Stop wasting incremental money with purchased services

I think we all know that purchased services are a different type of commodity group than our products. So why are we employing the same old tactics (e.g., price reductions and standardization) to reduce this category’s lifecycle costs when this category of purchase also requires new approaches to stop wasting incremental money?

When you realize that most of your purchased service costs are centered around the effective, efficient and productive use of the service being performed, you will then have a whole new mindset for saving money. For instance, when you realize that your cost-per-pound price on your contract laundry/linen service is only the tip of the iceberg, the iceberg being 9/10th under water, you also will quickly realize that your major laundry/linen contract expenses are in your replacement cost, linen utilization (e.g., misused, discarded, hoarded or stolen linens) and linen processing that are under the waterline. Therefore, the cost you should focus on is not just your laundry/linen cost-per-pound cost, but your laundry/linen’s lifecycle cost.

A better way?

To paraphrase the book Vested Outsourcing, new smart, lean and more efficient methods to increase your purchase service savings have been created and adopted by many progressive organizations. These new tactics could be one of the differentiators between your supply chain’s growth or failure in the new healthcare economy we live and work in.

Further, one of the big shifts in many industries is to move away from transactional relationships with vendors and move toward a collaborative relationship with them aimed at developing broad, true win-win solutions relationships. The goal is to become vested in each other’s success.

Tactical approach

Now that you get the idea of what I’m talking about let’s look at five tactics to rein in your incremental purchased service costs that are prevalent in other industries:

1. Focus on outcomes, not transactions: Both parties agree to align their interest around more efficient, higher quality and lower-cost solutions than is presently being provided for multiple years.
2. Focus on what, not how: Put less emphasis on things and processes and more weight on performance expectations. In short, let the experts do their job without dictating how they should do their job. All they need to know is their scope, not boundaries.
3. Agree on clearly defined, measurable and trackable outcomes: Outcomes are to be expressed in terms of a limited set of (ideally five) high-level key performance indicators. Less is more under these agreements.
4. Optimize pricing incentives: Structure pricing that incentivizes best price/service trade-offs. Under this arrangement your suppliers are rewarded for solving your problems and then not penalized for costs that they don’t control (e.g., fuel, transportation, postage, chemical increases, etc.)
5. Build a governance structure that creates insight, not just oversight: Employ a panel of internal experts (i.e., purchased services value analysis team) to help you manage individual contracts that improve performance over time. This value analysis team’s charge is to collaborate with your suppliers in improvements, not hang them out to dry.

These five recommendations provide you with a basic framework for restructuring your purchased services management model that will revolutionize the way you manage, monitor and control your purchase services. It jumps off where your price and standardization strategies and tactics end.

Mutual success

Let’s not kid ourselves, very few of us are vested in our vendors and our mutual success. Most of us are still at a transactional level with our service providers. If a service provider cleans all the spaces daily described in their contract, they would get paid for this service. Yet, how many times has this same vendor given you an idea on how to save money or improve quality on their cleaning contract? I’m willing to bet…none! Why? Because they would lose money by doing so.

Contrarily, what if we have a collaborative relationship with our service providers where they are rewarded for bringing savings and quality improvements to our attention, thereby creating an environment where you and your service provider’s goal are to maximize your healthcare organization’s profits, and they are rewarded for reducing their revenues. In short, it should be you and your service provider’s goal to make their contract as effective, efficient and productive as possible. To quote Henry Ford, “Coming together is the beginning. Keeping together is progress. Working together is success.” This quote exemplifies the transformation you should be shooting for with your purchased service providers.