Distributorship Sunbelt Business Graphics Inc. recently lost two hospital accounts when the facilities signed contracts with San Diego-based Premier Inc., the country's second-largest group purchasing organization (GPO) based on annual purchasing volume. (Irving, Texas-based Novation is the largest.) "When $300,000 is knocked off your annual sales with one fell swoop, it stings," says Ken Warlick, president of the Nacogdoches, Texas-based company. "That's a hard pill to swallow."
Warlick is no stranger to fighting health care purchasing contracts, and many other distributors can relate. Since the late 1980s, purchasing groups--and the guaranteed savings contracts they offer--have forced some distributors to abandon the medical market. Here's why: When hospitals sign on Premier's dotted line, they're required to buy at least 80 percent of the products stipulated in the forms management contract from one of the GPO's vendors--Dayton, Ohio-based Standard Register (SR) or Mississauga, Ontario-based Moore Corp. Ltd. The dual-source contract expires Nov. 30. In addition, Premier has a smaller, non-committed contract with Moore for its long-term-care facilities and doctors' offices that expires Dec. 31.
Hospital materials managers and purchasing directors relish the chance to save megabucks on everything from surgical equipment to syringes. Warlick says printed documents that necessitate customization and personalized care shouldn't be "lumped in" with those commodity items, but that's the case. And it's difficult to convince hospitals that GPOs don't always deliver on savings guarantees, he says.
The central issue in challenging GPOs is that buying groups bring discounts, but not everybody wants to use the products buying groups provide--especially when service is lacking. Sunbelt Business Graphics regained one hospital's cut sheet and 4-color business eight months after it lost the account to SR. The hospital realized it couldn't receive the level of service offered by the distributorship, Warlick says. "The process of regaining a hospital account can be slow and cumbersome," he says. "But it's a worthwhile strategy to say, 'We're still here if you ever need us.'" Sunbelt Business Graphics still is trying to regain the other hospital account it lost.
Warlick offers these tips for distributors fighting GPOs in the medical market:
* Keep tabs on former accounts. "If you put your head down, walk off and say, 'That's it' when you lose a major account, you're done for," Warlick says. "You never know when the customer may get fed up." Instead of burning bridges, employees at Sunbelt Business Graphics remain friendly with their hospital contacts, he says. "If you catch wind that people are upset at the service or benefits they're receiving, be ready to pick up the pieces," Warlick says. "When a hospital needs a form to operate on a day-to-day basis, it's going to find a way to get it. It's not going to shut down."
* Offer products not stipulated on contracts. In addition to the 20 percent of business hospitals tied to Premier can farm out to companies other than SR and Moore, distributorships can offer clients promotional items and other products not stipulated on contracts. (For details on the six largest medical GPOs, visit www.printsolutionsmag.com/medicalGPOs.)
* Target other industries, too. "If you put all your eggs in one basket, you're heading for trouble," Warlick says. "Our industry is changing fast, and so is the hospital industry. If you depend strictly on one market, something could come along and blow you out of the tub. It's fine to specialize and be good at one niche, but it's best to have broad-based clients." Sunbelt Business Graphics recently changed its name from Sunbelt Business Forms and began offering commercial printing to a variety of firms.
In September 2002, Tom Warnez, CDC, president and owner of St. Clair Shores, Mich.-based distributorship Metcom Inc., received a notice from a bankruptcy trustee requesting a $32,000 preference demand. The notice said he needed to pay the amount within 10 days to avoid litigation in bankruptcy court in Seattle. The preference demand was related to an airline, a former Metcom client that had filed for Chapter 11 protection. The case subsequently was converted to Chapter 7.
The saga began more than two years ago, when the economically distressed airline owed Metcom $67,000. To collect, Warnez filed an affidavit and received a judgment requiring the client to pay the distributorship that amount. Gradually, Metcom received all but $15,000 of the $67,000 owed before the client filed for bankruptcy.
But the bankruptcy trustee then said $32,000 of the payments to Metcom had been made during an "insolvency period." To ensure all creditors were treated fairly, Metcom was told to return the $32,000. Not surprisingly, Warnez was concerned about coming up with the money on short notice. Unsure of his next step, he turned to DMIA's member principals-only broadcast email system for help. An industry peer recommended a law firm in the Pacific Northwest that had worked on a similar case.
Warnez hired the law firm, and negotiations with the bankruptcy trustee began. His attorney settled out of court with the trustee and reduced the amount Metcom owed to $10,000. As maddening and time-consuming as the whole process was, Warnez says, such cases are part of business. "As distributors, we're working to differentiate ourselves and find organizations with problems we can solve," he says. "Our goal shouldn't be to become an expert in preferential law, but we all must face the challenges that arise."
Warnez offers these tips for business owners who become entangled in similar situations:
* Hire an attorney who has experience with bankruptcy cases.
* Attempt to settle out of court. If possible, negotiate a cash discount rather than working out a payment plan that extends several months, Warnez says. Metcom's attorney convinced the trustee to agree to a cash discount, which reduced the distributorship's payment.
* Realize that special payment agreements are more likely to be considered preferential. Such was the case with the agreement Metcom won after it filed the affidavit. Also realize that the IRS and secured creditors are most likely to receive owed money.
* Be aware that a contingency fee paid to an attorney during the collection process isn't considered by a bankruptcy trustee. In other words, companies simply lose that money regardless of what happens with the preference demand. Unfortunately, an outstanding balance--such as Metcom's $15,000--doesn't affect the amount of the preference demand either.
* Adopt a big-picture mentality. "Don't let it drive you crazy," Warnez says. "It's important to understand what process you're going through, but the biggest thing to consider is not becoming too much of an expert in this sort of thing. You have to put things into perspective and move on. Get back to the important issues facing your future: What are the goals for your company? How are you going to position yourself in the next five years so you can continue to add value?" Instead of becoming mired in litigation, Metcom concentrated on learning about Quantum Net software from Forms Management Data Systems Inc., a Reno, Nev.-based distributorship management software and e-commerce provider. Metcom will begin using the software this year, Warnez says.
