Starting Down the Path to Continually Finding Substantial Savings in Purchased Services

Starting Down the Path to Continually Finding Substantial Savings in Purchased Services

Robert W. Yokl, Vice President, SVAH Solutions

How do you find savings within purchased services areas that are primarily all covered by specific contracts that are running, on average, about two to three years in length? Most would strategize that if your CFO wants you to start saving money on purchased services contracts, you would just start with the most recent contracts that are coming due for renewal and the new services, software, and repairs, and scrutinize them. But does that really give you the best opportunities for big savings now? The answer is no, you are only looking at the contracts that are up for renewal or new contracts that may have little or no juice to squeeze for big savings. By taking the cyclical route of contracts, you commit yourself to taking what is coming due next instead of being more strategic in finding the big savings opportunities in all of your contracts now!

To Be Strategic with Purchased Services You First Have to Be Organized to Save

When you look at the purchased services budget of a healthcare organization you see a huge chunk of dollars that are comprised of contracts for vendors for various services, software, maintenance, and repairs. The challenge with these types of contracts is that there are up to 350 major categories of purchased services contracts and hundreds of smaller categories. There is a lot of space to cover within these major and minor categories, as well as all of the unique requirements that these contracts fulfill. How do we see the forest for the trees, or in this case, how do we see the big savings through all the purchased services contract noise?

Data Is Your Friend. Embrace It and It Will Help You Win Big. Ignore It and It Will Come Back to Bite You Every Time

When you mention words like key performance indicators, cohort benchmarks, and fiscal year to date reports, you will more than likely get a cringing look from the department head or manager who you are reviewing these with. That’s okay, as these reports will help you be more strategic as they will be volume-based measures that will calculate spend by the measure to give you a cost per case, square footage, patient day, etc. This information is invaluable when you start to compare it to your historical, system-wide, and cohort benchmarks. They will show real opportunities that will be justified (only a small percentage are), but the reality is that the majority need investigation and will bear big savings. Department heads and managers won’t be able to talk away these big savings like they have in the past which will give you the fuel for your savings engine.

Saving Big with Purchased Services is a Continual Moving Target

When you continually report/measure, monitor, and control your expenses with reporting systems that draw on accounts payable and volume-based statistics, you will see where your ebb and flows are happening any given month, quarter, and/or fiscal year to date period. When you see costs rising in a particular category that no one can explain, you can quickly investigate it and take mitigating action sooner which will help save big dollars from being lost from your bottom line. The alternative is to not have any system and to “feel” like your costs are “okay”, but you really wouldn’t know because you are not reporting these things out on an ongoing basis.

Wouldn’t You Rather Know Where Your Savings Reside?

Don’t assume that everything is going well. If you are a stand-alone hospital, you want to at least track everything comparing year over year with some best practice cohort benchmarks mixed in to alert you to areas you may want to pay more attention to. If you are a big system, you have a huge advantage as you can track year over year and add cohort benchmarks, but you have a major element and that is your own internal system-level benchmarks. Your hospitals are all buying through the same contract, so why is Hospital A doing 35% better than Hospital B? You would have the power to know that and to learn from your own best practices to save even more.

Knowledge is power with purchased services. You want to exploit your data to go to the next level of big savings with purchased services. Even better, you don’t have to wait until contracts expire for you to investigate why a particular contract and/or category is running over by 17% halfway through your current fiscal year over the previous fiscal year. You can go after it now. You have so many more options when you finally know where you are doing well and where you need to focus your attention. It’s time to take your strategic purchased services control to a whole new level today.