Here’s how to master your typically neglected service spend

Lately, I have been very concerned about one big expense category that has been universally neglected – service spend. To put it another way, we haven’t been managing and controlling all of our purchase service contracts (from elevator maintenance to transcription services) that at countless hospitals have a dollar value equal to or greater than their supply expenses.

We have found this category of purchase to be a new unclaimed gold mine for supply chain professionals. If they would pay more exacting attention to these elusive expenses this would ensure their healthcare organizations’ continuing financial health. I call this getting back to the basics and forward to even more savings for healthcare organizations.

Now that your prices are under control, standardization is complete and utilization is on most hospitals’ radar screens, what’s left in the supply chain puzzle but to effectively manage and control your purchase service contracts.

By doing so, you can save 11 percent to 18 percent on this spend category. I can tell you from my experience that this spend category is the easiest way to save money because you generally only need to convince a few customers to make a change in their practices, as opposed to hundreds of individuals in other categories of your supply spend, such as, pacemakers, orthopedics, dressing trays, catheters, custom packs, etc.

As an example of what a gold mine this spend category can be for you, we have found that there are hundreds of thousands of dollars to be saved in telecommunications expenses. Just last month a client of ours wrapped up a telecommunication project that saved them $720,295. They were able to do this because no one was watching or scrutinizing this category of purchase service, or any other purchase service contract they had on file.

Better yet, another one of our clients is on track to save $4,594,882 (or 24.6 percent) on their total purchase service spend because they have made it a priority to do so. In no other commodity group, with the exception of utilization, will you find these gigantic kinds of savings; not in price, not in standardization or even in your value mismatches.

To attack theses savings you will first need to broaden your materials management department’s scope and authority to include all purchase services contracts. You can build a case for change by showing your C-suite how much they are spending on this category of spend and what the savings potential (11 percent to 18 percent) is if you would be put in-charge of this spend category.

Second, you need to centralize all of your hospital’s purchase service contract files and their administration under your materials management department. And if the workload justifies it you will need to hire a contract administrator to manage, control, analyze, bid or negotiate these contracts.

Third, you will also need to benchmark all of your purchase service contracts to ensure that their total lifecycle costs are within acceptable limits. Otherwise, how would you know if there are savings opportunities if you don’t quantify them and have a roadmap to start saving?

Lastly, you will need to trend and track the performance of your contractors to identify spikes in your utilization cost and to ensure that they are conforming to requirements. Why is this important? Just last week we reviewed an IV pump rental contract for one of our clients and found that they used 2,252 more IV sets than originally estimated, yet they didn’t get a price break for doing so. We also noted that their pump set cost went up 28 percent during their four-year contract period, but no one questioned it. This is why you can never take your eye off the ball even after you have signed what you believe to be a very cost-effective and value-justified new or renewal purchase service contract.

The way I see it is that it is a deep dark secret that many healthcare organizations don’t have this huge supply spend up on their radar screens, and in many instances, it is their biggest supply chain expense category. It is now time to get control of these liabilities where there is the greatest legal and regulatory risk exposure for your healthcare organization, while at the same time wring the towel dry in savings that are ripe for harvesting.