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SPANNING THREE DECADES OF VALUE MANAGEMENT LEADERSHIP

September 15, 2002

Build Versus Buy Decisions Have Changed  -- Have You?

“ Getting These Decisions Right Means Lower Cost, Higher Quality,

Improved Agility and Performance. Getting Them Wrong Could Risk Extinction!”

Robert T. Yokl, President, The HCP Group, Ltd. 

Modern Healthcare Magazine’s annual contract management study shows that every category of contract service from food service to radiology contracts has increased, with the exception of physical therapy, wound care and security services in 2001 compared to 2000. However, according to the Stamford, Connecticut based Gartner Group, “ 60% of such agreements…will not be considered successful by executive management because they have not been developed and managed effectively”.

Building versus buying service decisions have changed over the last decade from healthcare organizations buying because they were desperate to find someone to take a problem department or function off their hands, to making strategic decisions about building or buying centered around strategic issues such as increasing market share, better service, lower cost, higher quality, improved agility and superior performance.   What hasn’t changed is that healthcare organizations still aren’t developing and managing these contracts effectively, as evidenced by the Gartner Group’s studies.

Building Fair, Flexible, Effective and Manageable Agreements

As healthcare organizations’ management practices evolve in the 21^st century it saves dollars and makes sense to strike a balance of building some services and buying some services, especially since technologies are changing so rapidly in healthcare that we must recognize we can’t be the best at everything we do or have the capital and resources to do everything we need to do or we could risk extinction!  Getting these decisions right means lower cost, higher quality, improved agility and performance.  Getting them wrong leads to costly mistakes, reversals and stalled initiatives!  To assist you with these decisions here are some guidelines that I have paraphrased from Scott Joslyn’s Modern Healthcare article, “Strike a Balance with Outsourcing” for your consideration:

·        Establish clear goals and objectives that are aligned with your business strategies: lower cost, improved service levels, better technologies, etc., versus just looking for a better price.

·        Define the scope of services in detail to insure that there will be no extra cost when you request a service you thought was in your agreement. The best way to do this is to asked your bidders to tell you what services and functions aren’t covered under your proposed agreement and what they recommend should be added to the agreement.

·        Know the cost of your current functions or services to be outsourced, so that you can compare the bids to your actual cost of you doing business now. This seems like an obvious first step prior to bidding any outsourcing contract, but surprisingly the usual method of finding out your cost is from the bidders who have surveyed your operations prior to presenting their bids. From my experience these cost estimates are shaded in favor of your bidders offering, not your hospital.

·        Develop fair but strong contracts in consultation with your corporate counsel to protect you from those, “what if” scenarios that tend to happen when you don’t plan ahead. For example, “what if” your hospital merged with another hospital could you renegotiate your current contract to add the volume of two hospitals?  Or “what if” you decided to add or delete a service? How would that affect your contract prices?

·        Measure and Manage the service by developing with your contractor key performance indicators, rewards and penalties linked to performance, and monthly scorecards.  Don’t let your contractor give you their usual monthly reports as proposed in their contracts, since you will only hear the good news about their services, as opposed to pre-established cost and quality measurements that you can manage and control with their assistance.

·        Build flexibility into your agreement since things change and people change very quickly. Allow for expansion and contractions of services at set fees at the time you write your agreements. And above all avoid long-term contracts without a 30, 60 or 90-day exit clause cancelable for any reason.

·        Retain Key People and Functions on your payroll to insure that you have ultimate control and flexibility over your operations.  You might want to keep your security director, but outsource your security staff to an outside agency or you might decide to contract out your mailroom or print shop, but have them report directly to your material management director.

Outsource Should Be a Strategic Decision -- Not a Call for Help

Every healthcare organization in the country outsources some of their operations to contractors whether they realize it our not.  Credit and collection agencies, group purchasing organizations, pharmacy, housekeeping, food service, laundry service and nursing agencies are the most common outsourcing departments or functions for which  hospitals contract today.  The question I would like to ask is, “were these outsourcing agreements based on strategic reasons or were they a cry for help?”

If these outsourcing decisions weren’t based on these hospitals’ strategic plans such as Tenet Healthcare strategic decision to outsource 75% of their housekeeping and food service functions in 2000 to bring nearly two-thirds of their hospitals under the management of contract service firms to meet the tough financial challenges in health care today -- then why are they outsourcing them?   Could it be that many healthcare organizations are just following their instincts to outsource challenging problematic operations or functions, without truly evaluating their build versus buy options in a strategic manner?

 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”.