How to Ensure Quality and Financial High-Performance from Outsourced Providers
Ensuring quality and financial high performance from outsourced providers is kind of like making a spanakopita from scratch—when you don’t have the recipe or guidance from a master (or even know what it is. Google it.) One word—disaster.
Following these steps will make it easier to execute.
It’s important that the senior leadership of the organization is fully onboard as you go through this process.
STEP 1: ANSWER THESE THREE QUESTIONS
First and foremost, you must thoroughly understand:
- Why you want to use outsourced providers
- What it is you are trying to accomplish through outsourced providers
- Where your organization is today and where it is going in the future
Many organizations gloss over or skip this step entirely believing that they already have most of this information and/or a mandate to move forward with the project. That may very well be true, but to skip this step is inviting disaster.
STEP 2: TRACK
This is the time to begin tracking:
- risks associated with the project along with appropriate mitigation strategies.
If executed properly, this step in the continuum may produce alternatives to outsourcing that are more efficient and cost-effective.
STEP 3: IDENTIFY TYPES OF ACTIVITIES
Identify activities that represent core competencies and those that are non-core activities.
Because activities that represent core competencies cannot be outsourced and non-core activities are candidates for outsourcing.
Before making any outsourcing decisions:
- fully examine the expected benefits;
- fully understand the risks of outsourcing and the costs that these risks impose;
- base the decisions on a sound trade-off of risks and benefits.
Be aware of these kinds of risks:
- the risk of overpaying;
- the risk of damage to reputation resulting from inferior service;
- risk of loss of control over vital assets.
STEP 4: BUILD AN OUTSOURCING FRAMEWORK
Before building an outsourcing framework, you must first decide that outsourcing is a viable alternative and that all other options have been thoroughly reviewed.
Outsourcing is complex and time-consuming to establish. There is no single approach to outsourcing that will guarantee success. Every situation is unique in one way or another.
The key to success is preparation and experience. Just as a sports team would not walk onto the field of play without a meticulous playbook and a coach to lead them, nor should an organization that is contemplating outsourcing move out of ideation without an experienced outsourcing advisor and a strategy to ensure success.
The first requirement in building a strategy for success is to develop a framework that will guide the involved parties. This strategic framework for success must be based upon years of hands-on experience to avoid the obvious and customary crises and pitfalls. As well, the framework must be detailed enough to ensure stability and consistency, yet flexible enough to be adaptable to the uniqueness of each client/vendor situation.
Here is a high-level five-step system for outsourcing:
- management of the outsourcing process
These 5 steps provide a framework to ensure that all major phases and processes are addressed, and identify any gaps or missing processes that need to be included for proper planning of engagements with outsourced providers.
STEP 5: KEY QUESTIONS TO ANSWER BEFORE OUTSOURCING
Here are two critical questions that must be answered:
- What non-core activities should be outsourced and what core services should be performed internally, within the hospital? (Step 3 should have provided the answers.)
- For those services that should be outsourced:
- How should the contract be structured?
- How should the contract be negotiated?
- How should the relationship be managed to ensure its continued strategic success?
- When will the relationship be terminated?
STEP 6: A NEEDS ASSESSMENT
Aspects of a needs assessment can include:
- cost reduction
- revenue improvement
- lack of internal specialization
The key activities in a needs assessment include:
- defining the business needs and key objectives
- benchmarking the current processes
- understanding the standard activities and service level measurements (“as-is”)
- reviewing future state service delivery options (“to-be”)
- assessing the gaps between the current and desired state
- assessing the feasibility of options & defining the strategy for service delivery alternatives (insource, nearshore, multi-shored delivery, combinations of, etc.)
- investigating the implications of assessment
- validating the associated costs, cost savings, revenue, and process improvements
- identifying risks, assumptions, dependencies, and creating a mitigation plan
- business case development and sponsor alignment
Once you have a detailed analysis of what your organization “needs”, then everything is built from there. Your contract, monthly, quarterly and annual measurements, the ability to ensure you will have best-in-class services provider, competitive pricing for those services, as well as a system of accountability are built into your agreement.
STEP 7: OPTIMIZE YOUR OUTSOURCED AGREEMENTS
Follow these 6 steps to optimize the value of your outsourced agreements.
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.
This means you expect them to 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 outsourced provider is responsible for meeting and to business benefits achieved by your hospital through the fulfillment of the contract.
Performance-based contracting agreements with outsourced providers 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. They should be implemented for projects with outcomes that can be measured objectively. Click To Tweet
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 should benchmark.
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.
If you choose to structure your outsourcing agreements, ensure you’re doing your due diligence in creating an arrangement that leads to success.
If you are seeking specific strategies to improve your hospital’s operational and financial health—schedule a call with Lisa Miller.