Yokl: Negotiate for Value and Everyone Wins

As your price savings dip, as inflation raises its ugly head again, you will want to keep your savings rolling in with new and better tactics to meet your savings goals for any given year. One of the best tactics I know of to do so is to “negotiate for value” i.e., Focusing on reducing your total cost of ownership on the products, services and technologies that you are buying. 

By definition the total cost of ownership requires us to identify all of our direct and indirect costs of a commodity over its entire life cycle to determine its actual ownership cost.  For instance, a computer system would have, as its direct cost, the hardware and software necessary to operate the system. However, its indirect cost would be installation, training, utilities, repairs, downtime, technical support, and maintenance contract. It’s our job to negotiate all of these cost elements, not just the price at the pump to obtain the best overall value for our investment.

I just experienced this ritual when leasing a new high speed color copier for my office. It was easy for me to determine the direct cost of the copier (monthly lease rate), but the running cost or indirect cost over the copier’s four year life cycle became a real challenge because of the variable click per copy charges. Since the lease rate was lower than my prior copier’s direct cost, I decided to hone in on the copy charges. First, I was able to negotiate a $1,000 credit on my old copier’s click charges because I had gone over my limit by $2,800. Next, I went after a credit for the toner that I had in inventory from my old copier, since the new copier used different toner cartridges. Finally, I negotiated a change in the mix of my click charges so my copy cost would be reduced to zero if I decided to outsource my high-end copying (which was my intention to do over the next four years) so I wouldn’t experience excess click charges if this eventuality became a reality.

 

I also found my copier sales rep to be very accommodating in negotiating my indirect cost of ownership because I didn’t take anything out of his pocket, which you will also experience. Most companies are willing and able to negotiate their indirect cost of acquisitions since they have more latitude in this area of their responsibilities. Most companies’ pricing is somewhat fixed, therefore they can only shave a few percentage points off their price.

Negotiating for value vs. just price is an important lesson we all must learn if we are to continue to reduce our overall supply spend for our healthcare organizations in the new healthcare economy. Most companies will be hit hard with inflation (iron, steel, aluminum, rubber, and cotton) over the next 12 months, so they can’t and won’t budge on their price, but they are open to negotiate the total cost of ownership if you would just ask them to do so.  This will place you in a much better position for reducing your overall cost of ownership,  and isn’t that what really supply chain cost management is all about?

Robert T. Yokl

Chief Value Strategist

Strategic Value Analysis® in Healthcare