How to Optimize Value in Outsourced Agreements
We’re concluding our series on ensuring quality and financial high performance from outsourced providers. In case you haven’t read them, here are parts one and two.
1. Have clear visibility to data, usage and the ability to understand costs easily. Research indicates that between 40% and 70% of outsourcing value may be lost due to unsustainable contract terms, incorrect pricing and poor relationship management. Understanding these factors, and their impact on revenue and value leakage over time, is absolutely essential to maximizing the value of an outsourcing partnership. Ensure your invoice is accurate, easily understandable and that there aren’t any issues with non-standard and convoluted pricing schemes that make your invoice difficult to validate.
2. Get feedback from the end-users. It’s important to have the insights from those who are working with your outsourced provider. Conduct quarterly performance reviews, quality surveys and an annual meeting with key end-users to understand how the outsourced provider is performing. Are there gaps? Are there issues that are not getting resolved? Are there opportunities for improvement? A well-designed feedback system will ensure a mutually successful outsourced partnership.
3. Expect that the outsourced provider is an extension of your organization and will be committed to cost improvement, process improvement, and revenue improvement. So many times when we review the services being provided to our clients and find out that there are “utilization” issues and we bring it to the attention of the outsourced provider—the provider says they are doing their job according to the agreement. We say, it’s your “job” to ensure utilization is optimized and costs are minimized. If you oversee laundry services, then you are responsible to deliver best in class services and standards in the industry per pound/patient day. If this exceeds the “norm” then it is the outsourced provider that must lead the charge to fix it.
4. Consider performance-based contracting arrangements. In a performance-based contract, the outsourced provider provides your hospital with specific benefits, such as cost reductions or revenue generation, and in return, the provider shares in the value created. A portion of the price of the contract is linked to a series of key performance indicators that the supplier is responsible for meeting and to business benefits achieved by your hospital through the fulfillment of the contract. Performance-based contracting agreements create an incentive for the provider to control its costs as these contracts align the interests of both parties. Performance-based contracts tend to encourage closer relationships with providers. Performance-based contracts should be implemented for projects with outcomes that can be measured objectively. Performance-based contracts can be used for any contract, including small-dollar-value contracts, but are generally most appropriate when:
• Projects are large, have new technology, or have high risks.
• Existing contracts can be converted to define as much of the requirements in performance-based terms as possible.
• Large umbrella contracts are experiencing cost overruns or performance problems.
• Benefits contributed by providers can be quantified.
• Project implementation and production time need to be reduced.
5. Never be afraid to benchmark. Either informally or formally; and during any time of your agreement. You have a right to know what the competitive marketplace is offering for services, prices, incentives and most importantly new ways of thinking – 16% to 30% can be financially gained when outsourced initiatives are benchmarked by VIE Healthcare.
6. Test-market the relationship — observe behaviors during a well-defined test phase, assuming that realistic tests can be devised and that necessary observations can be obtained, even if pre-contractual monitoring can only be done at a cost that could not be sustained during the contract. For the test to be meaningful, a certain level of environmental stability relative to the contract duration is required. Additionally, it must be possible to perform the test phase without massive irrecoverable investment from either party. Finally, the test must be reliable: it must be too expensive for either party to manipulate the test phase to influence the results, or there must be re-contracting intervals if the initial tests do not turn out to have been reliable.
It is difficult for departments to easily validate contract pricing to invoice pricing and the “promises” that were made initially when the agreement was signed. There is a lot of work on the front of putting together a high-performance outsourced agreement.
However, once that work is done, you have a system in place to ensure you are receiving the value for your investment into an outsourced provider. And remember, you don’t have to outsource an entire department or service line—“selective outsourcing” offers a way for your organization to outsource one aspect of a larger service.
However you choose to structure your outsourcing agreements, ensure you’re doing your due diligence in creating an arrangement that leads to success.