Healthcare Purchased Services Magazine

Healthcare

Volume 1/Issue 1

Advanced Strategies and Best Practices for A Healthier Bottom Line

Magazine It’s Time We Focus On Purchased Services as a Strategic Asset

www.PurchasedServicesMagazine.com

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Healthcare Purchased Services Magazine

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RIGHT TOOLS make all the

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Contents

Healthcare Purchased Services Magazine

9 FEATURED ARTICLE

By Robert T. Yokl

Healthcare Purchased Services Magazine is published quarterly

by The HCP Group, Ltd.

Outsourcing as a Strategic Weapon

14 LEGAL 101

By Robert T. Yokl

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

P.O. Box 939, Skippack, Pa 19474 Phone: 800-220-4274 FAX: 610-487-2883 www.PurchasedServicesMagazine.com ————————————

16 BEST PRACTICES

Editorial Staff

By Robert T. Yokl

Publisher

7 Purchased Service Best Practices that Positively Impact Your Bottom Line

Robert T. Yokl bobpres@svahsolutions.com

18 CONTRACTS 101

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By Robert T. Yokl

Managing Editor

A New Approach to Purchased Service Contracts

Robert W. Yokl ryokl@svahsolutions.com

20 SUSTAINABLE SAVINGS

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By Robert T. Yokl

Senior Editor

Purchased Services the Right Way: Sustainable Targeted Cost Savings

Patricia A. Yokl ————————————

22 COST MANAGEMENT

Editor and Graphic Design

By Robert T. Yokl

Danielle K. Miller

5 Overlooked Costs of Ignoring Your Purchased Services

24 NEGOTIATIONS 101

By Robert T. Yokl

Hot to and How Not to Make Concessions in PSC Negotiations

29 THE LAST WORD

By Robert T. Yokl

Price is the Smallest Element in the PSC Savings Equation

Volume 1/Issue 1

Copyright © The HCP Group, Ltd. All rights reserved. Reproduction, translation or usage of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright Act without permission of the copyright owner is unlawful. For permission call, fax, or e-mail Robert W. Yokl, Managing Editor, Phone: 610-327-4820, Fax 610-487-2883. E-Mail: Ryokl@svahsolutions.com for approval to reprint, excerpt or translate articles.

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From the Publisher's Desk

Robert T. Yokl

Why a New Purchased Services Magazine?

Robert T. Yokl

We, as a company, have been proselytizing for years that purchased services (i.e., services purchased from an outside contractor) are equal to or even greater in importance than supply chain expenses because of their huge costs, which are growing exponentially at your hospital, system, or IDN. Even a hospital with 7.5 occupied beds could have $10 million in purchased services expenses. Now, we are going to put our money where our mouths have been by introducing the first edition of the Healthcare Purchased Services Magazine. This is a magazine that will provide ideas, insight, and understanding that will enable you to master this supply chain discipline.

It is the mission of the Healthcare Purchased Services Magazine to fill in the educational gaps of this new and emerging supply chain discipline. We call it a supply chain discipline since there is no other department or division in your healthcare organization that has the time, talent, and experience to effectively manage these multi-million-dollar contracts. Even your GPOs can’t provide a contract that fits all of their members’ requirements, since each provider’s functional specifications are different.

Today, if you are a supply chain manager, you might think that purchased services management isn’t in your wheelhouse, but let me assure you that it is. Even if you aren’t managing every one of your hospital, system, or IDN’s purchased service contracts, some do come across your desk each month. With this said, we believe that you need every educational advantage possible, like this magazine, to teach you how to manage and control your purchased service contracts with the lowest in-use costs possible.

For you see, it’s not the contract price that is important, but the lifecycle cost of your contracts that you are aiming to control at the lowest per patient day cost possible. You also need to have a working knowledge about legal, safety, and quality issues that could affect the integrity of your contracts.

Naturally, we are excited about this new venture to bring you the most reliable information on purchased services topics that you can put into effect immediately to reduce your purchased services’ costs and improve your service quality. We hope you are, too!

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Visit Our Website

www.ValueAnalysisAcademy.com For More Information or to Sign Up for the Course

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From the the Managing Managing Editor’s Editor’s Desk Desk From

Robert RobertW. W.Yokl Yokl

You Have to Be Strategic to Save Big with Purchased Service Expenses Robert W. Yokl

For many years, purchased service expenses has been the forgotten brother/sister of the healthcare supply chain non-salary expenses. Yes, they were always there, but they were handled by their subject matter experts and departmental stakeholders. The mindset was that the stakeholders knew the services better than anyone else, so we let them negotiate the contracts year after year and it sort of worked, to a point. This was good 10-20 years ago, but with purchased service costs representing 30-45% of non-salary expenses at healthcare organizations today, we need to think differently to obtain dramatically new big savings results. Why? Because there are new and better ways to strategically attack these major expenses and reduce costs while maintaining and/or improving quality of services offered.

Time for Supply Chain to Take Charge of Purchased Services To be strategic about your purchased services you first must be organized to save big. This is not just gathering up all the contracts into one repository, though that should be a given. This is about taking responsibility for all purchased service contracts and that should be the job of Supply Chain. They are the chief sourcing agents for healthcare organizations and can apply supply chain best practices and value analysis methods to these purchased service contracts. Start to assign purchased service contracts to your contract managers or hire new contract managers to take on this new workload.

They will pay for themselves with new big savings.

Know Where You Stand on Purchased Services Before, During, and After the Contract is Signed In order to know where you stand with purchased services, you need reporting to tell you where you need to focus your efforts. To do this, you need to answer important questions on an ongoing basis.

Where are your costs increasing dramatically year over year? What categories are running over cohort or historical key performance indicators? How much savings can you realistically achieve in the next fiscal year? Did the contracts you implemented really save you money, and if so, how much?

To be able to answer these questions, you need to have a database of purchased services from your accounting general ledger listings and accounts payable. These new systems can be home-grown or Volume 1/Issue 1

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Featured Article From the Managing Editor’s Desk

T. Yokl Robert W. Yokl

purchased in the marketplace, but they are necessary to give you the edge on the who, what, when, where, and why for purchased service expenses. Otherwise, you are just throwing darts into the wind to see if any savings will stick. Plus, these systems will give you leverage on customers, stakeholders, and internal experts who may give you pushback just to avoid changing what they had put in place previously.

GPOs Drive Savings in Supplies and They Are Doing the Same in Purchased Service Contracting In years past, Group Purchasing Organizations (GPOs) used to have some purchased service contracts, but they were not very beneficial. This left supply chain leaders questioning even using GPO contracts as they felt they could do better negotiating themselves. Finally, the GPOs realized that this was a big area of savings that they could offer to their customers. Today, most Group Purchasing Organizations and now the regional cooperatives are making purchased service contracts better. Look to your GPOs (national and regional) whenever possible for contracts to save you more; there are some nice gems in those contracts. I especially like the new regional GPOs, as a good amount of these contracts have a local/regional aspect to them, and they can handle those details in a customized way for their members.

Savings Beyond Price in Purchased Services is Very Real Even though we are big proponents of GPOs and their contracting, that does not mean there are not huge savings beyond contract price —-because there are. Don’t just implement a new contract with new pricing. Go beyond pricing and look at the features and service elements that are being provided. Are you using all the features of this service and is your vendor following the service requirements inside the contract as well? This is where value analysis strategies play a major role.

Purchased services, representing a third of our non-salary budget, are too big not to put on the full court press like we do with all our supply areas. With a little time, effort, systems, and training for your supply chain team, you can start to roll out major purchased services savings rather quickly. It’s time to set up a formal purchased services program at your organization. Set up that value analysis team, give them good training, support them with supply chain personnel, and most importantly, provide them with good data/reports which is the evidence of purchased services. The time is now to save big!

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A UNIQUE APPROACH TO PURCHASED SERVICES MANAGEMENT NO TWO FACILITIES ARE ALIKE So We Don’t Offer a One-Size-Fits-All Approach

Reducing Your Purchased Services Cost with Activity-Based Cost Management You could be leaving 11% to 18% or more in new non-labor savings on the table untouched. It’s a little-known fact that most healthcare organizations have overlooked these savings opportunities or have only nibbled around the edges of these savings. What our Activity-Based Purchased Services Expense Management Software can do for you is to ensure that every dollar that can be saved in this category of purchase is saved. For more information or to sign up for a FREE demo, visit our website at:

www.SVAHSolutions.com Volume 1/Issue 1

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Featured Article Article Featured

Robert RobertT.T.Yokl Yokl

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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Featured Article

Robert RobertT.T.Yokl Yokl

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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Featured Article

Robert RobertT.T.Yokl Yokl

Growth Areas 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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Featured Article

Robert RobertT.T.Yokl Yokl

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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Legal 101 Legal 101

Robert T. Yokl Robert T. Yokl

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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Legal 101

Robert Robert T. T. Yokl Yokl

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?

Note that this article isn’t meant in any way to be legal advice. If you like the premise or ideas shared in this article we recommend that you consult with your company’s legal officer for an authoritative legal opinion.

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Legal 101 Best Practices

Robert T. Yokl Robert T. Yokl

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

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LegalPractices 101 Best

Robert Robert T. T. Yokl Yokl

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

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Legal 101101 Contracts

Robert T. Yokl Robert 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

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Legal 101 101 Contracts

Robert Robert T. T. Yokl Yokl

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.

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Legal 101 Savings Sustainable

Robert T. Yokl Robert T. Yokl

Purchased Services the Right Way: Sustainable Targeted Cost Savings Robert T. Yokl, President, SVAH Solutions

I can’t count the number of times a supply chain manager, director, or even vice president has told us that his or her goal is to save three, five, or even ten million dollars in purchased service savings as a one-time event. However, as HealthLeaders Media so wisely said, “Onetime slashes are not a long-term solution, you need smart, sustainable plans for spending less” to be successful in the long-term.

Smart - Sustainable - Strategic - Savings One reason this one-time slashing approach to cost cutting doesn’t work over the long-term is that you think you have cut your purchased service costs permanently, but these same costs creep back in about a year or two (if not sooner). How do we know this to be a fact? We have frequently seen hospitals, systems, and IDNs hire consultants or form teams to cut their costs in specific categories of purchased services (e.g., telecommunications, food services, laundry services, etc.) only to see these same costs sneak back into their healthcare organization’s cost centers over time because no monitoring systems were put into place to prevent this from happening.

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Legal 101 Savings Sustainable

Robert Robert T. T. Yokl Yokl

To the contrary, it has become quite clear that successful healthcare supply chain leaders are cutting millions from their purchased service budgets permanently, not randomly, by targeting their cuts based on hard data and then monitoring them continuously to be sure the savings stick. The three recognized ways to target your best purchased service savings opportunities are as follows: •

•

•

Employing traditional benchmarking with your peers to see why you are different in your major purchased service cost drivers (e.g., food service, laundry linen, telecommunications, records management, utilities, etc.) utilizing activity-based costing.

Developing historical benchmarking (average of 12 or more months running average activity-based costs) to determine your best savings opportunities. Note: We have found this benchmarking model to be universally accepted by clinicians as real, obtainable, and trustworthy.

Measuring year-over-year changes in your purchased service spend to detect big spikes in specific spend categories.

Anyone can cut costs as a one-time event in just about any category of purchase, but if you want to reduce your costs in a purchased service category permanently, you need to be smart, sustainable, and strategic to make the savings stick. These three recommendations can go a long way towards making this happen.

Improve Your Purchased Service Value Analysis Teams Another reason that you need to target your savings opportunities vs. going on your intuition is that your purchased service value analysis or other cost management teams don’t have time for “dry holes.” Meaning, your team members could work for months on a VA purchased service study and then find out, to their frustration, that there are no or very little savings to be achieved. This isn’t a good way to build confidence in your cost management program.

By the way, it’s been our experience that benchmarking (traditional or historical) enables our clients’ VA project managers to save money (with certainty) on 98% of their cost management studies. Isn’t this the same “hit rate,” you too, would like on your cost management projects?

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Legal 101 Cost Management

Robert T. Yokl Robert T. Yokl

5 Overlooked Costs of Ignoring Your Purchased Services Robert T. Yokl, President, SVAH Solutions

Purchased services, or the contracting for tasks, work, or services provided by an outside contractor (e.g., copier repairs, window washing), is one of the most ignored categories of savings opportunities for healthcare organizations in the 21st century.

The cause for this malady is that purchased services’ specifications, bidding/negotiations (if any), and final purchasing decisions, for the most part, are decentralized at most hospitals, systems, and IDNs. These multimillion-dollar aggregated contracts are usually the province of your department heads, division managers, and their administrators, not your professional and experienced supply chain staff.

For these reasons, there are five overlooked costs of ignoring purchased services at your hospital, system, or IDN that you need to know about:

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LegalManagement 101 Cost

Robert Robert T. T. Yokl Yokl

1. Legal Liability: The typical purchased service contract’s length is one to three years; therefore, there is a legal cost (e.g., contracts signed that aren’t legally binding, automatic renewal clauses, no arbitration article, etc.) if your purchased services’ contracts aren’t reviewed by your healthcare organization’s legal counsel. How many times are purchased service contracts reviewed at your hospital, system, or IDN? 2. Loss of Control: Since most purchased service contracts aren’t centralized in one location, your department heads maintain these contracts in their department. At most healthcare organizations, they don’t even know that they exist.

3. Not Bidding: It is rare to see a department head bid a purchased service contract under their control, so you are paying whatever the market will bear.

4. Standardization: It isn’t unusual for us to uncover identical purchased service contracts being employed for the same service (e.g., elevator maintenance, reference labs, trash removal, etc.) at the same hospital, system, or IDN. 5. Benchmarking: It would be an exception to find a department head who benchmarked their purchased service contracts annually to determine if they were within acceptable limits. Is this happening at your organization?

Annual purchased service contract costs are equal to or greater than supply costs at the average hospital. This means that a typical hospital has five, eight, ten million or more in purchased service contracts that need to be measured, managed, and controlled. Otherwise, your direct and indirect costs for this category of purchase will always be beyond acceptable limits.

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Negotiations 101

Robert RobertT.T.Yokl Yokl

How to and How Not to Make Concessions in Purchased Services Contract Negotiations Being First to Make Concessions May Not Be a Bad Thing Robert T. Yokl, President, SVAH Solutions

Making concessions, or an exchange of money for things of value to us or our healthcare organization, is an integral part of successful purchased service contract (PSC) negotiations. However, there is a right way and wrong way to do so.

Relationships Management Negotiations can sometimes test relationships, but shouldn’t break them. Therefore, your goal for your PSC negotiations is for each party to come away with what they believe is important to them.

However, it might not be everything they asked for or desired. The secret to negotiating your purchased services agreements is to uncover what that thing is and then try to find a way to provide it within the framework of your own goals and objectives. It’s never the same on each purchased service contract.

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Negotiations 101

Robert Robert T. T. Yokl Yokl

Making the First Concession Making the first concession in your negotiations may not be a bad thing, like offering a 3% price increase to your contractor on a renewal contract, if you believe that your contract partner will make a concession you want down the road. Unfortunately, many times your concession is often unappreciated and unreciprocated. Here are four tactics that were devised by Deepak Malhotra, Eli Goldston Professor of Business Administration at Harvard Business School, to prevent this from occurring:

1. Label Your Concessions: Your concessions will be more powerful if you label them as a concession and emphasize the benefit to the other side. For instance, you might say, “Jim, this will be a challenge for me but I’m willing to concede paying your invoice within 15 days of its receipt. I know this will improve your cash flow.” Lastly, don’t give up on your demands too fast, or the other side will consider your concessions not serious. Instead, make your concession slowly. In our example above, you might start with a 20-day payment concession vs. your current 30-day payment schedule, then go to 15 days if you believe you can get a concession from the other side in the future.

2. Demand and Define Reciprocity: “To increase the likelihood that you get something in return for your concession, try to explicitly but diplomatically demand reciprocity.” You might say, “A 15-day payment isn’t easy for us, but I have received a commitment from my CFO to make this concession for one year. Might you see a way to give us a 2%/15-day discount?”

3. Make Contingent Concessions: “When trust is low or when you’re engaged in a one-shot negotiation, consider making a contingent concession,” such as, “Jim, if you could give me a 2%/15-day discount, I’m sure I can convince my CFO to approve our new 15-day payment terms for one year.” Note: Over-reliance on this contingent concession can interfere with building trust.

4. Make Concessions in Installments: It has been documented by Stanford University Professor, Amos Tvershly, and Princeton University professor, Daniel Kahneman, that we like to get bad news all at once, and good news in installments. With this said, it is much better to offer our concessions incrementally. For instance, don’t offer an additional 5% discount all at once. You need to start with two smaller concessions, such as, 2% followed by 3%, then followed by 5%. The chances are good that your offer will be accepted before you get to 5% and you would have saved money on the deal.

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Negotiations 101

Robert Robert T. T. Yokl Yokl

The lesson to be learned here is that the parties to your negotiations expect the give and take of negotiations. If you give in too soon or refuse to reciprocate, both parties are hurt by this behavior.

Use these four tactics to make the best of your concessions.

Art and Science Negotiation is an art and science that needs to be studied, learned, and practiced for you to become proficient. The first step is to understand that negotiation isn’t about beating the other person in the negotiation, but to find out what they really want and give it to them in small bits which, believe it or not, will make them happy.

3 Purchased Service Pit Falls You Need to Avoid Robert T. Yokl More than ever before, healthcare organizations are targeting their purchased services for savings, which is a good thing. However, too often these same healthcare organizations are only nibbling around the edges of their purchased service costs. Here are three purchased service pitfalls that you need to avoid to reap the full benefits of purchased service management: 1. Forgetting that price is just the tip of the iceberg: We have observed that 97% of the time, healthcare organizations focus their purchased service contract analysis on price alone. These organizations either rebid their contracts or sign up for a local or national GPO contract to lower their costs. While price is important, the biggest cost driver on these contracts is their inuse or utilization cost. For instance, if you have the best price on your laundry/linen service in the region, but your cost per patient day is through the roof, what have you gained by getting a better price at the pump? Believe it or not, it’s a much better tactic to sign a laundry/linen service provider contract which has a higher unit price and a guaranteed cost per patient day. This is where your real savings reside.

2. Not starting with a blank piece of paper: Too many purchased service contracts are written using the contractor’s agreement, thereby, agreeing to terms, conditions, and service elements that could be detrimental to your hospital’s bottom line or not needed at all. We have a client that started with a blank piece of paper on his renewal food service contract that included 24/7 concierge services for their patients which was costing this hospital a million dollars annually. After consultation with his senior management, it was decided that this add-on service wasn’t needed at all. This is just one example that shows you don’t need everything you have in your purchased service agreements now.

3. Avoiding sacred cows: We hear from supply chain professionals that they don’t want to review the lab reference services, telecommunications, insurance, consulting, IT contracts, etc., because they are “sacred cows.” This should be a tip-off that there are savings in these contracts but people are afraid to look at them. No purchased service contract should be “off limits” for review or you will find down the road that it is too costly, vendor centric, or downright prohibitive.

Back to our original point: There are huge savings (11% to 18%) in most healthcare organizations’ purchased service contracts. However, if you are only looking at price savings, the savings are only 5% to 8%. Therefore, avoiding these three purchased service contract pitfalls will bring you much closer to wringing the towel dry on your purchased service contracts than any other tactics. Isn’t that why you decided to look at your purchased service contracts in the first place?

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How Is Your Organization Managing the Purchased Service Hot-Potato?

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The Last Word

Robert T. Yokl

Price is the Smallest Element in the Purchased Services Contract Savings Equation Focusing Exclusively on PSC Price Savings Can Make You Overconfident Robert T. Yokl, President, SVAH Solutions

We are all looking for quick savings fixes with our purchased service contracts (PSC), therefore, our first decision related to reducing the cost of these contracts is usually to standardize them by category of purchase under one vendor and then bid our purchased service contract’s portfolio to start saving money. While this is a traditional strategy to get started saving money on our purchased services, we must warn you not to be overconfident since price is the smallest element in the PSC savings equation (i.e., price, standardization, and utilization).

Overconfidence It is easy to become overconfident that your standardization and bidding strategies will wring the towel dry on your PSC savings when, in fact, price is the smallest element in your PSC savings equation. Our studies show that these price tactics represent about 2% to 3% (savings/total supply

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The Last Word

Robert T. Yokl

chain expense budget) in additional savings for your healthcare organization. Whereas, your purchased services’ utilization or consumption savings can represent 11% to 18% of your total supply chain expense budget. This is where the utmost PSC savings opportunities reside, not in price and standardization.

Best Value Vs. Best Price Purchased services are a different animal from any other purchase where the price at the pump is irrelevant. What is important with your purchased service contracts is that you are receiving the “best value,” which translates to the lowest cost per transaction, occurrence, or service (i.e., running cost) along with the highest service quality possible (i.e., you set the specs on your service quality). For instance, if you hired a contractor to perform a monthly pest control service at your company’s cafeteria, you would be looking for a contractor with the lowest cost per square foot serviced along the highest kill control rate possible. On the other hand, if your criteria for success was price alone, you couldn’t even measure the lowest qualified bidder since their quotes would vary wildly from proposal to proposal.

Keep Your Eye on the Ball Price and standardization savings might seem like easy pickings at first glance with your PSCs, but remember it is just the tip of the iceberg. The bulk of your savings will come from lowering your PSC utilization or consumption cost per transaction, occasion, or service. There is no other way that I know of to make real, tangible, and sustainable PSC savings happen year in and year out.

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