Price is the Smallest Element in the PSC Savings Equation

Robert T. Yokl, President, SVAH Solutions

Focusing Exclusively on PSC Price Savings Can Make You Overconfident

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).


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 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.