From individual functions and roles to entire departments and operations, outsourcing remains a fiscally attractive opportunity for some healthcare organizations, whether they choose the option for budgetary and expense control, hyper-focused expertise or both.
Typically, these organizations internally evaluate what they call their “core competencies” and determine what they’re capable of performing in-house with available staffers and what conceivably could be delegated to outside experts.
This can be a daunting, if not perplexing, decision, particularly if the revenue and expense streams are so unbalanced that there’s no way to avoid cuts in labor, services and supplies.
When push comes to shove, invariably the knee-jerk reactions emerge often as a last resort. Outsourcing selected facility contracts can be a wise decision, if you can determine what makes the most sense for your organization.
In a pinch, what do you choose? What pitfalls should you avoid?
Oblique, tunnel vision
Healthcare organizations run the risk of outsourcing particular functions or services for the wrong reasons and must think through their reasoning critically.
In fact, outsourcing does not always equal savings, according to Angie Haggard, Vice President, Supply Chain Services Operations, Owens & Minor Inc.
“If you are outsourcing just to save money, then outsourcing is probably not the right answer,” Haggard insisted. “Outsourcing must be aligned with business needs and your organization’s non-financial [return-on-investment]. No matter what function or service you consider for outsourcing, make sure you have established clear goals, expectations and roles/responsibilities as well as an ongoing communication plan for progress to goals and strategic alignment.”
Landscaping represents an easy example, Haggard said.
“When someone hires a landscaper, they do not expect financial savings,” she continued. “However, they do expect the landscaper to have expertise in curb appeal, plant maintenance, and have the tools to perform the work efficiently. Outsourcing other services is no different than hiring a landscaper. Goals, expectations, and roles/responsibilities must be crystal clear and there should be proven experience in performing the service.”
Outsourcing can offer a healthcare organization access to more experienced resources, the capability to reach a desired outcome at a faster pace, increased bandwidth for other activities and management of day-to-day details of a specific function or service, according to Haggard.
But don’t confuse outsourced contracting arrangements with a temp agency, which can complicate role delineations with staff, Haggard warned.
“When you make a decision to outsource, you are seeking to have an organization manage a service or function, not a temp agency to fill specific position(s) within a service,” she said. “When an organization wants to be selective on who does what for specific roles, you will not reap the benefits of the relationship. When outsourcing, provide clear direction on the organization’s strategy, short- and long-term goals so the outsourcing partner can align the structure, team, skills and priorities accordingly. Then let them do the work.
“If a supply chain professional is too involved in the day-to-day operations it is time to ask why you are involved in the details,” she continued. “Is the outsourcing service meeting the contract obligations? Is the outsourcing service meeting your expectations? Either way, if there is a gap, it’s time to meet with the outsourcing partner and clearly share your short- and long-term expectations — especially if they have changed from the original intent.”
Yet it’s not enough to design to contract out a particular function, process or service to a third-party without fully recognizing and analyzing the repercussions of the decision, according to Brian Murphy, Director of Business Development, Ryder.
Healthcare organizations need to evaluate the upstream and downstream effects any outsourcing project may have on the broader health system, he noted, and not just labor.
“Providers that have experienced success in outsourcing emphasize and prioritize the areas that will ultimately facilitate the return on investment,” he said. “As an example, within the hospital system outsourcing event, knowing how to structure agreements with vendors so that the relationship is a win-win will give the provider more savings opportunities to subsidize the value that the outsourcing event will bring. Additionally, the health system oftentimes under-forecasts enough time and effort that will go toward product standardization. Having a [stock keeping unit] mix that has not gone through an appropriate standardization process leads to supply chain risk and reduces the overall value the initiative can bring.”
Big picture
Poor decisions about outsourced contracting can result from a lack of a complete and thorough analysis, including cost comparisons, indicated Michael Bohon, Founding Principal, Health Care Solutions Bureau, and a former hospital supply chain executive.
“I was once asked by a hospital client to assist them in determining whether they should outsource the laundry services or continue to maintain and run their in-house, on-grounds laundry,” Bohon recalled. “When I asked them to provide their current cost-per-pound figure, they provided one that seemed too good to be true. After some discussion I discovered they were only including their obvious surface costs. They were not adding in the costs of water, utilities, maintenance, procurement, housekeeping and security, just to name a few. If we hadn’t revised their calculation they would possibly have made a poor, uninformed decision that they would have to live with for some time.”
Bohon encouraged planning for the “commonly inevitable” decision to reverse course where the healthcare organization changes its mind and decides to bring the outsourced serve or department back into the fold. Why?
“It is then that they learn that their former employees may have enjoyed significant increases in their pay and benefits when they were switched from a healthcare environment to a service industry setting,” he revealed. “That can make it very difficult to convert back to an in-house operation.”
Michelle Robbins, Vice President, Product Management, Life Sciences & Healthcare, DHL Supply Chain, observed that her company finds supply chain executives in any industry make one common mistake: “Not having a clear understanding of their current total activity-based costs, or an inaccurate baseline.
“That limits the true evaluation and business case for outsourcing,” Robbins said. “In addition, without having visibility into their current costs, it is difficult to measure the impact and savings of the outsourced function. This also limits a health system’s ability to accurately estimate its transitional costs — including startup expense, systems, labor, equipment upgrades, etc. — and can lead to project overrun early in the process.”
Robbins encouraged healthcare organizations appoint a “champion” to guide the outsourced relationship and ensure integration between the outsourced service provider and client-side dependents and objectives for at least the first 12 months. Further, incentives for this position should be aligned with the performance objectives of the contract and include the potential for personal reward based on program success, she added.
Robbins also warned against “a lack of objectives or service levels and key performance indicators to measure for the term of the contract, poorly defined transformational priorities, inaccurate timelines and milestones, and false expectations for utilizing outsourcing as a hedge for risk as opposed to leveraging a strategic partnership focused on value and expanded service levels. It is a common mistake for many first-time outsourcers to have misconceptions about the exclusivity of responsibility and risk,” she noted.
Healthcare organizations must clearly communicate their “end game” and what it is they are trying to accomplish through outsourcing, John Weiss, President and CEO, The Audit Group, said.
“Many times health systems will enter into consulting agreements that are nebulous at best,” he observed. “Not being able to clearly or correctly identify your intended outcomes is a recipe for wasted funds and contract addendums down the road. To determine if your agreement falls into this category, show the contract to a peer — someone you respect intellectually — who doesn’t know anything about what you want to accomplish and let them tell you how they read the agreement. Did they recite what you are looking to accomplish? Or did they go down another or various paths of understanding?”
Healthcare organizations also must be able to clearly identify the “true” total cost of the agreement.
“In other words, are the contracted results clearly identifiable and quantitatively measurable?” Weiss asked. “Compare those results to all contracted costs that are clearly defined and scheduled for actual disbursements. Costs can be based on units such as labor, soft services and hard products. What labor is to be used? When will it be used and at what labor rates? What exactly are the soft services and how do you know when they are correctly provided? What is the cost per unit or bundle of hard products when provided?
“Understanding the true total cost of the agreement also includes a set time — when is the contractor to be paid? Is it on a weekly, monthly or quarterly basis? Will payments take place upon accomplishment of predetermined goals and benchmarks? Was it acceptably provided?” he continued.
Weiss echoed calls for a designated internal management person to oversee and be accountable and responsible for contract performance results.
Other caveats include sufficiently investigating the background of the chosen third-party outsourcing firm to ensure that it has the “hands-on experience in healthcare with agreed-up results,” according to Fred Jasavala, CEO, Logihedron Inc.
Jasavala recommended healthcare organizations develop or define requirements — including KPIs and productivity standards — for the outsourced firm that can “accommodate the variability of healthcare needs without constant upcharges,” he noted. Then they need to “measure and ensure that they are getting the benefits they signed on for over time [because] they get busy with other projects and work and lose sight so there is a lack of follow-up.”
Red alerts
Several issued a series of warning signs that supply chain executives should spot.
Not performing due diligence is one, according to Doug Heywood, Managing Partner, Ron Denton & Associates LLC, and a former hospital supply chain executive.
“This step is necessary to understand what outsourced service models, vendors and fee structures will bring the most value to your organization,” he said. “This step is also important to leveraging competitive interest in outsourced services toward negotiating the best deal for your organization.”
Failing to check references is another, Heywood continued.
“This step is crucial to understanding potential issues, obstacles and remedies for a successful outsourcing engagement,” he said. “Checking references should include speaking with at least two current clients and one past client. And ideally, one should visit at least one current client that is receiving the same or similar outsourced services that you are considering.”
Heywood stressed the need for negotiating an activity-based fee structure, too. “A common mistake is to not provide for a mechanism to adjust or renegotiate fees if and when changes occur in your need for the outsourced service,” he noted. “An activity-based fee structure should be negotiated that provides for new negotiations or adjustments in fees if and when there are changes in your organization’s scope of services, level or quality of services, timing of services, and/or volume of service units required.”
Supply chain also should be negotiating services fees separately from supplies or capital requirements, Heywood stressed. “A common mistake in outsourcing services is to bundle fees for service delivery with fees for related expenses, such as supplies or capital equipment needed in the delivery of services,” he said. “By handling your capital investments and acquisition of supplies separately from your fee transactions for delivery of services, not only will your expenses be lower for ‘units of service” performed, but your overall expenses for services, capital and supplies will be lower as well.”
Supply chain should have an implementation/transition plan, he advised. “This step is essential to ensure all parties understand the objective reasons for outsourcing, the anticipated/expected benefits of outsourcing, and the timing, structure and staffing of services that will be outsourced. This step also involves having communication protocols for working with employees who will be impacted by the outsourced service, and for addressing any questions or concerns of stakeholders and end-users on the outsourced service,” he said. “The transition plan should include implementation of an issue resolution process that is approved and supported by your senior-most executives over the outsourced service.”
A performance management plan is another caveat not to be overlooked. “It is important to have a well-defined agreement with your outsourced vendor on how performance will be measured and reported, what will constitute acceptable and unacceptable performance, and what consequences, remedies or penalties will be imposed for unacceptable performance,” he noted.
Be sure to treat the outsourced vendor as a strategic partner, Heywood advised. “The vendor was selected to perform processes critical to the success of the operation,” he said. “Too often, the hospital will find fault with the outsourced operation when difficult situations develop. Instead, the outsourced vendor should be looked upon to provide critical feedback and solutions to bring ongoing improvement to the operations.”
Finally, employ a mechanism to review scope of services, he emphasized. “One of the benefits of utilizing an outsourced vendor to provide services is the ability to quickly respond to changes in scope to improve customer satisfaction. It is important to review the scope of services on a regular basis to ensure the vendor is fairly compensated for services performed,” he added. “The reverse is also true if the scope of services is reduced, the fees charged to the hospital should be reduced accordingly.”
Jack Datz, Managing Principal, Vizient Inc., issued his own set of caveats to maintaining control over outsourced contracts.
Pricing not only defines the partner but also the process. “Establish firm pricing and avoid vendor partners that allow for, or encourage, rate negotiations with every individual placement,” he insisted. “This practice results in increased or hidden costs that undermine the cost control initiatives that outsourcing may be designed to solve.”
At the same time, setting unrealistic rates, either too high or too low, is a common misstep, Datz continued. “Supply chain leaders should have a detailed understanding of what their competitors are paying and bill rates vendors are charging in their specific market or geographic region,” he said.
Pursue vendor neutrality, he recommended. “If the supply chain professional decides to contract with a single vendor to manage all outsourcing contracts there may be a conflict of interest,” he indicated. “The vendor then has the opportunity to define your rates, contract terms and even limit the candidates you are shown, benefitting their business, but not yours. This is like having the fox guard the hen house. Be sure the partner you choose always has your organization’s best interests as their primary goal.”
Contract terms and conditions can be another sore spot, he noted. “Agreeing to vendor-proposed language can leave an organization at risk for liability, lack of vendor accountability and underperformance,” he said. “Instead, supply chain pros should negotiate stringent, measurable terms, conditions and service-level agreements with agency vendors.”
Be sure to set up an effective vendor assessment, selection and measurement process to make decisions. “Not having the right qualitative and quantitative data to accurately review vendor performance evaluations can undermine your outsourcing goals,” he advised. Examples of qualitative data include a vendor’s prior ability to meet service-level expectations and performance feedback from your organization’s stakeholders who worked with the vendor previously. Quantitative measures include market-specific pricing benchmarks, key cost components, capacity by staff type and current usage at your facilities, he added.
Safety, security
One issue typically overlooked until gaining prominence within the last decade involve human resources requirements for background and security checks related to hiring decisions, according to Rosalind Parkinson, Founding Principal, Parkinson Logistics Associates LLC, and a former healthcare supply chain executive.
“A main reason [healthcare organizations] engage vendors to perform hotel services is to move much of the hiring process to vendors,” she said. “However, most HCOs also want to be sure that those people hired by vendors are just as carefully selected as those hired directly. This all makes sense, but must be clearly outlined in the contract with the vendor to avoid problems down the road. If the vendor is supposed to do the screening in the same way as the HCO, this must be detailed in the contract.”
Who maintains responsibility for health screening standards for the healthcare organization remains another hurdle, Parkinson noted.
“Careful attention should be paid to this item as the The Joint Commission is committed to hold the HCO accountable for all employees — whether directly hired or on contract from a vendor — to the health standards established by the HCO. Any requirements for TB testing, vaccinations, etc., established by the HCO for its own employees must also apply to those employees hired by the vendor. Contracts need to speak directly and clearly to this standard and establish who is responsible to maintain the standards for employees hired by the vendor.”
Rick Dana Barlow | Senior Editor
Rick Dana Barlow is Senior Editor for Healthcare Purchasing News, an Endeavor Business Media publication. He can be reached at [email protected].
