1. Technology Transactions GOOD POINT Purchasing Patient Care Systems May 16, 2003 Lawrence A. Schultis, P.C. Partner 202.663.8782 Larry.Schultis@ShawPittman.com

2. 2 Background  Our Client: A Midwest charitable institution owning 13 hospitals, as well as other clinics and facilities  The overall Goal – Replace an existing patient care system that is sun setting after 20 years in operation  Success Criteria – Getting the new system in on time, on budget and with caregiver buy-in  Greatest Fear - Poor or late implementation of the first hospital - the largest in the system

3. 3 The Situation When Shaw Pittman Joined the Team  The client had already gone through a two year selection process and had decided on a solution – McKesson’s Horizon system  Implementation of the solution required a replacement of a substantial amount of computer hardware and software in the IT environment  The scale of the implementation was very large – 7 year time line – $15mm in software – $58mm in services – $13mm in hardware

4. 4 The Vendor’s Approach  McKesson’s contract was very aggressive and vendor oriented  The statement of work (Contract Supplement in McKesson parlance) was poorly drafted, disorganized, inconsistent with the business deal and self contradictory  McKesson fought very hard to maintain document control; at first McKesson refused to provide an editable document  McKesson’s negotiating position, at least at the outset, was very narrow

5. 5 The Vendor’s Tactics  McKesson’s negotiation approach was very aggressive, and at times abusive to the legal team and condescending towards the business people  McKesson attempted to drive a wedge between the lawyers and the business people  The negotiating tactics were distasteful to the client and ultimately resulted in communications at the highest organizational levels in order to improve the methods of communication  What worked – “Improve your approach or you are gone”

6. 6 Lessons Learned  Include contracts/legal in the RFP process  Terms and conditions should be part of the RFP and the response to them should be part of the evaluation process  Do not down select prior to contractual negotiation  Ensure that the business people and the contracts/legal team present a unified front The problems we experienced with McKesson could have been minimized by following standard procurement rules that should be applied to any major purchase:

7. 7 Lessons Learned  During the proposal process, the vendor’s marketing team is often driving; better terms will be put forward in response to the RFP  The client can require use of its contract terms  If a vendor will hold to harsh terms in any event, this will be brought to the surface before a decision is made Include contracts/legal in the RFP process; Terms and conditions should be part of the RFP and the response to them should be part of the evaluation process

8. 8 Lessons Learned  Competition is the key to our economy for a reason – competition forces vendors to do their best  If the vendor knows that you have selected them, the vendor has too much leverage  If the vendor refuses to be reasonable after they have been chosen, you must step backwards and re-evaluate a previously eliminated vendor (who will now know it has more leverage than when it was eliminated before – the tables have turned) Do not down select prior to contractual negotiation

9. 9 Lessons Learned  McKesson tried to make difficult issues appear to be raised by outside counsel  If this tactic had been successful, Shaw Pittman’s ability to negotiate effectively would have been nil  We turned this tactic back on the vendor; our business people discussed the reasonableness of the client’s position with McKesson business people – the business people overruled legal Ensure that the business people and the contracts/legal team present a unified front

10. 10 Implementation Issues  McKesson only supports one back version of its software; any multi- site implementation plan must envisage the possibility of software upgrade(s) during the implementation schedule (three in this deal)  Any multi-site implementation must address “site acceptance” as well as “system acceptance”  What impact will a failure to implement at a subsequent site have on already implemented sites? This issue is important to both the hospital and the vendor -- as long as there is a risk of refund, no revenue can be recognized

11. 11 Key Negotiation Points  McKesson was very resistant to having set dates for deliverables and events –Get these commitments up front through the RFP process  McKesson’s drafts of the statement of work played the partnership card, everything was a joint commitment (e.g., Customer and Vendor working together will install the software) –Demand a clear delineation of the vendor’s responsibilities and your responsibilities  The client demanded clear responsibilities and several key dates in the contract –If these dates are not met due to McKesson’s fault, McKesson will be in breach –If the breach is not cured, the client can terminate for cause –This was the hardest concession to get from McKesson

12. 12 Legal Notes  McKesson is not willing to defend against third party personal injury claims relating to its systems, but it will agree to be implead and to provide a comparative fault indemnity  McKesson will indemnify against most third party claims of infringement, but you have to fight hard to get it  McKesson did not require sole and exclusive remedies for breach or limit warranty periods; however, maintenance starts on installation