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SPANNING THREE DECADES OF VALUE MANAGEMENT LEADERSHIP

March 7, 2002

OUTSOURCING: Who Needs It? When? And Why?

Robert T. Yokl - President

The HCP Group, Ltd. 

Healthcare organization’s outsourcing of departments or functions will increase by 30% by 2003, according to a survey conducted by VHA and Michael F. Corbett & Associates.  The survey found that the healthcare industry will use 17% of its operating budget on outsourcing, because they lack internal resources or to simply reduce their operating cost.  This percentage is expected to grow to 22% over the next few years.  Is this outsourcing craze accelerating because contractors are truly more competent, experienced, dedicated and cost-effective than your own internal staff?  Or is it because we are all being pressured to find quick, cost-effective solutions to difficult operational challenges?

What Are The Real Reasons For These Increases?

It has been HCP’s experience that healthcare organizations rush too quickly into outsourcing and hire contractors for the wrong reasons.  Typically, the top three reasons that we have found that healthcare organizations enter into outsourcing contracts is because they are unhappy with their current manager’s performance, don’t have the money to invest in essential capital investments or think they can save money by outsourcing these services as opposed to owning them.  Lack of internal resources is rarely the real reason for outsourcing a department or function, more likely these decisions are really political in nature, and too often outsourcing decisions are made on emotions, not hard facts.

Even contract management firms concede that if a department or function is well run, they have difficulty selling contracts to manage them.  So, why is there a dramatic increase in outsourcing contracts, when in many situations it can be more customer- friendly, cost-effective, and productive to insource a hospital department or function?   The answer is that outsourcing vs. insourcing decisions are difficult to make because there isn’t any clear-cut or easy formula to use in making these decisions.  Each outsourcing decision is unique and complex and should be based on a comprehensive value study, prior to awarding any outsourcing contract.

When Does It Make Sense To Outsource?

It makes sense to outsource departments or functions when a contractor has more economy of scale, cutting edge technology, exceptional knowledge, proprietary systems, specialized resources or productivity advantages that a healthcare organization would or should have in this highly competitive healthcare marketplace.  Laundry services are a flawless example of this being the case.  Few hospital laundry operations can compete with a commercial laundry’s economy of scale, capitalization, low wages and benefits and expertise in the laundry business.  That’s why 61% of our nation’s hospitals outsource this department.  Other departments or functions that should be high on you list for outsourcing candidates based on AHA’s Annual Outsourcing Survey are: medical/hazardous waste disposal (80%), pest control (78%), construction management (66%), laundry/linen (61%), patient satisfaction measurement (55%), Credit and collections (47%), biomedical engineering (42%), food service (37%), housekeeping (28%), transcription (27%), equipment maintenance (24%) and IT applications support (19%). The percentages shown above reflect the number of hospitals in the U.S. that are currently outsourcing these departments or functions.

When Does It Make Sense To Insource?

Where insourcing/outsourcing decisions become more difficult is when decisions are being made on information technology, finance and clinical operations.  The key question to be asked when making this decision is “What will my cost of outsourcing a department or function be over the life of the proposed contract vs. my internal cost of ownership over the life of the contract?  Your internal cost calculations would include the cost of correcting the problems you have been experiencing – hiring a new manager or management team, committing to extensive training, investing in hi-tech equipment, renovations, new software or hardware purchases, or hiring a consultant to meet your stated goals, etc. – to calculate your contract life cycle cost.  Based on your life cycle costs you will find the cost benefits for your organization on any insourcing/outsourcing decision constructed on fact, not emotions.

 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”.