Medical Center Strategic Outsourcing

Project Background

A world-renown pediatric hospital seeks to pursue its vision of continuing leadership in pediatric care and research, but is confronted with the same challenges that face other healthcare providers and academic medical centers. Cost pressures, clinician shortages, reduced reimbursement, regulatory changes, and uncertain government financial support all challenge the hospital’s ability to achieve its goals and vision of enhancing clinical programs, creating innovative teaching programs and continuing to be a premier research institution by making new contributions to science and improvements in children’s health and treatment of pediatric diseases.

The hospital had been experiencing a consistent increase in its annual budget for IT services. Despite the yearly increase in its budget, the hospital consistently exceeded the IT budget resulting from an increase in IT expenses and doubling of staff over a four year period. Furthermore, IT recruiting is difficult for a non-profit organization because of the challenge of maintaining a salary structure that competes well against the volatile for-profit industry. As a result, the hospital was facing staff retention and skill acquisition issues.

In an attempt to improve the delivery of IT services while trying to contain costs, the hospital had a facilities management contract with an IT services vendor to provide several key functional management positions, including a CIO, to manage the hospital’s IT operations. The IT services vendor, a leading clinical systems development firm, was also engaged by the hospital to select a clinical system package for use in the development of a new, health care enterprise system with integrated clinical, patient access, financial/operations capabilities. The IT vendor, in an attempt to secure its position as the hospital’s preferred vendor for its clinical application development, submitted a proposal to take over all IT infrastructure and applications development services.

Problem Summary

Runaway costs, poor service, inability to keep up with the technology curve, and staff retention were the key factors that motivated the hospital to consider outsourcing as a solution to its IT problems. The need to consider an alternative approach was further driven by the hospital’s executive management, which required IT costs to be reduced 10 to 20%. The hospital was unsure of the quality of its facilities management vendor’s IT outsourcing proposal, the vendor’s capabilities as a full spectrum outsourcing vendor, and the competitiveness of the overall deal being offered, in particular its price. The hospital decided to competitively bid the outsourcing all of its IT services to qualified vendors in order to achieve the best pricing and capabilities options. The hospital engaged TBI to assist it through the entire outsourcing decision making process from RFP development and vendor selection to contract negotiation. An outsourcing deal would have to be completed by the end of May 2001, six months from the beginning of engagement, in order for the hospital to meet certain end of fiscal year financial requirements. While the overall value of the deal would be small compared to typical deals of such scope and which are in the hundreds of millions (of dollars), the need to follow a required process to achieve the best possible results, could not be compromised. The six month window challenged the minimum time required to effectuate a suitable deal.

TBI’s Approach

TBI’s structured, yet flexible methodology, combined with its extensive database of outsourcing information, enabled TBI to rapidly collect requirements, develop an RFP, produce a set of vendor selection requirements, and develops a comprehensive statement of work and service levels after final vendor selection. Moreover, TBI’s oversight of the process ensured that all bidders were given fair and equal access to all information and the client and were given fair and equitable consideration to their proposals based upon a consistent set of selection criteria. The flexibility of TBI’s approach was critical in reducing the time required to negotiate the deal, and being able to complete the entire process within the six month deadline.

Successful Business Solutions

When suitable, TBI normally promotes a dual-negotiation process for two finalists in order to ensure the best possible terms, conditions and price. However, dual negotiations are a time consuming, expensive, and exhausting process which requires commitment of all parties to see the process through to its ultimate end, the selection of a winning bidder and a completed contract. Not all clients can afford the time and cost this process demands. TBI creatively suggested a “mini” dual negotiation with the two finalists, focusing on a smaller, critical set of requirements that were most important to the client. Both vendors were allowed 2 weeks in which to put their best proposal’s forward, followed by an additional one to two weeks of gaining greater clarity around the their proposals and negotiating the final details of the key requirements. Thus the finalist was chosen on a smaller, more critical set of criteria, and their solution and flexibility toward meeting those requirements. This approach saved 1-2 months that the process would normally have taken. The client had to sacrifice some leverage with the finalist during negotiation over the remaining contract issues and pricing. However, TBI with its benchmarking database and library of outsourcing deals was able to leverage the information to mitigate some of the lost leverage.

The time saved with the modified approach, together with TBI’s experience and assistance, resulted in a favorable deal for the client that not only closed on time, but also on the day of the hospital’s 100th anniversary, a event that was. The contract included all the key elements of a successful outsourcing contract, namely dispute resolution, audit rights, termination, indemnities, comprehensive statement of work, measurable, flexible service levels with service credits, flexible and competitive pricing, and favorable pricing discounts based upon future volume of work to name a few. The hospital project team not only projected that the deal, including both infrastructure, maintenance and enhancement work, would be able to achieve savings within the required mandated cost reduction over a five year period, but more importantly the deal would solve their access to technical resources with a qualified vendor who’d be able to help them realized their integrated clinical system requirements.

Despite some early problems with the vendor’s transition team not focusing more closely on transition activities, the vendor was able to make an immediate impact on improving IT services. Within a short three months, the hospital’s CEO was no longer hearing daily and weekly complaints about poor service. The success of the deal can best be summarized by the observation of the hospital’s CEO that he no longer hears complains about IT service.

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