At a glance…
Renegotiating vendor contracts presents no-nonsense, cost-cutting opportunities.
It's no secret long-term care professionals have a lot to manage. Preparing for surveyors, handling staffing issues, and ensuring the best quality of care for residents are time-consuming priorities that can overburden owners and administrators. They can also keep an otherwise vigilant business from noticing the simple strategies available to any institution trying to save money.
One of those strategies, which has come up periodically during interviews with industry experts, is this month's focus-the renegotiation of vendor contracts.
In today's economy, vendors are scrambling to keep customers satisfied, lowering prices to levels that they may have never before dreamed. Turn back a few months (Long-Term Living, July 2009, p. 40) to read about how Central Connecticut Senior Health Services, Inc. was able to reduce electric rates by 6% until 2014 by taking advantage of the recession. Those are significant savings.
So, the question isn't whether contract renegotiation is a viable option; instead it becomes, “What are the best practices to follow when renegotiating contracts?”
Maxim of stinginess
Linda Donoghue, COO of Longmeadow, Massachusetts-based Jewish Geriatric Services, offers a compelling answer: Expect more from your vendors. The company, which operates a large variety of programs-including skilled nursing, home health and hospice, assisted living, and adult day healthcare-has repeated this mantra to great effect recently, but it's not particular to the current economic landscape. Jewish Geriatric Services has always employed a system-wide purchasing plan that demands vendor flexibility.
“We have a practice that has been in effect forever that anything over $500 requires three bids,” Donoghue says. “That's just understood. But then, once we've identified the low bidder, we go back to that entity again and say, ‘You know what? Not good enough.’ Given the economic downturn, we've been very successful of late when we've said to the lowest bidder, ‘Sharpen your pencil and bring back further savings.’”
Major contracts with financial auditing firms; health, life, and disability brokers; and liability insurers have all been rewritten similarly. Like clockwork, Donoghue says the company returns to the market every three years to engage in “substantial due diligence” and then asks vendors to rebid services. “It's not unusual for us to change brokers or auditors because of pricing,” Donoghue admits.
Not satisfied with solely renegotiating the bank-busters, Jewish Geriatric Services also targets the smaller side of contracted service. For example, snowplowing at one of the company's campuses-which is 23 acres-is outsourced. Donoghue says they were able to convince the individual who had been doing it to drop his price, resulting in savings of 10% to 15%.
Here are some other best practices: They revisit stationery sales regularly to keep tabs on that market's bottom. Health insurers are guaranteed no brand loyalty, yet the company is able to ensure employee physician choice is not affected. And the two individuals in charge of dining services from the assisted living residence and nursing home frequently discuss best pricing, then they tag team in negotiations with vendors.
Such success occurs because of a collaborative system that the company has maintained steadfastly, says Alan Rosenfeld, president and CEO of Jewish Geriatric Services. A purchasing committee with representation from the clinical arena, operations, engineering, dietary, and administration provides the bedrock to achieve best pricing and volume purchasing. It also shows good faith to vendors that a true inclusive relationship exists between buyer and seller.
“We're really hard on everybody that we do business with, and at the same time, we're partnered with them,” Rosenfeld says. “You can be firm and demanding and get into their minds as well as find out what's really important to them for their business.”
As part of Jewish Geriatric Services' corporate compliance program, vendors are asked to sign a form saying they have received and will abide by the company's compliance plan. Vendors then meet with a corresponding Jewish Geriatric vice president, who oversees that particular area of business, and the chief financial officer. “[At that point] our CFO is very good about asking for any opportunities in terms of different discounts that may be afforded to us if we are creative about payment plans and things of that nature,” Donoghue says.
As for the company's reputation of being prickly when it comes to purchases, Donoghue assures that there is no sacrifice of image when asking for more. “It's a proven thing to do and I think our vendors know us well enough that they'd be surprised if we didn't beat them up,” she says wryly. “We do it with great fondness but they know what our practice is.”
To send your comments to the editor, e-mail firstname.lastname@example.org.
Long-Term Living 2010 February;59(2):28-29