Melting Contract Rationalization Icebergs in M&A

Contract Rationalization

In a perfect world, healthcare organizations would maintain a well-organized contract database that would allow for easy access, tracking and compliance. But the world we are living in is far from perfect and mergers and acquisitions of healthcare systems can be particularly messy. This is why we recommend organizations allot 6 to 12 months to identify and rationalize their contracts during M&A.

Tip of The Iceberg: Beware of The Threat Below

Contract rationalization is an iceberg scenario—you typically see a small part above the water, but when you start digging in to all the contracts in and beyond IT from phone service to food service, you realize there is a massive volume of contracts under the water line that are not immediately visible. All the contract work is critically important and represents significant compliance and cost implications. Ultimately, unresolved contracting issues can impact patient care.

For example, a healthcare organization completes an affiliation with another hospital and forgets to update a contract for EHR third party software. After the EHR goes live, the team finds a key piece of functionality is not working as designed despite all of the testing because the contract was not updated for additional user volumes. What happens often in mergers and acquisitions is the organizations are laser focused on infrastructure and applications transitions, but the actual contracts with vendors can be an afterthought. Two things can happen:

  1. Contracts can end up being extended longer than they need to be, which adds unnecessary expense OR
  2. Organizations are out of compliance with contract and licensing terms

3 Steps to Get Started

 So how do organizations get visibility into all contracts and mitigate risks as part of a successful merger or acquisition?

1. Start With Due Diligence

During mergers and acquisitions, contract rationalization should start at the due diligence phase. All contracts should be inventoried and a detailed assessment on each must be made to determine its disposition.

Today, most healthcare organizations use an asset tracking system to track software applications and strive to keep the system current to avoid operational complexity and ensure licensing compliance. A robust contract database is equally important, particularly during M&A.  Time and resources should be invested to build and maintain this system.

2. Identify Resources Dedicated to Contract Management

During M&A, organizations should start contract planning and review about 6 to 8 months before going live on new systems (typically EHR and ERP) and identify experienced resources—either a vendor partner or in-house—who understand the systems and the vision for the transition.

It will be critical for the resources to work across the organizations, as well as within each organization effectively given the contract rationalization process crosses over so many functions—including IT, risk management, clinical, finance and general counsel. In addition, compliance and IT need to work closely together on contract rationalization and contract management to mitigate risk and compliance burdens.

3. Organize & Automate

The ultimate goal for the new, combined organization is to create a well-organized database of contracts with reminders scheduled to automate the review process.  Technology can automate maintenance so when contracts come up for review, they can be sent to the appropriate committee and updated.

4. Avoid Hidden Costs

It is important that healthcare leaders understand what’s below the surface of the contract iceberg to ensure the short and long term success of M&A transactions. Taking a proactive approach to contract review and rationalization can help organizations execute and complete the transaction on time and on budget and keep the core IT team focused on what it needs to be doing—planning and implementing systems.

Investing time on the front end to go beyond the tip of the iceberg will enable organizations to avoid hidden cost and realize the full value of the transaction.

Pivot Point Can Help

Pivot Point Consulting works with clients nationwide in IT M&A and affiliation planning to support organizational growth and clinically integrated network development. We bring the expertise, experience, framework and tools and assist clients in planning for and optimizing their broader technology ecosystems with and across their M&A and affiliation community.

Need help with your M&A? Contact our experts.