As a country music fan, several lines in Kenny Rogers’ hit song “The Gambler” tend to make me think about outsourcing relationships, especially in the healthcare industry, as that’s where I’ve spent the bulk of my career. 

“If you’re gonna play the game, boy, ya gotta learn to play it right”

In the 1995 to 2004 timeframe there was a proliferation of outsourcing among healthcare provider and health plan companies. The outsourcing advisory community began to cater to large and complex Integrated Delivery Networks (IDNs) and Academic Medical Centers to ensure they received the same type of world-class outsourcing services that Fortune-rated companies in other industries had already been receiving. As a result, a large number of outsourced ITO, APO and BPO contracts were inked, and the healthcare provider and health plan organizations came to depend on the third-party service provision to more efficiently manage their middle business services and IT needs. 

Unfortunately, the healthcare firms got caught in the same conundrum as do all organizations that enter into long-term service delivery contracts. Once SLAs and joint governance models are agreed upon, service providers have little incentive to do anything but satisfy the contractual commitment in the most cost-effective manner. They also rarely get any clear understanding of what more the client may want. On the flip side, as technologies, markets, competitive drivers and growth objectives dynamically evolve over time, service recipients require, and expect, additional value from their providers to meet their continually changing business needs. But they rarely articulate what more they want from their service providers.

This disconnect ultimately leads to a mutual loss, as the original metrics of the contract are quickly outdated, value cannot be measured or realized, the incentives for both parties are misaligned, and a tension-riddled relationship develops. 

“You have to know when to walk away and know when to run” (or maybe not)

A case in point: In 2005, a major healthcare provider contracted with a global provider of healthcare technology infrastructure and application sourcing services to support critical Electronic Medical Record, Operating Room, Scheduling and Billing services, all of which are essential for providing patient care and revenue functions. SLAs and a governance structure were negotiated, resulting in a complex, 10-year relationship with delivery defined in the traditional structure. However, as the contract didn’t allow for dynamic and ever-changing needs dictated by the marketplace, enhanced technologies and changes in regulatory compliance requirements, the business value proposition was lost and the relationship was ultimately dissolved. This could have been avoided simply by creating a flexible contracting mechanism that the service provider and service recipient could continually update to meet necessary changes. Yet, when a relationship gets to this point, many buyers believe they must rebid the contract, change providers or bring the services back in-house. 

 “You got to know when to hold ’em”

But there is another solution that can result in a win-win situation for both parties. We think of it as service effectiveness, which is a big step up the value chain from traditional service efficiency models. Rather than focusing on things such as unit prices, process output, service levels and delivery risk, service effectiveness addresses those things that are the real priorities for service recipients – business value, process impact and receiving what they truly require, not just what is specified in the contract.

To come to mutual understanding on what service effectiveness means in a given outsourcing engagement – and change the way third-party services are perceived and accepted in the buyer organization – all delivery and recipient stakeholders should provide assessable input on three different dimensions: 

  • Objectives, which include cost savings, improved service quality, focus on core/strategic issues, currency of technology, capital expenditure avoidance, expertise/skills/innovation, and time to delivery.
  • Priorities, which include building trust and confidence, service quality, ease of communication, focus on business objectives, end user satisfaction, win-win collaboration orientation, and strategic involvement.
  • Performance, which includes end user satisfaction, service quality, price competitiveness, relationship effectiveness, and relationship value. 

By coming to an agreement on what service effectiveness means to both the provider and the recipient, there’s an immediate return on investment to the bottom line created by keeping current models and relationships in place. This, in turn, avoids organizational upheaval and transitional costs, and creates a mutually beneficial business arrangement via an efficient set of services that provide flexibility, measureable value and terms that ensure success.

2 Responses to ““The Gambler” and Developing Win-Win Contractual Relationships in the Healthcare Industry | Sherpas in Blue Shirts”

  1. First of all, I love the analogy! I understand that once SLAs are set, service providers lose the incentive to go above and beyond what is laid out in the contract. Do you have an example of how incentive is provided in an agreement built on service effectiveness?

  2. Sangeet;

    Providing a flexible mechanism for on going status on a quarterly basis is the answer. As contracts are executed market dynamics can dictate need changes related to market conditions, mergers and acquisitions that impact scope, regulatory compliance and new technologies.

    A quarterly review that allows for updates and new incentives to be crafted can make this a win/win for each party with a rolling 5 quarter annual review.

    Best regards;

    Gary Claytor

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