BEST PRACTICES

Legal 101 Best Practices

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7 Purchased Service Best Practices that Positively Impact Your Bottom Line

Robert T. Yokl, President, SVAH Solutions

Purchased service management (PSM) is a relatively new supply chain discipline. However, based on our 33-year PSM experience, we have observed the following seven essential PSM best practices that could positively impact your bottom line:

1. Ensure every purchased service (PS) contract is bid/negotiated: Even if your GPO has a PS national contract in their portfolio, this is just a benchmark price for you. Only by bidding/negotiating a new or renewal PS contract can you obtain the lowest price possible in your region of the country.

2. Attack older, ongoing, or automatic renewal PS contracts first: These are the PS contracts that have been on your hospital, system, or IDN’s books for years, but haven’t been put under the microscope. A quick review could save you thousands of dollars annually.

3. Eliminate unneeded and unwanted functions, features, and services: It is good to start with a blank piece of paper to write your PS contract’s specifications, since you don’t need or want everything your contractor might be offering you. For example, it took years before one of our clients

Legal 101 Best Practices

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realized that they were paying for 24/7 concierge food service (e.g., patient ordering a sandwich at midnight) for their patients from their food service company. By eliminating this unwanted service, our client saved thousands of dollars annually on their food service contract.

4. Track, trend, and benchmark all of your purchased services: Lowering your purchased service cost isn’t always about price at the pump. More and more, it’s about lowering the cost per gallon or utilization cost. This is accomplished by establishing metrics (e.g., laundry/linen cost per adjusted patient day) for each of your PS contracts, then tracking, trending, and benchmarking your PS contracts against your peers’. This new protocol could yield you 10x greater savings than price alone.

5. Complement managers with low PS total cost vs. peers: PSM isn’t just about statistics or measurements. It’s also about motivating your managers to keep their PS cost at the lowest possible levels. Accordingly, complementing, recognizing, and rewarding these managers is recommended, since these are the managers who make you look good.

6. Survey your PS contract customers on their experience with their contractors before renewal of any contract:

Always survey all of your PS contract customers to obtain their feedback before renewing their contracts. You will often uncover contract compliance, service, and quality issues that need to be addressed under your new PS contract (e.g., contractor not conducting four PMs as agreed to in contract or not returning phone calls promptly).

7. Start your PS contract renewal process 90 to 120 days from its renewal date: It takes considerable time to do a thorough job of surveying your customers, updating specifications, benchmarking your current contract, and then bidding and negotiating a new contract. That’s why most healthcare organizations start their PS renewal contract process 90 to 120 days in advance.

These seven purchased service management best practices have evolved, matured, and have been codified by progressive hospitals, systems, and IDNs over the last decade. Therefore, you can consider them battle tested and ready to be deployed at your own healthcare organization without

Legal 101 Contracts 101

Robert T. YoklRobert T. Yokl

A New Approach to Purchased Service Contracts

Robert T. Yokl, President, SVAH Solutions

Customarily, agreeing upon and memorializing a formal contract on a purchased service agreement has generally been a tug-of-war between the parties. This is because both parties feel unsure of the cost, quality, and outcomes of the contract they are about to sign, so they try to protect themselves from every eventuality with clauses like a “30-day cancellation for any reason.” This, in practice, means that your vendor only has a 30-day contract. So why should your vendors invest time, effort, and expense to exceed your expectations when their contracts could be cancelled tomorrow for any reason? This has actually happened to our firm, so we know how it stings!

A Much Better Way: Formal Relational Contract

There is a new contract construct that is getting a lot of buzz in other industries and has even been employed in the Canadian healthcare system. This is called Vested® Outsourcing and is designed

Legal 101 Contracts 101

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to foster trust and collaboration between the parties yet is legally enforceable and is especially useful for highly complex relationships when it isn’t possible to predict every eventuality that could happen during the term of the purchased service contract. Instead of both parties negotiating from the standpoint of, “What’s in it for us?” the goal with this new Vested® relationship is more like an equal partnership where both parties work to make their purchased service contract affiliation more efficient, effective, and at a lower cost than new or renewal contracts for the same purchased service.

Vested® Case Study: Dell/FedEx Contract

Dell has contracted with FedEx since 2005 to handle all aspects of its computers’ return-and-repair protocol. However, even though FedEx met all of Dell’s contractional obligations, Dell still wasn’t happy with FedEx’s performance, for example, not being proactive in continuous improvement and improving their relationships. To our thinking, this purchased service contract was a transactional relationship. FedEx did what the contract required, and Dell paid FedEx per transaction, which wasn’t really a relationship at all, just a work-forhire contract. After eight years, the parties were not happy with each other, but they also needed each other. So, they decided to try the Vested® formal relationship contract approach to become equal partners in their outsourcing venture. This defined their relationship, set parameters for trust, visibility, reciprocity, etc., and established a governance body after the contract was signed to manage the contract. The results of this new Vested® approach was an equal partnership which resulted in a cost decrease of 42%, reduction in scrap by 67%, and record low defective parts per million over a two-year period. Now, isn’t this the Vested® Outsourcing relationship you, too, want to create, mature, and maintain with your own purchased service contractors?

Source: A New Approach to Contracts by David Frydlinger, Oliver Hart and Kate Vitasek published in the Harvard Business Review September/October 2019.