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Outsourcing as a Strategic Weapon

Robert T. Yokl, President, SVAH Solutions

All healthcare organizations need to dramatically reduce their costs and improve quality to stay relevant in the current healthcare environment where customers are looking for the best value vs. just lowest cost options.

One strategic weapon for reducing your organization’s costs and improving your quality is outsourcing. Generally, outsourcing contracts can represent 12% to 25% of your total purchased services contract portfolio and can be a smarter, leaner, and more productive alternative to insourcing a function.

Strategic Weapon

Companies of all sizes are realizing that outsourcing, or the decision to have an outside party perform non-core support or clinical functions for their organization as opposed to performing it themselves, can be a strategic weapon. Why? Because an outsourced vendor can often provide a key function or service more effectively and cost efficiently than can be delivered with their own staff. For example, a few years ago we assisted a large community hospital in outsourcing all of their

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transcription services at a savings of $90,000 while at the same time updating their transcription service platform with state-of-the-art digital dictation equipment with no capital investment. This outsourcing decision put this hospital on par and exceeded their peers’ efficiency in transcription services. In addition, this decision gave them a strategic weapon in retaining and attracting new physicians to their staff.

Partnership Relationship

A new way to think strategically about outsourcing is as a partnership relationship, aimed at developing a broad and true win-win solution as envisioned by Kate Vitasek in her book Vested Outsourcing, where companies and their outsourced partners become vested in each other’s success. “In a vested outsourcing deal, the economics of the business model are structured so that the company that is outsourcing reduces its costs while maintaining or increasing service levels and the service provider improves its profits.”

Vested outsourcing focuses on four Lean business concepts: Outsourcing, collaboration, innovation, and measurement. “At its heart, vested outsourcing is about all parties in the business arrangement going the whole nine yards to unlock the most efficient and effective solutions to work being performed.” When you look at outsourcing as a partnership, a whole new world of opportunities opens for both parties.

Catalyst for Change

Outsourcing can mean many things to many people, but at its core it can be a catalyst for change. A change that may be needed due to the following:

The cost and quality of a function or department has deteriorated. A merger or acquisition has occurred requiring more efficiencies. A costly update of hardware or software can be avoided. New capital investments in new equipment or technologies are delayed. The growing complexity of business, government, and regulatory policies.

These and other reasons for needed change can bring about the perfect opportunity for healthcare organizations to investigate outsourcing as an alternative to insourcing.

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Growth Areas

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For years, outsourcing in business had been limited to support areas, such as, housekeeping, laundry, materials management, food service, financial, and facilities. Now, hundreds of areas of outsourcing growth include:

Information Technology Legal Services Software Development Software Asset Management Translation Services R&D Research Brand Management Data Analytics Transcription Services Revenue Cycle Management Enterprise Data Management Cloud Data Storage Portal Content Intellectual Property Management Online Banking Content Marketing

As you can see, almost any function or service in your company is a candidate for outsourcing. The only question you need to research, analyze, and determine is if outsourcing is a good fit (culturally, operationally, and strategically) for your healthcare organization.

Obstacles to Outsourcing

Even though the sales representative from the outsourcing firm will make his outsourcing offer seem too good to be true, there can be three obstacles to outsourcing that you need to consider before signing a contract:

1. Loss of employee relationships: Most outsource firms will either hire your employees, or they will hire their own employees to fulfill your contract. Either way, your relationships with these employees is severed forever. This can be a good thing or a bad thing depending on your situation. This fact must be factored into your decision to outsource.

2. Loss of control: You will no longer have direct control over your outsourced function or service because you will be working through intermediaries to get things done. Even your on-site manager will not have the power to grant all of your requests. Can you live with these constraints?

3. Loss of local connection: If you are trying to support your local vendors, there is only a slim chance that your outsourcing vendor will come from your local community. Is this important to you?

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If you can get past these three obstacles and the outsource contractor’s proposals look good to you, this could be the right decision for you. My own experience, after managing numerous outsourced contracts, is that the onsite resident manager is the secret sauce in what makes these contracts work as promised. So, make sure you meet and approve your on-site resident manager if you want your outsourcing to run smoothly, effectively, and efficiently.

Source: Vested Outsourcing, by Kate Vitasek, Mike Ledyard, and Karl Manrodt, Palgrave Macmillan publisher.

Who’s In Charge of Your Purchased Services?

I would like you to look around your hospital and then ask yourself, “Who’s in charge of my hospital’s purchased services?” I can assure you, if you are honest with yourself, that the answer at most hospitals is - no one!

The reason for this circumstance is that this function, at most hospitals, has been outsourced to your department heads and managers with disastrous results. We have seen department heads sign purchased service multi-year contracts that have cost their hospitals hundreds of thousands of dollars a year just due to benign neglect. Other department heads have missed deadlines on contract renewals that roll over for another five years without any renegotiations. Or, there have been instances when they have committed their hospital to a copier contract that had no cancellation clause.

To stop this train wreck, it is now time for supply chain professionals (as other industries have been doing for years) to step up to the challenge of administering these contracts from start to finish, since there is no other department in your hospital that is more qualified to do so. You have the training, discipline, ethics, and know-how to rein in your hospital’s multi-million dollar portfolio of purchased service contracts.

I know you don’t have the time or staff to do so now, but that doesn’t mean that you should continue to let these millions of dollars in contracts be outsourced with dire consequences to your department heads and managers. It’s time for you to develop a proposal to your senior management to take over this function that can save your hospital 11% to 18% right out of the gate.

I call this building a case for change by showing your C-suite how much they can save on their purchased service contract portfolio by having your supply chain department professionally manage and control these contracts. Why let this madness continue any longer?

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Master Agreements Can Greatly Speed Up All of Your Purchased Service Contract Approvals

Don’t Use a Vendor’s Contract Unless it Conforms to Your Master Contract

Robert T. Yokl, President, SVAH Solutions

I’m a big proponent of not using a vendor’s contract as my healthcare organization’s official purchased service contract since I have found that 100% of the vendor’s terms and conditions are in the contractor’s favor. However, I’m now seeing the trend from my clients of asking their vendors to sign their company’s Master Agreement which binds the contractor to the most favorable terms and conditions of the contracted party. I believe this tactic, if approved by your legal department, can save you time, money, and speed up the contract approval process for all involved parties.

Battle of the Forms

We all know that once a contract has been submitted to your legal department for review they will find something wrong with it, unless you have your vendor sign a Master Agreement (contract that

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takes precedence over any other legal documents) that was developed by your legal department. I have found that this tactic will clear the way to having your contracts quickly approved by your legal department without a hassle.

This way, you eliminate the battle of the form since your legal documents take precedent over your vendor’s terms and conditions. For example, a Master Agreement I signed recently stated a oneyear term by the client in their Master Agreement, whereas, my firm’s contract terms stated the contract was month-to-month until cancelled. Based on these facts, the client’s Master Agreement’s terms and conditions are in control.

Why Speed is Important

Every purchased service contract that is sent to your legal department for review has value (e.g., time, money, service, safety, etc.) that isn’t being provided to your organization during the legal review process, which can take 45 to 90 days. By speeding up your contracting process you can receive the benefits of the purchased service contract at an earlier date. Why lose these benefits because of time delays?

Standardization

The primary goal of a Master Agreement is to standardize the legal review process for approvals of your purchased service contracts (or any other contract) without compromising your company’s standard terms and conditions. This best practice can save your legal department hundreds of hours a year, since they only deal with the exceptions and thereby allow your company to receive the benefits of the purchased service agreement much quicker.

Reduce Complexity

The bottom line on this Master Agreement concept is to reduce the complexity and back and forth battle of the forms between your contractors and your organization since it can be costly, time consuming, and paralyzing. I just talked to a sales rep for a software company who told me that about one-third of his new software contracts are tied up in the battle of the forms between his company’s lawyers and his customer’s lawyers for months on end, which is causing him agita. Why continue this unproductive practice when a Master Agreement could solve 80% to 90% of your contracting terms and conditions issues for all involved parties?