Control & Process: The Keys to Driving Cost Out of Service Contracts

Categories : Procurement Goals | Set Strategy | Negotiate Published on : Jun 27 2017

By: John Strong, Principal, John Strong LLC

Purchased services have become a key focus in most healthcare supply chain circles, and with good reason. Depending on how frequently a provider elects to outsource services, these contracts can represent more than 10% of their total expense budget and are often unmanaged, or poorly managed. Generally, service contracts include, but are not limited to, areas such as outsourcing of food services, housekeeping and biomedical and maintenance departments; service on clinical equipment, landscaping, parking and the maintenance of equipment; and a whole host of services often taken for granted, such as language translation.

Creating a Process

This article presents a pathway for gaining control of service expenditures, negotiating and memorializing them in a contract and purchase order, as well as measuring the vendor’s performance during the contract period

  1. Develop a strategy and socialize it among all key stakeholders. Ensure that there are no “sacred cows,” or individuals who insist on owning their own service contract management. Stress that they will become part of a collaborative process.

  2. Gain control of all service contracts. In many organizations, there is no centralized authority over the development and management of service contracts. Often, these types of contracts are spread throughout a healthcare provider’s operations, and a number of individuals create and manage these relationships. The results often vary widely. Use a policy that includes a definition of service contracts and who will manage them.

  3. Create a process for requesting, processing and committing to service contracts. The supply chain (purchasing) and finance departments are two good places to vest control of the management process and approval for all contracts. The staff charged with management in the organization must be educated on how your process will work, and the approval levels necessary, based on the size of the service contract. Failure to do this effectively on all shifts often leads to process failure, exceptions and errors.

  4. Inventory your contracts. Sadly, many healthcare facilities have little or no control over service contracts. As a result, there is no central repository for these contracts, apart from information that is usually scattered throughout a provider’s accounts payable department. This often creates “fire-drill” conditions when someone realizes a service contract is about to expire.Therefore, getting copies of all service contracts and placing them in a database is critical to success. While there is plenty of good software out there to assist with this task, smaller organizations can start with a manual system. You can’t effectively manage contracts you don’t know about. While many organizations issue a purchase order for service contracts, they end up mixed in with orders for supplies as well. Important information to gather in your database includes the awarded supplier, contract start and expiration dates, monthly or annual value, description of services, times for regular delivery of the services, performance indicators, the department and cost center, and the key departmental administrator for the contract.Sometimes time and the expiration dates of service contracts are not on the buyer’s side. Therefore, keeping records, managing contracts according to their expiration date and having a plan for renegotiation is absolutely critical. To avoid fire drills, it is essential to start reviewing service contracts for renewal or bid at least a year in advance of expiration, keeping the size and complexity of the contract in mind.

  5. The departmental administrator works within the requesting department, manages the service contract for the department and is the go-to person when service is required, when issues regarding service arise and in other situations involving the vendor. They also become the point person when contracts come up for renewal within the system that is used by finance and/or supply chain to manage the service contracts.

  6. Establish performance metrics. Many service contracts with service vendors are created to improve the delivery of service, quality and financial performance. Relationships often fail because the parties in the agreement don’t work collaboratively on mutually agreed-to performance metrics. Today, risk-based contracts are common, often applying financial penalties if a supplier fails to perform as promised. Buyers should remember that no amount of financial penalty will offset disappointed patients, poor service quality or failed financial performance. Performance metrics should be established mutually with the departmental administrator, finance, the supply chain and the service provider. Metrics should also be documented and included as an exhibit to the service contract.

  7. Measure performance against reality. Numbers and metrics often do not tell the whole story. The departmental administrator and key stakeholders should review performance against standards on a regular basis, not just when there are issues or problems.

  8. Meet with the service provider on a regular basis to discuss all aspects of performance, as well as ideas that can improve service, reduce costs and lead to future innovation. All too frequently these meetings become more about issues and problems rather than innovation. Ensure there is a good balance. When appropriate, celebrate success, and plan for the future.

  9. Report the results of centralizing service contract administration on a regular basis. This should include more than cost savings, and provide a review of service improvements and innovation. Include qualitative and quantitative feedback.

Prepare, Take Action and Monitor Closely

Effective management of service contracts requires a significant amount of planning, implementation and continuous effort. All too frequently, there is not enough time spent on planning the process and developing it so that it fits well within an individual organization. Every healthcare provider’s processes, including culture and approval processes, vary; this should be taken into account when embarking on a project of this size, because one size doesn’t fit all.


About the Author:

John Strong is a healthcare industry veteran with more than 40 years of supply chain experience with healthcare providers and group purchasing organizations. He consults with both providers and suppliers along the supply chain as principal in his own consulting firm, John Strong LLC. He can be reached at


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