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, “One-time 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.

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 off 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?