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Creating a contract for success

April 01, 2008

Successful contract negotiation is a critical step in the process of acquiring and implementing new behavioral healthcare information systems. Oftentimes a provider's ability to plan for, manage, and execute a successful implementation is related directly to how well-defined the project plan and contract agreements are.

A behavioral healthcare provider simply cannot afford the capital expense of a project that gets half implemented, does not meet its objectives, or does not have the vendor support required to succeed. To mitigate the risk of failure and provide the best opportunity for success, a provider should negotiate a contract that is fair to both itself and the technology vendor.

Setting the Stage

Effective negotiations actually begin during the vendor evaluation and selection process. Undertaking a well-defined selection process, which commonly uses a request for proposal (RFP), sets the stage for a fair negotiation and planning process.

The process of developing functional requirements and inviting vendors to provide specific proposals in a structured manner enables clear expectations to be set. Written requirements become benchmarks referred to in evaluating vendors, negotiating the contract, and judging the success of the implementation. These requirements ultimately should become part of the agreement. This process also helps to establish expectations for your internal team, and engaging them in the process helps gain buy-in for change.

Ranking the finalist vendors is important. Once you have narrowed the field to two candidates, review the proposed agreements for each, considering key provisions that will help make the implementation most successful. Upon initial review, the agreements likely will appear one-sided and not in your favor. Don't be discouraged; conducting this review will help identify issues that will be important in negotiations with your preferred vendor.

During this review, also assess your confidence in the second-place vendor. How does it compare to the preferred vendor? Being able to switch to an alternate vendor is important while negotiating, especially if you reach a major sticking point with the preferred vendor. Coming to agreement within your own team about the top vendors and issues with each vendor will help you decide your negotiation tactics and resolution plan if talks break down with the preferred vendor.

Promises made by each finalist during the evaluation process should be recorded, and any outstanding questions and uncertainties identified. Now the stage is set for in-depth, meaningful negotiations and the creation of a fair and effective agreement.

Contract Negotiations

Information system agreements usually have multiple parts (e.g., license agreement, implementation schedule, support agreements, escrow provisions, etc.). Below we describe some key components in terms of the overall agreement with the vendor.

Acceptance criteria. To efficiently navigate through the negotiation process, it is important to establish clear and attainable acceptance criteria—that is, what you expect from the vendor at each step of the project. These criteria guide the implementation process and working relationship. Well-defined acceptance criteria can keep control in your hands, not the vendor's, and define what steps will be taken if you deem that some aspect is unacceptable (e.g., retesting, support, adjustment, etc.). This is particularly important if you will be operating a new software release, have complex needs, or require customization.

Milestones. Establishing clear milestones for the implementation and the vendor is essential. Key points such as the completion of training, software testing (e.g., of assessments, treatment plans, and progress notes), and beginning live operation are major implementation milestones. They mark progress during the implementation and become objective benchmarks to help determine if the project is on-track.

Milestones help you assess if the vendor is meeting requirements before progressing to the project's next stage. Incorporating milestones into the acceptance criteria and tying them to important events, such as significant payments to the vendor, help to keep everyone's eyes on the goal.

Communication. Crucial to success are provisions to establish and maintain consistent communication with the vendor. A good communication plan will keep you up-to-date on the project's progress. For example, stipulating weekly project meetings provides a crucial starting point for effective communication and problem solving.

Cost and payment terms. Price and payment terms command a lot of attention. It's a tempting place to start and focus most of your attention; however, this is only one component of the entire agreement.

No one wants to pay more than he has to. The goal should be to establish a fair price and agreement with respect to the entire implementation. A great price is no good if the system takes more time and effort to implement than anyone anticipated.

Some vendors use creative ways to license their software and price their systems. Beware overly complex and confusing pricing schemes. No matter how complex they are, it should be possible to come down to the one-time cost and any recurring costs. These are the numbers to focus on.

Payment terms should be tied to acceptance criteria and successfully achieving milestones. The old days of 50% down and 50% on software delivery are not appropriate or realistic for complex software and system projects.

Problem-solving and escalation provisions. A clearly understood process for resolving difficulties is essential. Ideally, difficulties are identified and resolved by the implementation team and those closest to the project. Sometimes this is not possible, and problems or concerns need to be escalated to the appropriate level—within the vendor and your organization. An effective problem-solving and escalation clause lays out the process, key individuals involved, criteria by which the process will be invoked, and what should be done.


Be mindful of how you may be changing the chances for success as you negotiate key provisions. Changes to one aspect of the project, such as data conversion resources, can impact other components, such as the time needed and schedule for your internal team members. Contract negotiations should establish a meaningful agreement to guide the implementation process and your working relationship with the vendor.

What you agree upon with the vendor on paper will be what the vendor can be held accountable for during the implementation process. Unfortunately, an agreement is sometimes tossed on a shelf once signed and not looked to until problems, delays, and frustrations have set in. Yet if the vendor and your team hold to the project plan in the agreement, then problems and difficulties will be addressed in due course. Following agreed-upon acceptance processes for deliverables and being mindful of milestones will help to ensure tasks are completed as outlined. Changes can be made as needed and by mutual agreement. In fact, making effective use of change orders when needed can be a sign of a well-managed project, and one that achieves the business objectives set forth at the outset. Thus, a well-written agreement allows both sides to handle the inevitable problems—and make mutually acceptable changes—during these large-scale projects.

Clint Davies is a Principal with the management consulting and accounting firm Berry, Dunn, McNeil & Parker. He can be reached at
Dan Vogt is a consultant who works with Berry, Dunn, McNeil & Parker. He can be reached at Clint Davies and Dan Vogt have worked with many behavioral healthcare clients to select, negotiate, and plan for software and information systems.
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