read the Modern Healthcare article on how Norman Regional Health System uses CAP Connect to proactively manage their capital spend. 8

9 BEST PRACTICE #4 Distributive & Integrative Negotiations Experienced negotiators use two main approaches to negotiations distributive and integrative. Choosing the right approach for the occasion is important for negotiation outcomes, and also to your long-term relationship with the other party. Distributive negotiations, also known as a fixed pie strategy, is the approach used when parties are trying to divide up finite resources. When resources are finite, parties view each other as adversaries and put their best foot forward to maximize their size of the pie. Some of the common tactics used in this approach include: trying to gain an advantage by setting up the rules for negotiation, conducting research on the other party, or using deception, threats, and ultimatums, to outsmart the opposition with an aggressive offer. The outcome of such a negotiation? One party wins and the other party loses. 9

10 By contrast, integrative negotiations involve mutual coordination and cooperation to maximize joint outcomes. Integrative negotiations are used as a conflict management tool when two parties are working towards a situation that benefits both, i.e. an expanding the pie strategy. Since there is coordination, both parties are open and often share information such as needs, desires, concerns, and fears. The result of such cooperation is a win-win situation for both parties. Each of these approaches can be suitable for supply chain leaders, depending on the situation. That said, if you value supplier relationships long term and don t want to spoil it with a one-time deal, then defaulting to an integrative approach is best. Ultimately, varying these two strategies based on available time, relationship considerations, and your bargaining strength will make you strong at the negotiation table. The OpenMarkets Advantage The OpenMarkets Exchange TM can complement both distributive and integrative negotiation strategies, making powerful pricing and alternate supplier information available at the touch of a button. 10

11 BEST PRACTICE #5 Get the Good Guy Discount As an experiment on public radio, a reporter for This American Life went around asking for a so-called good guy discount. His approach was to first establish a good relationship and rapport with the salesperson, and then to request a discount on the product just because he s a good guy. While a slight majority of attempts drew rejections, the reporter was surprised to get discounts in multiple situations -- usually when he felt a good connection with the salesperson and no other negotiation opportunities existed. The key takeaway from his learning? When negotiating, it s important to let go of any fear of rejection. Many of us are leaving items of negotiation value on the table just because we are shy to ask. But once you begin to ask at the appropriate juncture, you develop a knack for utilizing the ask and getting the discount. If you are a buyer, try asking for a good guy discount as a last resort once other approaches have been tried. Suppliers can creatively employ this technique for a new client by offering a discount or saying they ve done everything they could as a good guy. The OpenMarkets Advantage While supply chain leaders do not have the time to go door to door asking for the good guy discount as the reporter did, communication features in The OpenMarkets Exchange TM make this easy. 11

12 BEST PRACTICE #6 Bring a Third Party to the Table There are numerous reasons to introduce additional parties to a negotiation table. The first is when the 3rd party is an expert. This happens, for example, in court situations when either side brings in an expert witness who knows something well that can attest to a data or fact pattern. Second, adding an additional party to a negotiation can help avoid direct confrontation between buyer and seller. A realtor does this for you when you are negotiating with a builder. Third, leveraging an additional party can help you maintain a long-term relationship with the counterparty, if you anticipate an acrimonious negotiation. A good example of this occurs when you are negotiating a new or increased salary: dealing with your boss directly on a sensitive subject like salary could impact your relationship long-term, but the conversations become routine when you introduce an HR person as a third party. 12

13 There are countless creative situations when a third party may benefit a negotiation. As supply chain managers and suppliers, one must carefully consider the benefits before introducing a third party into discussions. Supply chain managers can use third parties as intermediaries to receive quotes and get product information. Third parties can also provide benchmarking information that may help them make a good purchase decision. Suppliers likewise use third parties for an additional sales channel, to lower the cost of sale, to accelerate a deal and even to explore new avenues for growth. The OpenMarkets Advantage For complex equipment purchases, the OpenMarkets Optimizer platform is a simple way to bring in subject matter expertise and increase a buyers confidence in the supplier and the final terms. If using a third party for equipment purchasing strategy is something your team does not fully employ, contact OpenMarkets to see how this online service will create a stamp-of-approval on your equipment purchases. 13

14 BEST PRACTICE #7 Be Prepared There are multiple points of pain on both sides of an equipment transaction in today s healthcare industry for both providers and suppliers, all of which point to effective equipment negotiation as one way to buy more strategically. When it comes to negotiating best practices, this one is simple, says OpenMarkets Co-founder and Senior Vice President Tom Derrick. Supply chain folks simply must find a way to work efficiently and map out how they will put the six other best practices into motion. We ve got to be prepared. Critical actions involved in preparation for an effective equipment negotiation include identifying the universe of suppliers out there, taking the steps necessary to vet them, and looking carefully at new suppliers. Market share evaluation is a key data point as well, to help determine how best to implement other best practices, such as establishing your BATNA or introducing an anchor price. 14

15 Knowing the market share and identifying the suppliers emerged as a pain point for a lot of providers in our research, Derrick says. Providers can t possible know who all the suppliers are out there in the equipment industry. But with a grounding in solid data, well-prepared providers lay out their plans to effectively leverage the other six negotiating best practices. The OpenMarkets Advantage Hospitals can use a free application available at marketshare.openmarketshealth.com to look at suppliers across several equipment categories, to learn who the primary market share leader is, as well as the secondary and tertiary leaders. With that information in hand, providers can use the OpenMarkets Exchange TM to get quotes from different suppliers. By accessing The Exchange TM at getquotes.openmarketshealth.com, providers streamline the process of getting quotes from any number of suppliers, for IV poles or ultrasounds for example, available at the touch of a button. 15

16 Negotiating Best Practices at Norman Regional Health In a recent article from Modern Healthcare profiled the equipment purchasing best practices employed by John Kott, CMRP, and his team at Norman Regional Health System. The Oklahoma-based provider previously had a fragmented purchasing process where it would place similar equipment orders by department or by facility. Now, the organization has aligned the acquisition process. Instead of buying one and two equipment orders here and there, we want to bundle them together to act strategically, said John Kott Supply Chain Director at Norman Regional. This approach will provide value to both the suppliers and our organization through reduced transaction costs, better forecasting and enhanced strategic alignment. Norman Regional partnered with OpenMarkets, whose software helps hospitals and suppliers improve the equipment procurement process and better manage requests, workflow, budgeting, data and communication across the organization, Kott said. Kott and Sott Terry, both supply chain executives at Norman, then joined OpenMakrets for an education broadcast on how they employ each of the seven best practices in this guide. We re on a journey right now, said Kott, the Director of Supply Chain Management at Norman. What I mean by that is, we re changing our approach to capital equipment purchasing, with OpenMarkets help. We re moving toward being more strategic when we buy. We want to look to the future. We have two strategic objectives as it relates to capital equipment, he said, First, it s automating requisitioning and capital budgeting. With OpenMarkets, we can be more strategic in our coordination with suppliers. Instead of buying one and two orders here and there, we ll bundle them together to reduce costs and enhance alignment. Our data says 15% is saved by negotiating in bundles, so this may be the single best-negotiating strategy out there, OpenMarkets Co-Founder and Senior Vice President Tom Derrick said. By making pricing information readily available, using The OpenMarkets Exchange is one way to ensure better collaboration and more transparency between providers and suppliers, simplifying negotiations. Kott s and his team at Norman Regional Health are taking advantage of those tools. We re not unique here, Kott said. Healthcare resources are finite. And if we don t explicitly manage them, we will increase disparities in care. We ve got to get better at identifying resource protocols that provide the value we need, and eliminate the waste. We have to end the try everything approach, and discontinue actions that don t improve outcomes but do increase cost. That s the journey we re starting, and we ll get there in less than two years. 16

17 As many are becoming aware, the OpenMarkets platform is deep rooted in the mechanics of the healthcare equipment marketplace with a passion for simplifying the process via technology, data and 21st century collaboration. In OpenMarkets, providers discover a seamless and simple approach to all facets of the equipment process from search to budget - from budget to PO. The supplier community, on the other hand, is energized by the access, visibility and data their subscription affords their sales and marketing departments as value from past partners has diminished over time. To learn more about OpenMarkets and the marketplace to buy and sell medical equipment more efficiently, visit getquotes.openmarketshealth.com or contact us at info@openmarketshealth.com Program on Negotiation at Harvard Law School: PON 3 OpenMarkets Capital Equipment Purchasing Trends, June 21, OpenMarkets Proprietary Data & Analysis