Tag: service effectiveness

Can Outcome-based Pricing Replace “Till SLAs Do Us Part?” | Sherpas in Blue Shirts

ITO deals in which service providers’ compensation is linked directly to the business outcomes they achieve for the clients have started gaining prominence. While the idea has been around for some time, and indeed should be part of a gradual evolution process from pure FTE or T&M models through to gainsharing arrangements, we’ve observed with interest both parties’ strategic interests (see image below) converging through shared business outcomes on several mega deals.

ITO Deal Demand and Supply Forces

A number of clients have recently asked for our advice and insights on the upsides and downsides of outcome-based pricing models. Following are the factors we told them they must carefully consider before asking their providers to make the change:

  1. Trust:  Ask yourself, “Do I really trust my partner?” Use your common-sense. Outcome-based models are often used in combination with a base T&M model in situations involving complicated deployment of new technology, where both parties share the risk.  However, not everything goes smoothly in such situations, so don’t fall over yourself to shout “Penalty!” You might need to arrive at a negotiated outcome once your partner admits to an honest, unforeseen mistake. In other words, incentivise your provider to make it right, rather than masking the flaw and investing in a sub-optimal environment for the duration of the contract. The latter is the road to poor relationship health, contract disputes, and a frustrating end-user experience.
  2. Corollary to the Trust Principle, be prepared to Cede control: If the implementation partner is responsible for improved business outcomes, the team needs to have control over the business process and the underlying stack, including platforms, management, and reporting tools, and quite simply…the way you do business. You can play the powerful investor, but let your partner be the empowered CEO. Share your powers.
  3. Identify scope accurately: Building on the above point, the scope is often beyond the obvious. Mere implementation of an ERP system won’t raise productivity or prevent revenue leakage if the overlying process is inefficient. State the scope in line with your desired outcome. For example, scope is not, “implement ERP”; it’s “raise productivity by XX% by implementing ERP and optimizing the accompanying process.”
  4. Know the price of improved outcomes: Most providers won’t tell you they build a risk premium into their base fees on outcome-based models. In other words, while you are encouraging your partners to take on more risks, they want to cap the downside. Remember that they don’t want to, and sometime can’t, back out of a contract. Thus, if the desired outcome cannot be reached, they would have spent significant time and effort without recompense. So, you must carefully evaluate the business case for an outcome-based model. Is the scope large enough? Are the benefits of transformation deep enough?
  5. Make it stick: Arguably, this is the most challenging part, as it’s  often difficult to establish causality between the provider’s performance and business outcomes, making “Cede control” (point #2 above) even more important. In addition, governance models must be suitably evolved and often supported by sophisticated management tools and chargeback mechanisms. Keep in mind that these come with a cost and, consequently, must be built into your ROI model.

At the end of the day, an outcome-based model is a bit like marriage – it represents the triumph of hope over experience. So be clear about why you are getting into it, choose your partner carefully, share space, and who knows – you could live happily ever after!

What Is the Investment Profile of Your Service Provider? | Sherpas in Blue Shirts

Like many financial investors over the past decade, my portfolio resembles a buoy floating on ocean swells. Most of the “ups” have been offset by painful “downs,” and the real growth has come simply from saving more money. At this point, I often wonder if I am actually investing, or just riding out a storm and hoping for the best. I fear the same is true of many organizations and the relationships they are continuing with their service providers.

Those of you who attended last week’s Market Vista webinar will recall that we spent some time looking at the service provider landscape in banking applications outsourcing. One of the key takeaways from our assessment of this competitive landscape (one of the largest outsourcing markets, with over US$6 billion in annual revenue) is that the players most improving relative to their peers have targeted their investments on technology (e.g., HCL with Capital Stream, Polaris with Intellect, and TCS with Bancs).

At the risk of sounding like a broken record, the market must find ways of creating more value beyond just labor arbitrage. First, yesterdays or today’s successes get no credit next year – competitive pressures require moving forward. Second, the arbitrage-centric model is okay, but not great. Maintaining satisfaction – let alone improving it – is elusive. Quite simply, it is too dependent upon too many people, and people are not as reliable and consistent as we would like to believe. Think about it: do you prefer a switchboard operator or your personal contacts directory in your smart phone?

My strong, strong belief is that users of third-party outsourcing services need to pay increasingly close attention to the investments their service providers are making, and re-align their relationships accordingly. This applies primarily to technology-related capabilities, but also to other areas such of geographic scope, domain knowledge, partnerships, and others.

But haven’t we been investing already?

While there have been some investments, many of the hard-dollar investments to date have really just been in creating fungible scale – seating, recruiting pipelines, sales organizations, and training for resources that could be used in multiple ways. They were largely about how to expand the existing business into new, but roughly similar markets. Few of the “investments” were hard choices between one or more options to create meaningfully different and new types of value. For example, having a building for employees to work in is only a question of estimating demand and therefore size of the space, not whether a building is required.

Other than a few acquisitions of Global In-house Centers (GICs or captives), such as Citi’s by TCS and UBS’ by Cognizant, there have been few larger scale bets on enhancing capabilities. Many service providers have been incrementally optimizing capabilities with an extra million dollars here and there. Occasionally, a firm has bought a technology capability for tens of millions of dollars. HCL’s acquisition of Axon, (£440 million), is the largest capability expansion that comes to mind in the past five years – and it was a bet on combining two different, but seemingly complementary, types of value propositions (Note: I consider HP’s mammoth acquisition of EDS to be industry consolidation, not fundamental capability enhancement. The pending US$2.6 billion acquisition of Logica by CGI is both consolidation and capability enhancement).

Overall, the investments have been very tightly aligned to expected revenue streams that could create fairly quick pay-off, and often just mimicking what others were already doing rather than boldly breaking the mold or venturing into truly unknown territory.

What can break the mold, and how it changes everything

If service providers continue to largely mirror each other’s capabilities, we will continue to end up with 10, 20, or more service providers that largely do the same thing, and are not particularly differentiated. To create true and sustainable differentiation, an organization must be able to do things that others simply can’t do (i.e., it’s not a question of “getting the right team”).

Technology is the strongest lever for creating defensible differentiation, but it tends to be a big and sustained bet. Done correctly, leveraging investments in technology across multiple clients generates powerful economic returns not only for a service provider but also for its clients who can ride a rising tide of capability as network effects take hold and more investment is added to the solution.

I don’t want to suggest that big bets on technology will be appropriate in all areas. However, technology investments in areas in which they will make a difference will in turn drive a radical alteration in the service provider landscape. So instead of 10 or 20 service providers, we’ll be down to two or five – far fewer of these types of investments will be able to create a positive ROI, so there will be fewer providers that try, and fewer that are successful. Quite simply, the world does not need 20 service providers building and maintaining a core banking platform or 10 running a global payroll system. Further, when considering big bets on technology, the world suddenly breaks into hundreds of possibilities, and no service provider can afford to pursue and sustain more than a handful of them.

The implications of technology investments for clients will be that some of their service providers will look increasingly dissimilar, and no longer considered interchangeable. This is both a good and a bad thing. Clients will be able to gain greater value and have more types of solution models to choose from, but they will have fewer choices within the higher value solution models. The fundamental economics of investments dictate that any high investment service will naturally restrict the service provider landscape.

Client implication #1: be thorough in your understanding of how service providers are investing, and in what type of solution you want now and ideally in the future.

Client implication #2: implication #1 applies both to your existing service providers and others you may not be using – are you aligned with the providers investing in the direction in which you want to go for your priority services?

Client implication #3: implication #1 also applies to your existing providers’ service delivery areas that you are not currently using – is your industry or function receiving priority investment, or is it an after-thought?

If you want the extra value, it will require extra investment by service providers; and that will lead to less choice within a particular solution type. This means we will move from a sea of service provider options to lots of smaller ponds tightly organized around well-defined service delivery capabilities.

Helping Pharma Cliff Dive | Sherpas in Blue Shirts

In late November 2011, the world’s largest branded drug by revenue – Lipitor® – went off patent. The forecasted fall in revenues for Pfizer is expected to knock it off the perch of being the world’s largest pharmaceuticals firm. By 2015, industry analysts expect the patent cliff (revenue loss due to patent expiries) to cumulatively knock out more than US$200 billion in pharma industry revenues. For an industry that brings in just under a trillion dollars annually, this is a major revenue hit.

Exacerbating the problem is continually dipping R&D productivity that has constrained pharma firms’ capacity to replenish their pipelines. While R&D spend has doubled to nearly US$50 billion annually over the last decade, new drug approvals across the industry have more than halved.

To manage this unprecedented change, pharma firms are taking a re-look at their business profiles and cost structures.

Emerging market expansions are the industry’s new mantra for growth. IMS, a leading provider of information services for the healthcare industry, estimates the industry’s share of revenues from emerging pharma markets to double to nearly 40 percent by 2015. And all players, from the big pharma companies to generic manufacturers, are expanding their footprint in these markets, aggressively building and buying distribution capacity, and expanding sales and marketing networks. For example, Pfizer teamed up with ITC in India last year to leverage its distribution network to sell drugs to rural consumers.

In the face of steep revenue declines, productivity and cost optimization are but a given. The R&D function is being restructured into leaner and more collaborative partnerships, with growing industry-academia interfaces. For example, in 2011, Pfizer aimed to reduce its R&D budget by US$1.5 billion.[1]. And in the commercial function, sales force reductions have become the norm. In December 2011, AstraZeneca announced that it would cut its U.S. pharma sales force by over a quarter (even as it announced plans to scale up its emerging markets sales force).

Further, as the industry tries to manage its risk profile, it has begun to diversify into new consumer-centric business areas including generics, consumer healthcare, diagnostics, nutritionals, health management and animal health. For example, GlaxoSmithKline (GSK) today lists the creation of a ”diversified global business” as its top strategic priority.

In this era of significant change, technology and business service providers have a great opportunity to exhibit leadership and step up to stronger partnerships with the industry by:

  • Helping drive innovation in the pharma industry
    • Bringing in ideas from other industries, not just in R&D, but also in manufacturing, retail, and distribution, e.g., helping pharma improve field-force design based on fast-moving consumer goods (FMCG) principles, and its manufacturing and supply chain per ideas from logistics
    • Enabling a more effective use of technology to drive business results, e.g., through use of collaboration technologies to improve research, and by leveraging digital media more effectively for a more effective consumer presence
  • Helping pharma firms address the myriad of complexities they face as they enter and expand in emerging markets, e.g., establishing local market relationships, navigating regulatory issues, building distribution setups and partnerships, structuring low-cost solutions, etc. Established service providers with significant emerging market presence also have the potential to enable the industry with more holistic propositions to address a number of these complexities end-to-end.
  • Helping the industry optimize its cost structure:
    • Improving field-force effectiveness – where nearly one-third of pharma spend is concentrated – through enabling sales force management tools, data and analytics (in next generation areas such as effectiveness research and digital analytics) and back office services (sales operations)
    • Driving manufacturing and supply chain efficiencies through more integrated technology architectures (e.g., redesigned ERP implementations, and emerging rollouts)
    • Managing regulatory complexity (an area in which pharma firms spend a couple of billion dollars each year) through building validated, compliant technology environments and cost-effective BPO services in areas such as pharmacovigilance
    • Driving R&D efficiencies through collaborative platforms, and helping manage large volume high-throughput data environments
    • Increasing flexibility in the face of rapid change, e.g., through cloud-based models

Today, service providers seem focused on servicing the pharma industry’s IT-BPO requirements largely in a “vendor” capacity. Traditionally, the pharma industry’s cash rich and risk-averse culture often drove this arms-length positioning. However, in this time of massive change, a more proactive approach is called for, and smart technology and business service providers will not miss the opportunity to challenge the industry’s status quo and support its growth through bold, provocative offerings and thought leadership.


[1] Source: FiercePharm, “Pfizer top 10 Pharma layoffs 2011

Self-Service and the ATM | Sherpas in Blue Shirts

Many of today’s shared services organizations like the idea of moving to a self-service environment as it assists them in achieving cost savings and headcount reduction targets. However, when they begin mentioning the term self-service outside the shared services sanctum,  the business lines they support often puts up their hands and say, ”Oh, no you don’t! Don’t take away my generalists! We already have enough work to do; why are you pushing your work back on us?” So, how can shared services organizations overcome this resistance?

Consider likening self-service to use of Automated Teller Machines (ATMs). When the ATM was first introduced, the banking die-hards would have none of it. Not go into the bank? Never! Drive or walk up to a machine to get cash? Bah! But when was the last time you drove to your bank, got out of your car, went into the branch, wrote out a check to ”Cash,” and gave it to the bank clerk? Last week? Last month? Last year? A decade ago? Never?

Now think about the convenience of the self-service aspect of an ATM. You can access it whenever and wherever you want to fit your needs. Yes, you have to swipe your card, enter your pin, select the type of transaction you want to perform, etc. But in the end, performing the transaction is simpler, more accurate, and more timely for you.

Self-service in a shared services environment is very similar. Take the HR function. As a manager, think about how much easier it would be to access a system and directly enter in employee performance information, compensation changes, performance ratings, and position changes. Rather than taking the time to type an email, send it to HR, have HR enter it, validate it in the system, and send a note back to HR to fix any errors, you enter the information once. This is much simpler, increases accuracy, and reduces your expended time.

The same goes for employees. How much nicer would it be if you could enter and maintain your personal information directly in the system, rather than manually filling out pages and pages of personal information and submitting it to HR, only to have it entered into the system incorrectly? And, think about the convenience of being able to access your health benefits information after hours if you’re unable to call a service center representative during the day?

So how can you ensure adoption of self-service solutions within your organization? First, consider Gen Y’s expectations, given the changes in workplace demographics. This younger generation of workers, having never lived in a world without the Internet simply expects organizations to be self-service-enabled. Their world of texting and e-mails makes self-service solutions very natural for them. They use social networking more and the phone less. They expect to be able to connect to the tools they need, anywhere and anytime. They expect to have the flexibility to work from home either part-time or full-time. They expect – and in some cases demand – full time 24/7 connectivity and self-service solutions. And in fact, not having this connectivity can actually hurt morale and reduce productivity.

That said, organizations typically have a broad cross-section of age and demographics, making change management critical when implementing these types of solutions. It’s very likely the older generation will need more change management than the younger, although they are becoming more comfortable with self-service solutions as the years wear on (just like the ATM). As an example of effective and innovative change management, one Fortune 500 organization instituted a program wherein younger employees were paired with older ones for training on and assistance with online and self-service solutions. This reduced the demand on HR training resources, decreased training costs, and sped up the change process.

Providing self-service tools and solutions can to create a win-win for an organization. For example, self-service solutions are typically SaaS solutions and can be far cheaper than staffing a call center around the clock, saving precious cash. If the solution is implemented thoughtfully and carefully, the online tools can enable employees to very effectively perform their duties from anywhere and at any time, allowing them to achiever a better work/life balance via increased flexibility, which easily translates into increased morale and productivity. And, if the change management is handled effectively, managers and employees will adopt the tools and never look back, just like we did with the ATM.

Must Improved Customer Service and Increased Cost Go Hand-in-Hand in Retail Banking? | Sherpas in Blue Shirts

Given the current economic environment and fierce competition, most retail banks have multiple goals of improving customer service, selling additional products, and increasing market share…without incurring any additional cost.

Is it possible? And if so, what needs to be changed in the current banking model?

There are several best practices banks must employ to achieve these objectives:

  1. Standardize service quality across all branches
  2. Increase the time existing branch FTEs have available to interact with customers
  3. Reduce the queue levels at peak hours

Let’s look at how Bank Z approached the problem.

First, it carried out work sampling and time studies to understand the breakdown of the employee activities during the day. The data helped it understand which activities were not essential to customer service and thus were ripe to move to the back office:

Personal Banker Activities Breakdown

Second, it conducted interviews with key bank personnel and discovered significant time-wasting process break-downs:

Time Wasting Processes1


Third, it created process maps to capture current processes and identify areas in which it could enhance its efficiency:

Process Map


Fourth, it looked at how many transactions the FTEs in its branches were completing per hour to gain insight into FTE scheduling:

Percentage of Daily Transactions per Hour


Fifth, it assessed, via work sampling, the queue size by hour/day/number of staff and identified that its allocation of resources to traffic patterns were out of alignment. It observed ranges from three service reps and no customers to five service reps and 19 customers.

Number of customers in the queue

Number of customers in the queue

Number of staff vs. customers in the queue

Number of staff vs. customers in the queue


And sixth, it benchmarked the results from its data collection exercises across branch locations to identify non-value added activities, understand variability between the processes in the various branches, and create a game plan to modify processes bank-wide based on best in class practices:

Benchmark Results


Its implementation plan included:

  • Create cross-functional teams consisting of personal bankers, product operations staff, and CSRs to redesign processes based on an analysis of the data collected
  • Verify proper alignment with the back office  to ensure a seamless end-to-end customer service process
  • Train employees on the redesigned processes
  • Schedule FTEs according to customer traffic, using data extracts on customer transactions and traffic for each branch

By collecting data, understanding customer demand patterns, engaging cross functional teams to redesign processes, and shifting non-customer facing activities to the back office, Bank Z was able to enhance its efficiency and free up FTEs time to be focused directly on top-notch customer service, without increasing its costs. And you can too, if you follow Bank Z’s lead…bank on it!

The Evolution to Next Generation Operating Models in the Energy Industry | Sherpas in Blue Shirts

As pioneers of global sourcing, leading organizations in the energy industry such as ExxonMobil, Shell, Chevron, and BP have been able to extract significant value from offshoring while maintaining a manageable risk profile. However, the growing complexity of their global sourcing portfolios in terms of internal and external supply options (see Table 1 below), service delivery locations, governance models, and systems/tools has led to a set of challenging issues around design and ongoing optimization.

Comparison of sourcing model for leading energy companies

From a design standpoint, energy companies are rethinking their operating models to address a wide range of issues and concerns including:

The next wave of scope expansion opportunities

  • How can I systematically identify new sourcing areas balancing value and risk?
  • How can I predicate and manage short- and long-term demand?

Building an integrated supply mode and global delivery footprint

  • How can I maintain an optimal, complementary mix of internal and outsourcing supply alternatives reflecting requirements for capacity, competencies, and cost?
  • How can I build a consistent framework to place incremental scope into the right supply model?
  • How can I create an integrated, flexible global delivery model that meets current and future demand while minimizing exposure to risks?

Energy companies also face challenges in building a holistic management approach to enable ongoing value capture and expansion, such as:

How to build a holistic, enterprise-level governance model

  • How can I appropriately assess performance across outsourcing service providers, captives, locations, and service lines?
  • What is the optimal governance approach to enable best practice sharing, risk mitigation, and economies of scale?

How to improve end-to-end process effectiveness and control

  • What are the value and constraints to standardize and simplify end-to-end processes across my enterprise?
  • What are the right effectiveness metrics and process efficiency measures?
  • How can I enhance process control to minimize operational risk?

Many of the top energy organizations are experimenting with next generation operating models to address these issues. For example, a global energy major that utilizes both outsourcing service providers and internal shared services recently embarked on a multi-year journey to integrate services design, delivery, and governance across business units, functions, and geographies. The objectives are to enhance end-to-end process effectiveness and control, reduce complexity and risk at the enterprise-level, and improve service performance and cost efficiency.

Our experience in the energy industry clearly indicates that unlocking the next wave of value requires more deliberate design of an integrated global delivery model, a consistent framework to better align supply with demand, and a holistic approach to govern and optimize services. In addition, corporate culture impacts cannot be overlooked. In global energy companies’ large, complex environments full of competing interest and priorities, strong executive leadership and commitment are vital to success.

Note to All Healthcare Organizations: “When You Come to a Fork in the Road, Take It!” | Sherpas in Blue Shirts

American baseball great Yogi Berra’s second claim to fame is for being one of the most quoted figures in the sports world. Best known for his deceptively simplistic observation, “It ain’t over till it’s over,” his philosophy is plainspoken, down-to-earth, and honest. Stay humble. Trust your instincts. Most importantly, act, as in another of his famous quotes, “When you come to a fork in the road, take it.”

U.S. healthcare organizations are right now at the proverbial fork in the road with healthcare reform and the implications it will have, whatever form it finally takes. The magnitude 9.5 issue they are currently facing is compliance with the 2011, 2012 and 2013 deadlines for reimbursement – ICD-9 to ICD-10, and HIPAA 4010 – 5010 transformation. Compliance will significantly impact the majority of administrative and financial functions in healthcare provider and payer organizations, including substantial analysis and changes to pricing rules, policies to manage adjustments to old claims, and eligibility rules definitions. Claims and payment calculations will be altered based on changes in the contract and adjust rules. Charges for an expanded set of codes will require adjustment. Rule sets for defining high-risk patients will be expanded. And this is just a small sampling of all the challenges healthcare organizations will need to address.

A client recently asked me, “But what if the healthcare reform legislation is overturned?” The reality is that this set of rules has been legislated separately, we are out of ICD-9 codes, and the system, whether within a reform bill or not, will go forward. The client then asked if deadline extensions will be granted as we have seen in past reimbursement coding efforts from Diagnosis Related Groups (DRGs) to Universal Claim Form compliance. Another reality is the price any organization would have to pay for non-compliance, and the revenue disruption that will result, is not worth gambling on extension grants.

Unable to delay the looming deadlines, compliance with such massive scope regulations is forcing healthcare organizations to plan for extensive and costly internal and external resources, and most of the large onshore and offshore healthcare service providers are clamoring and competing for these $100 million+, multiple year projects. And each one claims to have a solution and multi-faceted approach.

Another reality: I have been working with both onshore and offshore service providers regarding the ICD-9 to 10 and 4010 – 5010 transformation since 2008. Healthcare payer and provider organizations have been slow to define the real issues, and service providers have been slow to develop the solutions. There is an interesting mix of service offerings including compliance programs, impact analysis, testing, crosswalk, and remediation automation programs, and a number of service providers have one stand out piece of the puzzle. But not one has emerged with the complete package of services, and as a result, buyers must take great care when researching and deciding on external support. In fact, their fork in the road answer may well be a combination of very carefully selected tool sets and provider companies.

Einstein’s Definition of Insanity and Its Applicability to the Healthcare Solutions Industry | Sherpas in Blue Shirts

Starting with the premise that all providers and all clients in the healthcare industry enter into large, multi-year arrangements with honesty, fairness, and a desire for a successful engagement…why do only a small handful come in on time, on budget, and with measurable outcomes? I think Albert Einstein’s famous statement, “The definition of insanity is doing the same thing over and over and expecting different results,” is, unfortunately, applicable here.

In financial and clinical implementations, ITO/BPO engagements, ADM solutions, clinical transformations, and clinical trial deployments over the past several decades, the providers and clients have been doing essentially the same thing, again and again, and in most cases the engagements have ranged from lackluster to volatile. Yet with all the increasing governmental requirements, major advances in personal and mobile technologies, and demands from patients, customers, physicians and clinicians – and let’s not forget escalating competition – we need to stop the insanity to ensure the problems of the past aren’t continually replicated in the next generation of healthcare solutions.

For healthcare industry improvement or transformation initiatives to succeed, we need methodologies. We need qualified staff to help guide and manage the projects over a multi-year period. And we need to deal with unplanned turnover, inflexible contracts that don’t allow for any change in the client’s strategic direction, ever-shrinking budgets, and the client’s desire to finally have measurable outcomes. So, assuming both sides want to deal in an environment of honesty and candor, and both parties have strong resources, why do we continue to fail? One single word – misalignment.

Misalignment occurs between clients and providers due to differences in objectives, priorities, and performance. For example, if the provider thinks the major objectives are cost and capital expense avoidance, and the client thinks improved service quality, skills and innovation, and time to delivery are the critical success factors, we have misalignment. And the result is relationship tension that can ultimately derail the engagement. Yes, in a perfect world each party knows the other’s objectives. But we don’t live in a perfect world, and so this doesn’t happen often. Combine that issue with the changing landscape the client deals with over a multi-year engagement, e.g., acquisitions, new product offerings, strategic changes in direction, etc., and the relationship can explode quickly. And even if the two parties agree on the business objectives, it does not mean they both give them the same priorities. For example, I know of one particular instance in which the client wanted significant focus on innovation and meeting strategic objectives, while the supplier felt it was doing its job by using low-rate resources. Without understanding these types of gaps, how can we fix the misalignment? We can’t!

We’ve heard similar discussions before, and each fix had a methodology or clever name. But few were implemented, and even fewer were successful. The result is continuation of Einstein’s definition of insanity. As we deal with next generation solutions for the healthcare industry, let’s get sane and change the results by viewing large, complex or strategic engagements from a holistic point of view.

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

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.

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