Follow the third-party money trail with purchased services

June 1, 2016

Previously, I introduced the concept of holism as it applies to Purchased Services. I also laid out an 11-step approach to the process. After much thought, I realized that no truly great approach has fewer than 12 steps, so I have added one. You will see it when it comes along.

Just to review, we are using the example of Food and Nutritional Services (FNS) as the area we want to address. As you will recall, I concluded the prior article at Step 1: Define the problem (or function) you want to solve. Actually, “address” is a more appropriate word than “solve,” so let’s use that word.

In our scenario, you are the Supply Chain Leader at an integrated delivery network (IDN) that has chosen to outsource the management of its FNS operation to a third party. You have been asked by the CFO to spend the next twelve months focusing on Purchased Services, and he has selected FNS as the place he wants you to start.

As you may recall, last month’s article ended with this question: Who ya’ gonna call?

My first call would be to the CFO or to his Administrative Assistant. I would ask for an hour of his (or her) time to talk about the big picture and get some direction. Prepare a list of questions that you need to have answered before you start out. Here are some I might ask:

  • What do you define as Purchased Services?
  • How do you want me to involve those managers, directors and vice presidents that may already be responsible for the areas I am asked to address?
  • Are you willing to roll this initiative out at a leadership meeting so that it has the best chance of succeeding?
  • Can I call in outside resources if I need them (our GPO, industry experts, tools and toolsets from specialty suppliers)? Are you willing to spend money to save money?
  • Do we want to look at the current state “as is” and just find a better cost for what we are currently doing, or do we want to address bigger opportunities?
  • Will you promise to stay involved as the C-suite face of the initiative?

I’m sure there are other questions of a similar nature that I may have missed, but one of the things you owe yourself before you take the plunge into the deep and uncertain waters before you is at least some kind of an idea of whether you are swimming alone, or if someone is willing to take on these shark-infested waters with you.

Depending on your current relationship with the CFO, it may take some preparation and “courage enhancement” steps on your part, but it is something that must be done. Not only must you ask the questions, but you must also have the guts to tell the CFO if his answers fall short of the mark. Addressing complex issues requires total understanding and agreement as to what and how things must be done.

Bobbing and weaving

So let’s say the CFO comes through like a champ and you are absolutely certain that she (or he) will give you all the support you would ever need to march forward.

Now it is time to turn your questions toward the area that you have been assigned: Food and Nutritional Services.

When the CFO first talked to you about looking at the current management agreement and perhaps putting it out to bid, you dutifully printed a copy of the current agreement, read it, marked it up, made some notes and began looking for alternative suppliers. You also asked Accounting to send you a copy of the FNS operating budget and budget reports for the last 12 months. After the person you asked for the information balked, you called the Controller, told him that his boss wanted you to look at the FNS management agreement, but you wanted to get a good understanding of total costs in the department. So, could he please send the information you requested ASAP because you are meeting with his boss next Tuesday at 10. He sighed and said he would get back to you (knowing, of course that his next move would be to call his boss and see if what you said was true). A couple of hours later the requested information comes through via email.

After reviewing the files, the issue takes on a different light. True, the IDN was paying somewhere north of $1.5 million to the third-party management company to run the operation, but that number was only a small portion of the overall expenses. Here is part of what you saw (hypothetical and not intended to be representative):

Salaries and Wages (IDN Employees)

$3,800,000

Food Acquisition

$5,600,000

Equipment Maintenance and Repair

$243,000

Depreciation

$200,000

Management Services

$1,500,000

Total

$11,343,000

Once again, you review the management agreement (the one you have been asked to address). Looking at it, you see that, while there are penalties to the supplier for not maintaining patient satisfaction scores above a certain level, there is nothing in the agreement that ties the supplier’s performance to the operating budget beyond some general language that says the vendor will help devise an operating budget and maintain or amend it in conjunction with the IDN leadership team.

Once again you do the math: Saving 15 percent to 35 percent on the management agreement will net the organization between $225,000 and $525,000. Knocking 10 percent out of the overall budget will net $1,134,300.

You show the numbers to the CFO. You tell him that, while bidding out the management agreement may knock a nice chunk out of the operating budget, the agreement as currently written does little if anything to address the opportunity to control overall departmental costs — especially food acquisition and salaries and wages.

Pointedly, you ask, “So do you want me to address just the management agreement ‘as is’ or do you want me to address the problem with a solution that will impact total departmental expenses and bring the third-party supplier into the fray with skin in the game for total costs?”

Without hesitation, the CFO replies, “Yes.”

You scratch your head. “Yes, what? The first thing or the second thing?”

“The second thing.”

Your job just changed.

Part three: The perfect purchased services program

About the Author

Fred Crans

Fred W. Crans currently serves as Healthcare Business Development Executive for St. Onge Co. He is a veteran industry observer and frequent HPN contributor with decades of experience as a hospital supply chain leader within hospitals, IDNs and GPOs. Crans can be reached at [email protected] and at [email protected].