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SPANNING THREE DECADES OF VALUE MANAGEMENT LEADERSHIP

January 9, 2001

TREATING YOUR CONTRACTS AS  STRATEGIC ASSETS

Robert T. Yokl

President-The HCP Group, Ltd.

"Contracts represent over 30% of a healthcare organization’s non-salary expenses, yet they are still being treated as a back office function.  As opposed to being managed as strategic assets."

Healthcare organizations are losing income, increasing their cost and liability while missing contract savings opportunities due to a lack of time, knowledge, systems or resources to effectively manage these strategic assets.  This fact has lead to healthcare organizations renewing contracts that they didn’t want to renew, paying for contract work not done and repeatedly missing escalator clauses, discounts and rebates.  Here are 5 tactics to avoid these pitfalls:

1.                Centralize Contract Administration  

Historically, contract administration has been a decentralized activity at our hospitals; this fact alone has placed the management of this function in the hands of hundreds of employees. By centralizing the management and control of these strategic assets under one person you will increase the integrity and effectiveness of your contract administration function 100 fold.

2.                Automate Contract Administration 

Some, but not all, hospital contacts are now being housed in electronic spreadsheets or material management information systems, which is an honest attempt to give some structure and organization surrounding the contract function. However, these data warehouses don’t link contract information to critical financial activities and responsibilities, and aren’t available to multi-users. Nor are they programmed to handle large complex contract information and transactions.  An investment in contract management software that can handle these complex activities will save you more in just one month than continuing to use these outmoded technologies to manage your contracts activities. 

3.                Develop Early-Warning System 

More contract deadlines (escalators, discounts, rebates, tier pricing and termination clauses) are missed than met today in healthcare, because there is no early-warning systems build into contract modules to alert responsible parties of actions to be taken.  By building into your contract management system email alerts and instant messaging features at critical points in your contract’s lifecycle, lost income and increased contract cost can be averted.

4.                Generate Real-Time Status Reports 

A 250-bed hospital can have contract portfolio, at any given time, valued at $10 million dollars or more.  Yet, I would challenge the ability of any hospital to generate a real-time report on the status (active or inactive contracts, value of contracts in force, termination dates, renewal dates, etc.) of these strategic assets.  Since your contracts are an accurate reflection of your business health, I would strongly recommend that you have the ability to generate real-time status reports on a monthly basis to test your strengths and weakness in this area of your hospital operations. 

5.                Benchmark Your Contracts 

Healthcare organizations are now benchmarking everything from clinical processes to labor resources, but feel they lack the expertise to effectively benchmark their contracts. This is a myth that should be put to rest, since contracts are actually easier to benchmark than many other commodities, because by law they must contain uniform commercial terms, conditions, and consideration (usually money), which makes them ideal markers. All you need to do is find benchmark partners that have the same or similar contract as you do.  These benchmark partners aren’t hard to find, since most companies list their clients on their websites and there is a good chance you know some of them that will partner with you. 

Your contacts can be treated as a necessary evil that you can ignore or as strategic assets (it’s your choice) that have strategic value.  If you choose to treat them as strategic assets you then can reap the benefits of lower contract cost, increased income, more satisfied customers (internal and external) and the assurance that you have a business process that has integrity and reflects your business philosophy – lean and responsible.

 Copyright © 2002 The HCP Group, Ltd.

Robert T. Yokl, President, The HCP Group, Ltd., has over 35 years of experience as a consultant and manager in the field of Supply/Value Chain Management and is one of the country's leading healthcare experts in value analysis, value engineering and materials management. He is the developer and program leader of the award winning Certified Value Analysis Practitioner Training Program™. Mr. Yokl is also the developer of the healthcare industry's leading ValueNetCentral™ Value Analysis Software. Over the past two decades he has trained thousands of healthcare managers in his patented Strategic Value Analysis™ and Team-Based Project Management™ processes and has assisted scores of organizations in developing their own value management programs. He has published six books, videos and audios on supply/value chain management. His latest book being, “ Strategic Value Analysis™: The #1 Smart Strategy for Taking Cost Out of a Healthcare Organizations’ Supply/Value Chain”.