Manage purchased services holistically

One of the hottest opportunity paths for cost savings in healthcare today is in Purchased Services. No matter who you talk to, folks will agree that Purchased Services — those things that healthcare organizations pay outside firms to do for them — represent a great opportunity to deliver savings to the bottom line. While that idea may be true, it is also extremely naïve.

Let’s remember, first of all, that the reasons most organizations choose to “purchase a service” is because they believe it will be more cost-effective than doing it themselves.

Still, Purchased Services is one of this year’s buzzwords, and many organizations find themselves poised to rush into the fray, go out there and save some money. So they purchase a “solution” (really a tool) from one of the many purveyors of savings in the marketplace, or they engage a high-priced consultant, or even call-in support from their group purchasing organization (GPO) to help them discover the savings they have heard are out there.

Often the savings discovered fall far short of initial expectations, and leadership at the healthcare organizations find themselves sitting around the conference table with egg on their faces, asking, “What went wrong?”

The answer is simple: They failed to take a holistic approach to the problems they were trying to solve.

Opening doors

A holistic approach to managing Purchased Services, therefore, would necessarily require an intimate and discrete knowledge of the “whole” problem as opposed to managing costs related to one or more of its parts. Interestingly enough, this brings us to why, after all these years, Supply Chain Leaders are finding their way into participating in contracting in spaces where heretofore they were never allowed to enter.

Throughout history, healthcare has seen in its operational structure the existence of two types of domains — the domain of the Subject Matter Expert (SME) and the domain of the Physician (all knowing, all powerful and ready to jump to a competing organization on a moment’s notice). A virtual “gender neutral ‘Gentlemen’s Agreement’” has often existed keeping Supply Chain away from areas like Food Services, Environmental Services, IT, Laboratory Services, etc. Consequently, people who know about the ins and outs of contracting were kept separate from people who know the ins and outs of various important operational disciplines.

Not necessarily the best use of resources, but the peace was maintained and many local fiefdoms were built.

Enter the Affordable Care Act. Suddenly, healthcare organizations were going to be held accountable and rewarded or penalized because of outcomes, customer satisfaction and operational effectiveness. The C-suite was under siege, and no one was safe.

Traditional responses at such a time of crisis (generally a year or years of negative operating margins) would see the advent of one of the major consultancies that would come in, slash the figure identified by senior leadership, go away and wait for the next call. This time, however, things were different. Now every organization was going to be compared to its peers all the time, and rewards or penalties were going to be meted out depending on where the organization fit into the distribution.

Almost immediately a spate of suppliers began to shower the marketplace with “solutions” for the Purchased Services arena, claiming that these products would deliver various percentages of savings to the bottom lines of the organizations that purchased and used them. While many of these offerings were strong and viable, none was in and of itself a — or — the “solution.” It is rather like saying that a hammer and nail are the “solution” to getting two boards to stick together.

They are merely a tool and a coupling device. It still takes human intervention to accomplish the desired result, and while a $500 drill with an LED bulb that lights up the spot you’re aiming at is significantly advanced over the hand-turned auger an Amish craftsman uses, I can guarantee without doubt that any work the Amish craftsman does would far exceed anything I could do with the most expensive tool.

So what does a “Holistic Approach” look like? Here are 11 steps I suggest:

1. Define the problem you want to solve.
2. Identify the team you need to solve it.
3. Develop a single, measurable benchmark to measure against.
4. Get the tools and resources you need to address the problem optimally.
5. Assemble the team.
6. Build a plan.
7. Work the plan.
8. Identify a solution(s).
9. Implement.
10. Measure against the benchmark.
11. Review and revise as needed.

Define the problem you want to solve. Often, people fall into the trap of looking at a current approach to an issue and thinking that the current approach is the best and simply try to re-negotiate a better price for their current solution. Or they choose a completely different approach to what they think is the problem and try to find a way to financially justify that approach (this is known as the “Jeopardy” approach to problem-solving, where you start with the answer and ask questions that will produce that answer just like in the television game show).

What is really required in order to approach purchased services opportunities is an intimate understanding of the total environment associated with an issue. Failure to accurately identify the totality of an issue can produce a solution that is “penny wise and pound foolish.”

Let’s take a look at Food Services as an example.

You are a Supply Chain Leader and your CFO has asked you to help bring home savings related to Purchased Services. He has even given you the place he wants you to start: Food Services.

Currently, your organization has outsourced the management of the Food and Nutrition Services (FNS) operation to a third party. You have a managed services agreement that covers what the outside party will do and how much you will pay. Such an agreement is generally fair game for all the folks who want to help you save money on Purchased Services.

You are currently paying the vendor $1.5 million per year to manage operations across your multi-entity integrated delivery network (IDN). You have heard individual suppliers, your GPO and, of course, the big box consultancies say their products can slash 15 percent to 35 percent from your costs. You pick up your smartphone, engage its calculator, and quickly identify an opportunity range of $225,000 to $525,000. Your eyes pop out of your head. You can feel your heart pounding through your chest. Who ya’ gonna call?

Part 2: Follow the third-party money trail with purchased services