Outsourcing is a powerful tool in response to the changing business needs of increasingly dynamic organizations. In healthcare, information services outsourcing is on an upswing as organizations get squeezed between cost pressures on one side and growing needs for new technology on the other.
Properly structured, outsourcing can improve a company's competitiveness and agility, and it can help balance services and costs. However, the managerial challenges are considerable.
While there have been some success stories, there have been plenty of disappointments with outsourcing. According to research by Stamford, Conn.-based Gartner, 60% of such agreements (in all industries) will not be considered successful by executive management because they have not been developed and managed effectively.
The benefits of outsourcing are sufficiently great, however, that some organizations, including Memorial Health Services, have entered deals for the second or third time. Or, they have executed deals with multiple vendors, each with particular strengths. These organizations have learned important lessons from their initial experiences, enabling them to perfect subsequent arrangements.
Today there are new outsourcing choices, and a great deal of experience has been accumulated with these transactions. Memorial Health capitalized on its first round of outsourcing experience and exploited the evolving market for IT services. Following the guidelines provided here, it developed a second-generation agreement that brought cost savings, avoided capital investment, allowed IT staff to focus on critical issues, and provided opportunities to bring in newer and more effective information systems.
Outsourcing, past and present
It's important to establish that the purpose of outsourcing is not solely to reduce costs and manage the risk of operating information systems, which was what the option once meant to managers. Historically, outsourcing service providers have concentrated on economies of scale in areas such as data center operations, network management, and maintenance of personal computers.
Vendors also have provided highly specialized resources as needed: the right person for just the right amount of time to solve difficult problems or aid with planning. This is more efficient than hiring such resources full time, and it relieves the organization of hiring and retaining staff who are often both expensive and scarce.
Later generations of outsourcing have focused more on strategic objectives, though cost reduction is still an important agenda item. Outsourcing has been used to improve service, enhance skills, expand the business, or free internal staff to focus on core business activities and competencies. Now it may be prudent to focus internal IT staff on installing a system that sends, receives and analyzes information at the point of care -- potentially mitigating medical errorsÃrather than having staff deal with payroll processing.
Today, outsourcing vendors are also being asked to help with technology "migrations" -- in other words, keeping existing systems running while at the same time moving to new information systems based on new-era technology. Here, the outsourcing vendor can join forces with internal staff in a number of ways. For example, it can concentrate on supporting older applications while you focus internal staff on new systems. Or it can introduce new applications and technical know-how while your staff continues to operate existing systems and gradually learns the new ways.
The Internet allows vendors to offer services more cheaply and packaged in new ways. A good example is the evolving concept of an applications service provider, or ASP. A variation on outsourcing, an ASP is an alternative to buying and installing the centralized computing hardware and software that you would need to run a laboratory or pharmacy system, for example. In effect, the application is "rented" and served up on your network through a connection to a remote data center. Not all software is packaged with an ASP option, however, and the ASP model is largely unproven. Nevertheless, an increasing number of software providers are revamping their products to work under an ASP model.
Learning from past mistakes
Memorial Health outsourced its entire information services function in 1993, chief information officer and all. The key goals were to achieve savings, improve operations and maintain the integrity of the IS function in an environment of severe cutbacks.
In retrospect, the transaction was less than ideal in that some functions critical to Memorial Health's business were handed to an outside firm. Such functions included strategic systems planning and decisionmaking that should have been retained inside the company. Some of these errors were reversed over the seven-year agreement, but it was a painful and expensive experience.
In spite of the difficulties, Memorial Health was interested in continuing outsourcing as expiration of the original agreement neared. Memorial Health believed that its experience and that of others could be used to effectively shop for outsourcing services and craft a fair, flexible agreement. Here are some key considerations that should serve as a general guide for outsourcing services:
* Establish clear objectives aligned with business needs. Different goals require different relationships and measures of success. When seeking cost savings, focus on price and service level. If seeking innovation, focus on alignment of business objectives and development of a common vision with an outsourcing partner. Seek vendors with established track records and check references.
* Define the scope of services. Spell out what is included, and insist the vendor list categories of service that will add charges. Consider clauses in an agreement that state if something is not specifically excluded, it is to be included in the services provided.
* Know the costs. Establish internal costs for the functions to be outsourced and compare costs against proposed fees. The most valid comparison will compare internal costs against not only production costs (direct fees) but also all of the transaction costs -- the expenses involved in pursuing, engaging and managing the outsourcing agreement.
* Develop a fair but strong contract. An outsourcing contract should be constructed with the aid of lawyers experienced with these agreements. Be realistic about terms and be prepared to pay for certain options -- for example, termination of the agreement for convenience. Spend extra time on appendices that lay out the contractOs scope, service levels and incremental charges.
* Quantify, price and measure the services. Provide one or two key measures for every major service element. Develop a service measure scorecard and establish monthly reporting. Consider rewards linked to savings or benefits, and penalties for poor performance. Have a portion of fees linked to customer satisfaction.
* Build flexibility into the agreement. The nature of a deal often changes after a few months when more or different services are desired. Anticipate changes in needs and allow for both service expansion and contraction. Ensure that a vendor is able to address changes in your business and can increase or scale back the level of services. Avoid long-term deals without exits.
* Retain key functions. Companies that outsource as much as 80% of their IT functions still retain key roles and capabilities. Keep IT vision and planning roles; suppliers shouldnOt be setting your business strategies. Keep IT service delivery roles, including the people who will negotiate and manage IT service contracts. Keep IT architecture design. Internal staff should determine IT platforms and technical infrastructure.
* Outsource selectively. Consider multiple vendors with specialized expertise to take on specific aspects of the total scope of services to be outsourced.
* Be wary of ASPs. Arrangements with application service providers assume Internet ubiquity, reliability, security and sufficient transmission speed. These qualities seem certain over the long term but may not be sufficiently robust in the short run to reliably power mission-critical applications. That said, ASPs are an especially attractive outsourcing option today for smaller niche applications that can tolerate occasional service interruptions.
Finally, outsourcing should not be viewed as a way of avoiding responsibility or making up for inherent business failings. Enterprises may be tempted to divest themselves of responsibilities, hoping that a service provider will provide a grand solution to all your IT problems. Outsourcing cannot provide magic solutions to correct flawed processes or inept strategies.
Pursued for the right reasons, good outsourcing outcomes can be achieved with well-defined services, performance measures and costs that are supported by a solid agreement. However, it takes time and effort to determine needs, find the right company, and put together a fair deal.