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Tying Supplier Payments to Performance

Purchasing Training
Avoid Purchasing Hell!

Purchasing is the school of hard knocks. A really good purchasing professional is one who’s made a lot of mistakes, but was a little smarter after every one of them.

Sometimes those mistakes are big though, and can take you to “purchasing hell”. I define “purchasing hell” as when a supplier is doing *exactly* what the contract says, and you’re mad as hell about it. There’s really no worse situation, because the supplier can’t be faulted.

They’re doing exactly what you told them to do, and you’re not happy about it, but it’s your own fault! In all likelihood, if you’re not happy, neither is the customer. Misery loves company….. I guess. Nobody else that I know really uses the term “purchasing hell”, but who knows, maybe this is how expressions start. Somebody has to go first.

The worst this ever happened to me was early on in my career with a complex software development contract. I made the mistake of agreeing to pay by milestones, and the supplier wouldn’t get a red cent sooner. That sounds great, right?

Well, my milestones were defined as key dates and not by key deliverables. In other words, whether or not the supplier was performing, I owed them money because that magic date came around where they were due money. I was in purchasing hell. The only worse experience I’ve had was a 1940’s technology endoscopy in the Middle East, except nobody told the medical provider that it was 2005. Worst supplier selection decision ever on my part.

I was pleased to read recently something recently on this topic of payment for performance, which is what prompted this particular blog. Starting this last January, Medicare has created a system of bonuses and penalties for nearly 3,000 hospitals as it ties almost $1 billion in payments to the quality of care provided to patients.

This law was instituted as a part of the new government program called the Hospital Value-Based Purchasing Program. It is a pay for performance program… run by the government no less. What a concept!

The other interesting thing that came about from this is that some of the “big name” hospitals got penalties, and some of the “no name” hospitals got bonuses. The program evidently is valuing substance over perception.

One of the biggest shifts that any purchasing department has to make is paying for results instead of paying for resources. Resources (goods and services) take up space and time, and may or may not get you to where you want to be in purchasing. Results are measurable, and they solve problems and capture opportunities.

I taught myself a useful trick years ago. It was after I got in a debate with a supplier over whether the contractual performance results were actually achieved or not. Predictably, they said they were, and I said they weren’t. The fact that this discussion was even taking place really bothered me (not as much as the endoscopy from hell though).

I decided I needed to create a mechanism so I would never have that discussion again with any supplier. I added a clause in all of my performance clauses moving forward that said “the extent to which this performance deliverable has or has not been met shall be the exclusive determination and decision of the Buyer.” No other opinions about supplier performance would count but mine and the customer’s. That’s the way I wanted it.

How are your contracts written? Are you putting performance clauses in place? Do they say whose opinion matters when there is conflicting interpretation of whether or not that clause was met? Or are you simply buying goods and services….. and letting the supplier off the hook….

Back to the government Medicare pay for performance effort. It still might fail miserably. I’m not saying they did a great job setting it up, because I don’t know that. I do like however that there is this shift to performance based procurement and payment models in our government healthcare system. With any luck, the program will be generating real results right around the time I’m forced to retire for health reasons. Personally, I can’t wait.