Friday, October 30, 2015

Attorney Raven Willis: Severability and Partnerships, Part 1 of 2

Attorney Raven Willis’ Contract Time Bombs caught my attention.  They were great free nuggets of advice and very relevant to my current phase.  Transitioning to a multi-vertical business is hard work.  It’s hard on nearly every level when doing it sort of Richard Branson-ish like - less the billions.  Willis’ Linkedin post on severability provoked a re-evaluation of my thought process.  And it prompted me to contact her.  

Severability sounds so ominously debilitating, like it may be a term relevant to fighting zombies instead of legal battles.  Severability refers to removing a provision from a contract when it becomes known as unenforceable or illegal.  The provision is cut but the remaining body of the contract keeps lurching forward.  Practically, this means that a particular provision may leave one party with no reason to maintain the business relationship and seek to terminate the contract.  However, the other signatory, Party B, may see no reason to terminate the agreement at all.  In fact, it may be to its advantage to keep the contract active.  Party A can be required to keep paying or providing a service to Party B regardless of the lack of mutually positive economic outcome.  Showing bravado in a bold statement like, There is no longer anything in it for me, so I am not paying, is a non-starter that may get you on the losing end of an expensive legal battle.

Willis quoted the legal case of Circle Appliance v. Appliance Warehouse, Inc,  (AWI)  In this case, AWI stopped paying Circle because the non-competition clause was found to be illegal.  AWI asserted that the contract was void in its entirety.  When sued, AWI won initially.  Circle appealed and the judgement was reversed to its favor.   One result of the successful appeal would be that AWI ended up funding a competitive base against itself. 

I placed this precious note in my red flag file, hit the like button on the post, and reached out to Willis.  I asked her why she focused on small businesses with her legal posts.  Secondly, I asked about other cautions to small business owners. This will be covered in Part 2.

On why she focused on small business with her Linkedin pulse feeds, Willis stated, “I have a place in my heart for small business owners.  My mother’s small business put me through school.”   
 “Is that why you went into law?”
 She replied that it wasn’t.  It was her cut and dry legalistic view that got her into law.  “My mother told me that I had a definite sense of right and wrong.  There are no gray areas for me.  After finishing my undergraduate degree, I wanted to further my education.  I really didn’t know what my advanced degree would be.  It seemed like MBAs were a dime a dozen.  Law school took time but it seemed to fit my best attributes.  So, in 2005, while my husband worked on his PhD, I started law school.”
 “What was that like for you?”
 “I worked a full-time job dealing with government contracts.  After work, I hurried to my car and headed to law school until about 10:30.  Just over a year after I started, I got pregnant.”
Of course, I interrupted her, “Sorry to interrupt.  Please go back a second.  So… you were married, had a full-time job, pregnant, and in law school, not getting home until late.”
“Yes and we were happy, but I wondered how I would get through it.  It turned out that the timing was good.  Morning sickness was worse at work than it was in school.  Things were better by the evening time.  I had to compartmentalize my work to get everything done to be present in both places.  Also, I had such wonderful classmates.  Some classmates were retired and working toward new careers.  Others were trying to change careers.  There were mothers who already had children and pregnant again.”
Willis went on to say that family was a great help.  When asked about the most difficult thing she encountered while being pregnant in law school, she replied, “Sitting in a hard surfaced chair was misery.  Carrying my donut shaped pillow was more important than carrying books.  After I delivered in year two, I sat out a semester.  All the people who started with me graduated.  That was really hard to have to graduate a semester after them.”
More on Willis in Part 2.  In the meantime:

Tuesday, October 20, 2015

Supply Cabinets - Another No Cap No-No?

My previous article, Another No-Cap No-No (part 2), uses satire to contrast two similar contracts, a rental agreement for a vehicle and a rental agreement for supply cabinets. A Supply Chain Manager or Materials Director is asked to approve a terribly structured contract; rent a new vehicle for over 30% more than its purchase price then give it back to the dealer at the end the five-year term.  A $36,000 car became a $46,800 vehicle that will be returned to the dealer when the term has ended.  Maintenance contracts, taxes, and other fees are additional costs.  Banks and leasing companies offer far better options. 

Rent this $36,000 Dodge Charger for only $46,000
-Renter Responsible for Maintenance and Taxes
-Must Return at the End of Contract
-Renew at the End of Term for 3 Years
Total Payout = Great Deal, just over $93,600 
Then, Another No-Cap No-No 2 turns sharply from the vehicle, in that case, a Dodge Charger, to satirize that straight rental agreements for supply cabinets,  “So you do have supply cabinets?”

It seems that this is one hard case to crack, despite pointing to the huge expenses  incurred even after “hard" negotiations.  The longer the term or the more renewals the deals tend to be worse for the buyer. Vendor supplied  cabinet rentals just don’t seem to get the same scrutiny as comparative equipment acquisitions despite how excruciatingly bad these contracts tend to be for the buyers.  In fairness, these rental programs appear to make life easy.  There is no easy button to hit here.  Presenting other options is viewed as risky, getting unwanted questions.  So, rentals remain a default play at a huge expense.   

First, managers tend to focus on Annual Percentage Rate, APR, instead of markup.  Personally, I prefer to view term agreements simply stated as markup.  Markup does tend to ring of wholesale and retail – the need to create profit.  The term also refers to total cost.  A low APR does not mean less cost.  In contrast, markup shows the dollar amount that will be paid in rental fees and applicable buy-out in comparison to the purchase price.  In this scenario, less versus greater cost becomes more obvious.  Second, the purchase price is a markup.  The rental imposes an additional markup.  So, to be clear, we are talking the markup on a markup. 

Below is one line on a typical highly discounted supply cabinet proposal.  In this case, there is no buy-out nor will ownership pass to the customer.

A vendor may offer to upgrade current software and extend the contract at the current monthly fee.  The markup actually grows.
Granted, the software adds some value to the operational side and Net Asset Value.  How much value is arguable, but it’s really beside the point of rental cost.  Any increase in value that the software adds can exist despite the acquisition method.  Going back to the example of the car gives a perspective on such value.  The Dodge Charger has a software – aided eight speed transmission.  Suppose that dealer upgrades the software to potentially obtain better gas mileage and deliver more torque but does not touch the transmission hardware at all.  The price: keep the same rental fee for another three years.

Switching back to an actual supply cabinet rental, that means the buyer will pay $52,800 over eight years for a cabinet that cost $25,000 .  There are situations where the markup runs more than 200% over the sales price, $105,000 in this case for a $25,000 asset.

Oh the inculcated incorrigibility of this common vendor business practices:
  1. Does that sound like a best practice?
  2. Should rental be the default position?
  3. Does extending the term for a software upgrade summarily justify continuing such rental agreements?

For the last points of a very costly  deal, remember, the proposal is for only one double cabinet.  How many cabinets, double or otherwise, are there is your hospital or IDN? Additionally, compare the markup of the equipment below which reflects the same markup for supply cabinet rentals.  The last system, Cost Cutting Supply Management System, is meant to help significantly reduce inventory cost.  
Hardy AMC has partnered with CHG-Meridian to apply the principles of Life-Cycle Asset Management and TCO analysis to extract clients from this quagmire to a money saving position:
  1. Reduced total cost of ownership and current markup status
  2. Passive RFID, for inventory control
  3. Inventory in one place, with quantity, type, and Net Asset Value
  4. Leave a comment with your contact information or email

Covering Your Assets by Exposing the Butt-Ugly Truth