In major outsourcing deals, the bang should be bigger than the buck. At least that's usually the hope of hospital executives who attempt to reduce costs by contracting their information technology services to an outside firm.
But in the case of New York-Presbyterian Hospital and Healthcare System, the goals were mostly nonfinancial. When the 31-hospital system hitched its information technology department to the star of outsourcer First Consulting Group, its top objectives were to gain access to IT talent and integrate the proliferate parts of a newly merged organization.
The partnership is still young, so the degree to which major goals have been accomplished will be easier to assess after another year, the system's executives say. In the meantime, the experience of New York-Presbyterian offers an excellent case study of the promises and perils involved when organizations confront the complex fusion of healthcare and information technology.
"The jury is still out concerning if we can make this work or not," says Walt Zerrenner, vice president and chief information officer of New York-Presbyterian, who started his position early this year.
Here are some of the trials played out in just the first 16 months of the seven-year, $228 million contract:
* The entire lineup of corporate senior management turned over after the contract was signed, but before the transition to outsourced information technology could gather momentum. In the first year with First Consulting, the medical center welcomed new chief financial, operating, information and executive officersÃnone of whom were there when the outsourcing deal was calculated and completed.
* The contract was vague about the specific improvements the outsourcing arrangement was supposed to accomplish. Without quantified objectives, neither side could determine what the expectations were and whether they were being met.
* The transfer of all information technology personnel to the outsourcing side, including the medical center's then-CIO, led to concern at New York-Presbyterian that it didn't have a corporate voice to provide counsel on its best interests. That led to the hiring of Zerrenner as a top strategic information executive who works with the outsourced management but represents and reports to the New York-Presbyterian executive team.
The New York-Presbyterian outsourcing deal has many of the features that define arrangements elsewhere in the country: shared risk and reward, missteps in the pioneering months of the contract, and the goal of transforming disparate information systems into responsive technologies.
Less than 20% into the life of its contract with First Consulting, the team at New York-Presbyterian has more qualitative than quantitative evidence documenting the strides made as a result of outsourcing. Even so, those on both sides of the contract say that despite some growing pains, the partnership is beginning to mature.
"We've fixed the basics," says Steve Heck, president of Long Beach, Calif.-based First Consulting. "Now the question is how do we move into a much more strategic mode."
Executives at New York-Presbyterian are waiting it out, but have a hopeful outlook: "Over time this will be a positive experience for FCG and New York-Presbyterian," says Michael Berman, M.D., New York-Presbyterian's executive vice president and hospital director. "I don't have any doubt about that."
A massive challenge
The path that led to the outsourcing route can be traced to January 1998, when New York Hospital and Presbyterian Hospital -- two of the city's most prominent academic medical centers serving 20% of area residents -- merged to create New York-Presbyterian Hospital and Healthcare System. At the time, New York Mayor Rudolph Giuliani characterized the deal as "two world-class hospitals merging to form the largest and most comprehensive healthcare institution in the city, and one of the largest and best medical centers anywhere."
During their first year, executives of the newly minted system began considering ways to provide cleaner, more efficient fuel to the organization's massive information systems engine.
Financial systems, including general ledger and patient accounting, were inconsistent. Materials management and accounts payable applications were incompatible. On the clinical side, greater challenges emerged when physicians had their own idea of what constituted the ideal system, according to Lynn Vogel, New York-Presbyterian's vice president of information services.
Having determined an outsourcing partnership made the most sense, New York-Presbyterian opted for a deal with First Consulting. In November 1999, First Consulting set up a new company charged with managing its major outsourcing accounts. New York-Presbyterian was given 15% ownership in that company, which was named FCG Management Services.
With its equity position in FCG Management Services, New York-Presbyterian became the first outsourcing client to take an ownership interest in the newly created company, which expects to negotiate ownership stakes with future outsourcing clients.
"I think this is a unique arrangement," says John Lavan, who was New York-Presbyterian's CFO when the FCG transaction closed and played a significant role in structuring the deal. "As the first mover, we have the lion's share of the minority interest."
New York-Presbyterian's ownership stake, however, may create conflict when the economic interests of the healthcare system are at odds with the profit motives of FCG Management Services.
"Anytime you get into a joint venture where the venture might be providing services to one of the partners, you have potential conflicts between the fiduciary duty to the partnership and to your own organization," says Bernadette Broccolo, an attorney in the healthcare practice of Chicago-based Gardner, Carton & Douglas.
To prevent legal problems, Broccolo recommends a contractual "unwind" provision that allows the healthcare system to back out of the deal if such conflicts become too tough to resolve.
Unlike others, the New York-Presbyterian deal was not signed with the main motive of cutting costs. "The driving reason to do this wasn't financial," says Lavan, now CEO of New York-Presbyterian Ventures, a wholly owned subsidiary of New York-Presbyterian focused on for-profit opportunities. "It was service and technical issues and systems planning."
According to unaudited financial information, New York-Presbyterian's two flagship hospitals together posted 2000 revenue of $1.8 billion and operating expenses of $1.8 billion. Further financial information on the hospitals and the system as a whole was not available at deadline.
The success of integration and performance-improvement projects depends on New York-Presbyterian's ability to recruit and retain increasingly expensive and hard-to-find information technology professionals. "We're in a tough job market in healthcare, particularly in New York where people can make multiples of what we're paying," Berman says. "(FCG) can draw on talent we can't keep in house."
At this point, however, that expectation is open to question. Gaining access to the technical resources New York-Presbyterian needs "has not happened because we're finding that the outsourcing company is having the same problems (with recruitment). That may change a little with all the layoffs in technology companies," Zerrenner says
"New York-Presbyterian viewed the partnership as a way to deal with recruitment and retention issues and also as a catalyst for organizational change," says First Consulting's Heck, who spent significant time on-site at New York-Presbyterian negotiating the partnership and now often finds himself there working to be sure the execution matches promises made.
Shoals and goals
At times that has been a rough road, especially with New York-Presbyterian's entire senior management team leaving in the early stages of the outsourcing agreement. "Our complicating circumstance was that the CEO, COO, CFO and CIO who worked on the contract were all gone during the year 2000," Heck says. "We had to re-establish relationships with each of those individuals."
Meanwhile, New York-Presbyterian's 365 information technology staff members joined the team of First Consulting in January 2000.
A key decision in any outsourcing agreement is whether the CIO is an employee of the hospital or the outsourcing firm. In the case of New York-Presbyterian, the decision to bring in Zerrenner to work for the healthcare system was made because "we're so large that we needed an individual with knowledge we could turn to within the organization," Berman says.
Others agree. "Management was particularly concerned that if they didn't have their own IT person, the outsourcer could install things that were convenient for them, systems they could bring up successfully," Lavan says.
Its parade of new executives did not change one of the fundamental goals New York-Presbyterian had in deciding to outsource: standardizing its inherited hodgepodge of information systems from a multitude of formerly independent operations that were forced to share a single management reporting structure.
"We came out of a merger where everyone got to pick their best-of-breed (system), and now we have this conglomeration of systems that don't fit together very well," Lavan says. What executives wanted out of the deal, among other things, was to consolidate those systems in an effort to improve IT services.
New York-Presbyterian has made significant progress standardizing some applications and systems, but much of that work was done before First Consulting ever arrived, Vogel says. "We have used FCG resources in continuing the rollout of products," Vogel says. However, he adds, "if the question is, 'Was outsourcing the thing that made the difference?' the answer is probably not."
Representatives of both New York-Presbyterian and First Consulting were hesitant to share measurements that demonstrate how the outsourcing arrangement has succeeded. They do, however, believe things look better now than they did one year ago.
"I can't give you specifics but we have saved dollars," says New York-Presbyterian's Berman. "The help desk (for troubleshooting computer problems) has been improved dramatically. Level of service has also improved."
It took between six and nine months before service levels substantially improved, Berman says.
From Zerrenner's perspective, computer-service performance levels represent one of the toughest challenges he has faced -- and one that could have been prevented. When New York-Presbyterian signed the outsourcing agreement, the system did not have defined standards in place that dictate the staffing resources required to provide various levels of service to users.
Zerrenner says he would not have put ink to paper without reliable metrics in place to measure how well the contractor was meeting performance expectations. "One of the things we did incorrectly as an organization was that we signed an outsourcing agreement before having (targets for) service levels in place," Zerrenner says. "Once we have the metrics and we can measure performance and deliverables, we'll be able to determine whether this is working or not working."
The problem of vague service levels has affected both partners. First Consulting "sacrificed some (profit) margin to get customer satisfaction," says Guy Scalzi, vice president of FCG Management Services, and New York-Presbyterian's former CIO.
That may be part of the game of expectation management. "I think the expectation is that the day the contract is signed, anything that is perceived to be a weakness or a failure of the past should be immediately fixed," Heck says. "Unless you're careful, you're highly disappointed on both sides."
Those considering an IT partnership should remember, Heck says, that "in the outsourcing world, talk is cheap. It's the outcome that's really valuable."