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High-Cost Fears

November 1, 2006
by Sally Goostrey and Denis Desjardins
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With proper contracts and good relationship management, healthcare companies can achieve flexible, cost-effective outsourcing agreements.

Clearly identified retained costs. Even after outsourcing, a company will be responsible for certain internal functions. The agreement needs to clearly delineate tasks and responsibilities, establish governance parameters and develop the budget for retained costs.

Industry-standard unit costs. Convert a company's budgetary view of cost into industry-standard unit costs, such as 'cost per help desk call', 'cost per minute of processing power' or 'cost per hour of application development time'. When a vendor's pricing comes back in the same units, this facilitates a direct comparison and accurate gauge of relative performance levels and value.

Open dialogue with vendors. Participating in open dialogue about the base case while in a competitive mode prior to signing a contract gives the vendor a complete picture of a company's environment, and helps it price services accordingly. The highest level of a successful relationship is when the cost of the relationship (the price paid) balances with the value to be derived.

Managing ongoing cost drivers

Well-measured, well-documented cost drivers. The company and vendor must understand the causes of cost fluctuations to manage them effectively. This is particularly important in a healthcare organization, where rates are regulated and cost drivers directly impact the rate structure.

Identified unit price escalators (e.g., COLA). Companies and vendors can build predictability into a contract by identifying what components of the price will escalate based on changes in the business and what the formulas are for determining the new prices.

Managing the relationship

Successful partnerships put significant effort in establishing an agreed-upon management and governance structure when the new operating model is implemented. This helps both the client and vendor to uphold their sections of the agreement and constantly work to meet contractual expectations.

Establishing clear and accurate service levels in an agreement documents expectations, protects against unanticipated pricing fluctuations and helps companies measure a vendor's success. Education and communication with business units is critical throughout the outsourcing process to ensure a clear understanding of the service levels to expect, new procedures to follow and the impact of employee behaviors on vendor costs.


Author Information:


Sally Goostrey and Denis Desjardins are principals at The W Group (Malvern, Pa.), a technology-management consulting firm.

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