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Common Contracting Dilemmas in Purchased Services Part 2

In our last blog post, Common Dilemmas in Purchased Services, I shared the first four problems associated with negotiating Purchased Services spend. But, you guessed it, there are more! This post will share the next four. Purchases Services is an area that can potentially be an untapped source of savings in an organization, for good reason: There are many predicaments that are encountered that can prohibit progress. The good news is that there are ways these difficulties can be conquered. But first, before you can solve your problems, you have to know what they are. Read on to see if you identify with any or all of these issues.ThinkstockPhotos-perplexed_man.jpg

5. How much should this service cost?

How do you know if the contracted price and service levels you currently have in place are competitive for your market? You don’t unless you have access to good benchmarking information. Benchmarking costs for a service that is affected by services levels, frequency, regional wages, size of the facility or environmental conditions is a very difficult thing to do.  There are some benchmarking solutions available for purchased services but if you look at the methodology used, you will see most of them are high level guestimates and therefore not able to address the unique factors that must be considered when benchmarking Purchased Services. In addition, these benchmarking solutions don’t have enough current transaction data to provide accurate comparisons and if used will not provide you with the information you need to get realistic savings opportunities.

6. Building the RFP and Sole- Sourcing

Building the RFP will provide a challenge in a lot of Purchased Services categories, especially if you don’t know the category well.  Part of the issue is that each facility may require a different type or level of services.  You can, in theory, try to standardize these services across your system but if you recall from the section earlier about the end users, you can imagine some wouldn’t be too happy if you were to alter their service levels to make your contracting efforts easier.  To further complicate this, it’s likely that you will have multiple incumbent suppliers which means multiple relationships at stake.  In other instances, you may have one sole provider for a service and if you are in a small market, you may need to search for others.  An RFI round will likely help you understand service capabilities and coverage prior to selecting your supplier pool for a full blown RFP.  Ideally you would want a sole sourcing opportunity, since they are typically sought after because aggregation of spend equals greater cost reductions while getting the added bonus of reducing the number of suppliers to manage overall. Making all of this happen is difficult if you don’t have a good handle on what you are spending, where and with whom and if you don’t have a streamlined negotiation process in place.

7. New Supplier Implementation

Getting through the RFP process can certainly take some time and if you stay with your incumbent supplier(s) at the end of the process, you will see light at the end of the tunnel.  However, if your RFP yields a supplier change, implementation of new services will most likely be challenging and time consuming.  The difficulty meter will be a factor applied if you have more than 1 or 2 hospitals that require the new implementation.  For systems that have more than 10 hospitals, implementation of a new supplier’s services can be extremely time consuming and for those cases you may want to consider adding a 3%-5% cost of change factor to proposals submitted by the non-incumbent participants, just to level set the final costs.

8. Did we actually get our savings?

Monitoring the contracts performance against what was expected is an area that even the most sophisticated health systems around the country miss.  Most health systems barely have enough resources to run a successful event beginning to end let alone track all of the ones that they put all of this effort into.  Let’s say a sourcing event has concluded, the supply chain department reports 27% savings up to the finance team.  The end of a successful event right?  Not always.  As mentioned earlier, this spend is really hard to track.  If the annual spend is large enough, you are probably doing quarterly business reviews with the awarded supplier(s) but that isn’t feasible for every category you are responsible for.  Often times when we look back at spend files a year or two after a sourcing event has concluded ,  savings realized are less than what was expected.  Many factors can cause this.  Finding this out three years later when the contract expires and you pull data to run this initiative again does you no good.  You can’t fix it then.  You needed real time visibility at your fingertips to spot check these things. 

What’s Next?

Now that I’ve outlined the most common problems associated with sourcing Purchased Services, let’s move on to what you can do to resolve them and increase your savings. And I’m not talking about a measly 4-5%, but savings that can average 24% and more. These solutions may surprise you. If you can’t wait for my next post in this series, then contact me directly at elege@medpricer.com. I would be happy to have a conversation with you to better understand your current situation and share the best ways you can maximize your savings. Guaranteed.

In the meantime, stay tuned, because coming soon I’ll share my best tips to help you overcome these problems and achieve success and savings.

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