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October 25, 2001

COST IS OUR #1 ENEMY; WE SHOULD ALWAYS   BE ON THE ATTACK

“Management tends to take the smallest bit out of the cost apple”, says Jack Welch, as opposed to cost being the #1 enemy of any organization. Jack goes on to say that, “I’ve never seen a business ruined because it cut its cost too much, too fast.” 

It been my experience as a healthcare consultant that healthcare organizations nationwide tend to follow this same cost cutting model – taking small bits out of the cost apple – when they should be always be on the attack. Even when I thought that a healthcare organization had cut its supplies or labor cost too much, I observed that these egregious errors could be fixed quickly when management realized their error in judgment.  More importantly, I noticed that no real harm came to these healthcare organizations’ quality standards, because these errors were quickly identified and rectified before any real harm was done.

Anecdotally, one of my healthcare heroes in the war against cost was the president of a healthcare system in the Northeast who realized that there was no sin in cutting cost too much or too fast.  His philosophy was that if he didn’t need the savings today, he would certainly need them tomorrow, so let’s make big savings happen now.  Further, this president was a champion for installing cost management systems to manage and control his labor and non-labor cost continuously, as opposed to reacting to revenue downturns by crank up a rusty saving machine to prevent a disaster from happening. He didn’t like surprises and was always proactive in his cost management efforts, because he realized that he could never lose by being the low cost competitor in his marketplace.

His first line of defense was to install an activity-based labor management system to measure and control his systems’ departmental workloads and staffing ratios on a continuous basis.  This enabled him and his management team to have a real picture of their labor resources so they could take action to control, refine or reallocate them in real time -- if necessary.  And provide him with a framework for accurate bench-marking with his peer healthcare organizations.  It was his goal with this new system to no longer be held captive by the whims of his department and managers or swings in his census, but instead to manage by fact!

Next, he installed a value analysis program to manage and control his non-salary expenses, which replaced his products evaluation committee that had previously had this responsibility.  His reason for making this change in philosophy, form and function of this critical activity was that he realized that his former products evaluation committee had limited scope, focus and wasn’t function-oriented, but was rather price-oriented, which was a limiting factor in this committee’s maturity.  Conversely, he saw a greater opportunity for savings breakthroughs with a value analysis approach to managing his non-salary expenses that would streamline and reinvent the products, services and technologies he was buying, in place of just getting a better price for what he was buying.  This new approach to non-salary expense management generated hundreds of thousands of new savings for this system within one year of its adoption. In addition to giving the hospital a new management system to evaluate the worth and relevance of the products, services and technologies in a strategic manner by recognizing how they fit into the hierarchy of the hospitals overall product, service or technology mix.  Not just how much the product, service or technology cost.

The moral to this story is that whether your healthcare organization is in financial difficulty now or your just looking to increase your profits, you should realize that cost is always your #1 enemy and you should always be on the attack. Preferably, by installing management system to manage and control you labor and non-labor cost continuously, not just when a crisis rears it ugly head.