Shared Services: Back to the Future for the Healthcare Industry
A few decades ago, during the cooperative-spirited days preceding diagnostic related groups, enterprising healthcare executives began to band together in a wide variety of ventures designed to maximize the economies of scale for various services needed by the provider side of the healthcare industry. As the political and economic landscape for hospitals and other acute-care providers was reshaped by the landslide of governmental perspective payments and tighter scrutiny of costs by all payers, the industry shifted radically from one of openness and cooperation to become a fragmented conglomeration of egocentric enterprises adopting harsh business practices, industrial competitive tactics and slick marketing differentiation efforts. This transformation sucked the economic and cultural life out of the myriad of Shared Services organizations that had emerged to provide the various support needs of these health care providers. Now the landscape is being reshaped again, by the deep rumblings and resultant collapse of the foundations of many of our largest integrated delivery systems, public healthcare enterprises and academic research and treatment institutions.
In recent years, providers have instituted efforts to abate some of these pressures by adopting (but not necessarily adapting) various business techniques like strategic planning, re-engineering, benchmarking and strategic business unit restructurings. A few astute organizations have survived in the Shared Services arena since they were formed in the later decades of the last century, and a few enterprising entities have entered the field since the turn of the millennium. While most of these endeavors are woefully inadequate in comparison to their true potential, they show promise.
Why Shared Services?
Many of the motivational factors and practical reasons for forming cooperatives in the later half of the twentieth century are still valid:
Gaining economies of scale
Reduction of staff/management FTEs
Productivity & efficiency
Free space within HPOs for clinical services
Pooling of scarce labor
Enhanced staff benefits/satisfaction
Potential vendor consolidation and related cost reductions
Enhance individual and collaborative functional integration
Minimization/sharing of capital investment
Shared risk and rewards
Quality standards & control
Enhanced regulatory compliance
Standardization of products & processes
Catalyst for much needed operational changes/collaboration
Closer alignment with organizational strategies
An examination of nearly any HPO's support services structure will reveal a patchwork affair of greatly varied methods, procedures, policies and practices, many of which are misaligned with the strategic and economic direction of the organization’s executive team.
While these services are critically important to the institutions and patients served, there is no rationale that mandates they be directly provided by each hospital’s staff or on any hospital property. Support services are largely invisible to the public being served, and if provided adequately, they have little bearing on the clinical quality. However, they can have a huge positive effect on the overall healthcare experience of the patients, families, visitors, staff and physicians.
Targeted Shared Services
For the purpose of this article, a shared services encompasses such services as:
Facilities Support Services
Real Estate Management
Energy Procurement / Mgt.
Parking Facilities & Services
Human Resources Support Services
Self Insurance Programs
Training & Development
Nursing PRN Services
Temp. Labor Pooling
Day Care (Adult / Toddler)
Financial & Management Services
Corporate Legal Services
Medical Records Admin.
Pooled Imaging Services
Blood Collection /Bank
Visiting Nurse Services
Centralized Pharmacy /IV Prep
Medical Library/Research Serv.
Resource & Materials Management
Standardized Value Analysis
Third Party Logistics
Central Sterile Processing
Common Equipment Pool
Central Print/Forms/ Document Mgt
Outsourcing As An Option
The anti-cooperative, self sufficiency trends of the past quarter-century have resulted in each healthcare enterprise creating their own array of shared services ("insourcing"). A few fundamental shared services have migrated to stand-alone status and are often outsourced to contract management firms. Combined, Food Services, Environmental Services, and Facilities Services are outsourced in a few hundred HPOs.
There are also dozens of other services that have been outsourced but only in select healthcare markets and with limited success. Despite years of having these other services available to health care provider organizations they have not been adopted by the industry at large. Management firms are not the only source of obtaining such services. Others include:
Healthcare Trade Associations/Consulting Firms
Commercial Service Providers
Group Purchasing Organizations
Other Healthcare Providers
Healthcare executives have a wide array of motivators to consider outsourcing:
Focus on core competencies
Establish new / enhance existing service
Improved methodologies / processes
Increase quality & satisfaction ratings
Enhanced regulatory compliance
Human Resource Motivators
Staff recruiting, training, development
Supplemental staff availability
Maximize ROI for resources expended
Overall reduction in staff/mgmt FTEs
Many of the motivators for outsourcing are similar to the motivators for developing shared services. When contemplating these make (i.e. create an owned shared services) vs. buy (i.e. engage an outsourced management firm to provide the services) decisions, two key elements need to be carefully analyzed and considered: strategic alignment and managerial or fiscal control.
While there may be short-term benefit to relinquishing these elements to an outsourced provider, the healthcare provider organization will reach a point of diminishing returns – both strategically and economically. There are a number of inherent factors that will always prevent these sources from providing optimal results for the facilities being served.
The desired benefits and outcomes that are produced by outsourced providers can also be achieved readily through a shared sourcing arrangement, defined as having needed services sourced through an entity that is formed, financed, managed and controlled by the parties who utilize the services of the enterprise being created. All the desirable characteristics and outcomes that are produced by outsourcing can be achieved, and exceeded, by a shared sourcing organization.
The challenges historically have been the restrictive legal structures of the healthcare provider organizations, ego of leadership, competitive suspicions, and lack of an operational or financial commitment or mandate.
The current economic environment and nearly non-existent operating margins of provider organizations have reached the point where shared sourcing is not only attractive, but necessitated to assure the maximum return on the investment of dwindling human, capital and physical resources.
Organizational Models and Structure
The restrictive environment and organizational structures that have developed within healthcare require that these proposed shared services organizations (SSOs) be established as separate and autonomous enterprises. The exact structure and legal form of the enterprise will vary depending on the structures of the sponsoring organizations and the regulatory atmosphere within each state and locale. Such enterprises have historically been established under both the not-for-profit and for-profit umbrellas. In recent years, the most common form seems to be a limited partnership (LP) or limited liability corporation (LLC). Key elements to be considered while investigating the various structure options are:
Ownership & control interests
Growth & shifts in ownership dynamic
Investment sharing & ROI
Oversight & management modeling
Service selection & breakeven analysis
HR transition, recruiting and benefits administration
Downsizing of each sponsoring organization
Geographic service areas and related transportation issues
Competitive services environment
Service marketability to nonsponsoring organizations
These shared services enterprises can also have a variety of physical configurations and structures that can either make best use of a monolithic centralized service center, or have diverse and scattered facilities, perhaps even modular components, designed to maximize the efficiencies of service delivery and linked with the latest technologies. Each shared services enterprise and each service to be provided within each enterprise needs to undergo appropriate evaluation to seek optimal outcomes for all parties. In considering the organizational and physical structure the following elements should be incorporated:
Use open architectures (physical spaces) to allow for future space changes
Adopt flexible systems (storage, communications, IT, furnishings, etc.)
Provide for emerging technologies
Changeable and responsive fiscal arrangements
Flexible benefits and HR policies and procedures to accommodate diversity
The time needed to adequately plan, legally establish, create the infrastructure, transfer staff and other resources, and implement each and all proposed services from the new enterprise will vary considerably. The following estimates should be considered as a general guide:
Defining the need/cultural acceptance among the sponsors: 2-4 mths
Defining legal structure & filings: 3-6 mths
Business & transition planning: 3 mths
Asset/staff transfers (per service): 1-3 mths
A common barrier to success (or conversely a source of disappointment/failure to meet deadlines and expectations during the planning and implementation of these Shared Services enterprises) is short-sightedness. The sponsoring organizations frequently fail to dedicate sufficient staff and other resources critically needed to plan for, transition to and operate these shared services enterprises. Failure to provide adequate resources in any phase of the development processes will yield significant consequences.
Also critical to the success of the venture is the recognition that it is absolutely essential to identify and employ the leadership of the Shared Services enterprise in the earliest phase of the development process, and engage this leadership fulltime for the duration of the development and startup processes. These complex enterprises cannot be sufficiently planned or operationalized using the part-time efforts and limited energies of staff from the sponsoring organizations that are distracted by their existing daily operational obligations.
Also, there is the issue of timing. The best advice for the provider community is that the sooner they take the initiative the more effective and satisfying will be the end result. There are two key factors that support this "sooner rather than later" stance.
First, are the economic factors confronting the vast majority of provider organizations. Operating costs for labor, supplies pharmaceuticals and new technologies are spiraling upward at double digit annual rates, while third party payers are squeezing reimbursements ever tighter. The results are that the operating margins are shrinking each quarter, and there does not seem to be any relief in the foreseeable future for the provider segment.
Second, is the dwindling array of players in most markets. Hospitals continue to close their doors or eliminate high-risk and nonprofitable services, and the formation of dysfunctional integration delivery networks still occur, although at slower rates. The remaining viable healthcare provider organizations have the opportunity, if they act quickly enough, to create and control their own solution to these nagging realities. These remaining, relatively healthy, organizations can and should seek out and select other viable HPOs within their regions to form their own collaborative Shared Services enterprises while the options are still available. It is always better to be proactive in such matters, than to wait for inevitably poorer outcomes resulting from further economic constrains and/or government intervention that would force less optimal solutions.
There are two other key enablers that must be thoroughly evaluated when considering the formation of a shared services enterprise: information systems and funding.
Healthcare provider organizations have collectively spent billions on information systems with some fully integrated and others highly fragmented. Despite these significant investments the healthcare industry lags far behind in the investment of IT enablers, compared to other industries.
The investigation and ultimate formation of any shared services enterprises requires an adequate investment in IT. The historic nature of software program development supporting different elements or services shows that development is done in isolation, with little regard for potential consolidation of multiple services in either a real or virtual centralized shared services enterprise. For example, laundry production and linen inventory systems are different to software used for transportation or courier services, and these are in turn radically different to software used to monitor and run blood bank operations. Any systems designed for the shared services enterprise needs to bring these varied systems together; at least from a managerial reporting perspective (i.e. providing critical summary information on production, resource flows, inventories, goods in motion, and all financial roll-ups).
Funding for the investigation, evaluation and development of a Shared Services enterprise is a key enabler. The organizers and projected key stakeholders need to be able to adequately project various financial models and structures to determine both the fundamental viability of the enterprise as well as to demonstrate to investors the potential return on investment under the various scenarios being considered. Each potential Shared Services enterprise is unique and, as such, requires an individual investigation and evaluation process, including economic modeling and funding modules. This component of the due diligence process cannot be adequately addressed in the confines of a dissertation of this nature.
Establishing Shared Services enterprises utilizing a Shared SourcingTM approach provides the greatest opportunity for today’s economically challenged healthcare provider organizations. The creation of such self-serving and selfsufficient enterprises has the promise to: shed millions of dollars of unnecessary and redundant staffing and related overhead costs; provide superior services at maximum efficiency; and enhance quality for the staff, physicians and patients who access the services.
The time has come to make better use of the dwindling resources available to support the patient care mission and to restore the collaborative and true service spirit to the communities served by our healthcare provider organizations.