The 7 Components of Establishing an Agile Cost Transformation Structure for Long Term Sustainability

The “Structure of Cost Savings” Model                                                          

When you look at the eleven reasons why cost initiatives tend to fail, most of them have to do with structural issues rather than strategy.

While strategy is important to your overall cost-saving and improvement planning, it is not as important as the structure and sustainability of your plan. In fact, I’d weight structure and sustainability at 75% importance and strategy at just 25%.

Why?

Well, what good is strategy without a solid structure or the ability to sustain it?

There are seven components of establishing an agile cost transformation structure for long-term sustainability – and these components largely have to do with the commitment of leadership, including board members, to this plan.

The 7 Components of Establishing an Agile Cost Transformation Structure for Long Term Sustainability

Just as growth and other strategic priorities are pillars for leadership, so should cost-improvement be a pillar with a single leader guiding the charge. Call it a “Cost Czar”, a “VP of Cost”, or a “VP of Cost Transformation”, but a leader must first be appointed who reports into the CEO, and transcends the organization to work with the supply chain, Chief Medical Officer, Chief Nursing Officer, COO or CFO to pull all the components together for the successful execution of your plan.

This VP of Cost must be fluent in working throughout the organization, as he or she will need to know about the journey of a cost, from buying a product or service, to going into the item master to the charge master, then how that gets mapped to reimbursement and how different people within the organization are using it.

Next, cost-transformation must become the DNA of everyone in the organization. From top to bottom, employees need to understand that cost-transformation touches everyone and that every person looking at cost has the ability to impact patient care. As a leader, you should use transparent and meaningful verbal or written communication to let employees know how you’re looking at cost on a day-to-day basis – and not just in the big areas like outsourcing dietary or EVs - but how everyone should look at it across the board.

Third, all cost initiatives should be centralized and maintained on a single platform, accessible by the VP of Cost, the CEO or the C-Suite so they can track progress. They should be able to look at the platform to track the status of all cost-reduction or improvement initiatives, including outsourcing, GPOs, and department initiatives. This platform is integral to a successful short-term and long-term plan.

The fourth component of establishing an agile cross-transformation structure for long-term sustainability is the skills and resources needed to implement them and the required investment for those resources.

For a cost-saving or cost-improvement plan to be successful, your organization needs to be ready to make an investment not just on those who reside in the supply chain or purchasing areas, but also in those who have an impact on purchasing and those who work with the vendors and suppliers.

There are five areas in which this investment in resources is critical:

1- Project Management. Every hospital should have some sort of either internally or externally built (although I recommend externally built) robust project management system that can be customized to their own needs. A project management system lets you to monitor and track every phase of the plan and really allow you to get as much as you can out of the plan and glean as much information from it as possible. It also allows you to go back and revisit what’s been done before as you move on to future plans.

Regardless of which system you choose, it should be used for the sole purpose of executing the cost-saving and cost-improvement plan. This is important because having access to what’s been done previously provides you with a knowledge base in the event that over the course of a few years, you’ve had turnover or if a vendor contract is up for review.

We use a tool called Work Front to manage all of our clients’ projects and we’re able to understand the status of every project, whether the projects are in trouble and what milestones need to be completed.

2-  Data Analytics. In the section about implementation strategy, I’ll talk about why data analytics is so important to getting buy-in from your stakeholders, but let’s first talk about the investment you’ll need to make to get accurate and trustworthy data. This could mean hiring one too many data analysts and a data scientist on site or outsourcing your data analytics all together.

In some cases, I believe that outsourcing your data analytics is useful because you walk away with an independent, impartial, third-party view from a team with a tremendous amount of expertise. Typically, an outsourced firm will not only slice and dice the data but send it back to you with an analysis of where there are issues and opportunities for improvement by looking at pricing, trends, and variations to name a few.

3- Decision-making Criteria. Decision-making isn’t an art. It’s a science – and it’s critical to your planning. How you make decisions about analytics, products and strategy are important to establishing decision-making criteria. You’ll need to determine what investment you’re ready to make and who should be a part of that planning, because ultimately this will determine how your hospital will spend, what you’ll buy and how much you’ll pay for that framework.

4- Negotiation. With supply chain vendors growing more and more skilled in their pricing tactics, it is critical that every single person who has any kind of buying or purchasing role in your hospital or health system, anyone who influences or works with vendors even in a supporting role, and anyone who even works with the products and services needs some degree of negotiation training.

The more advanced negotiations, of course, can be reserved for those on the front lines of purchasing and making those final decisions, while introductory training should be considered for people like those OR nurses or physicians who influence the decision-making. But ultimately what it comes down to is this: Great negotiators are essential.

5- Outside Use of Resources and Technology. To create a long-term sustainable plan, you need to be aware of any and all outside resources your hospital is using, and you’ll need to know their function. For example, you’ll need to know what resources you’re using outside the hospital or health system for things like benchmarking, pricing tools, comparative data and even consultants who help with initiatives or support the back end.

You will ultimately determine to what degree and for how long these resources and investments are needed. But the key is that wise decisions can be made when you ensure that there’s no duplication of technology, that you have the support of all of those resources, especially as hospitals are asked to do more and more with less and less.      

The fifth component you need for a long-term sustainable strategy is an implementation methodology. In other words, how is the core strategy going to be implemented?

First, you’ll need to identify the category, the opportunity gap or the need identified.

Let’s use the specific example of your hospital looking at the variation in laboratory testing. One opportunity may be to look at orthopedic implant pricing. In many cases, hospitals have multiple vendors providing the products and technology to needed to execute various procedures, each of whom have different pricing structures for what they offer. In these cases, there may be opportunities to standardize all pricing to each specific component level.

Another gap you may identify is with environmental services. Your system may be purchasing janitorial supplies and services from seven different companies. The reality is, though, that you don’t need that many. Ideally, you need only one or two suppliers. By taking a close look at everything that’s entailed with environmental services, you can identify how to standardize the processes and improve overall cost savings.

In a different scenario, without even recognizing a specific need, you may see your budget lines increasing in supply costs or your operating room. You may not know why that’s happening, but you’ve identified the need to investigate further to determine the reasons for those increases in the operating room.

The next step in the implementation methodology process has to do with project leads. Each different cost improvement or cost savings opportunity will need a project lead as well as project sponsors to lead the charge and see it through. You’ll also need to have a solid definition of what data is needed.

Going back to the example of the orthopedic analysis, you would likely need to look at:

·       Contracts

·       Spend data from your new material management system

·       Invoice data for a few months to see if there are additional costs being added.

Next, you’ll need to look at the bill-onlys to see how these constructs are put together. Ask yourself questions like, “Is there a reason that you’re seeing a bill-only that you’re not seeing the line-item detail in the material management system?”

All this information is critical to be able to define the data needed for every specific opportunity for cost saving.

Once you have it all together, it’s time to analyze the data – and this is not a linear data analysis. You’re going to need to look at various components. You may even need to add reimbursement data in some of these cases, like the in the example of the orthopedic analysis, or anything that matches up or lines up to a clinical service. 

I’ll talk more about the actual analytical process later in the book.

The essential step to having your implementation methodology is getting stakeholder buy-in. This presentation could be to your CFO, COO, CEO, physicians or department directors and it must be presented in a brief, clear and specific way for it to be successful. Your stakeholders need to be confident that the information is accurate, the analysis was well-performed, and that the data can be trusted.

You would be surprised at how many plans for cost improvement and cost savings have been cut short simply because a poorly executed presentation with questionable data was a roadblock for stakeholder buy-in.

Part of getting full buy-in on your plan is to have a collaborative implementation strategy, because often times those who will be most impacted may be scared off by changes happening all at once. One way to do this is to present the full idea but break down the changes over the course of a year. For example, let’s say your team has come up with a million-dollar opportunity, but it’s going to require a significant shift in mindset and the way things are currently being done. Look for the lower hanging fruit, the easiest things to implement first. Propose that a portion of the plan to achieve half the savings be implemented this year, with the remainder of the $500,000 savings or improvements be implemented next year. Then have a plan for the actual strategy – who will do what, who is responsible for different aspects of the plan, who will communicate it and who will support it.

And, of course, let’s not forget setting milestones, or deadlines, for achieving each phase of the implementation.

Now it’s time to start implementing your strategy. But keep in mind that communication along the way is extremely important for keeping the initiative going. By regularly evaluating, documenting and communicating the financial and performance improvements along the way, reflecting on the work, the lessons learned and what worked or didn’t work in the process, stakeholders will not only continue to buy-in to the plan, but the new culture of savings becomes status quo in the mindset of everyone down the pipeline.

This is one of the reasons I love a project management system, because you can include all that knowledge for future view.

The job is not done there, though. Three months after the plan is finalized, go out and verify the work. Ask yourself:

·       What are the outcomes and results?

·       Are the results what you projected or were there differences?

·       Did any unexpected issues or opportunities arise as the result of what your hospital has implemented?

·       Are there parts of the plan that need to be changed, modified or improved?

And if you see opportunities for changing or modifying the plan, just pivot. Reframe your thinking and make changes to the plan accordingly.

The sixth step in developing an agile cross-transformation structure is accountability to achieving results – and not just any results, but exceptional results. Accountability is so important because hospitals are an ever-changing environment, meaning that as your cost-saving initiatives are being worked on, the hospital’s responsibilities on cost improvement, cost analysis and transformation are also evolving. But having all the initiatives on a single project management dashboard gives you the foundation to offer up reports at even a weekly level.

It’s easy, though, to bog people down in the data, so it’s also important to choose wisely when determining who needs the reports, what data needs to be seen and how often it’s delivered. 

The CFO or COO is a good place to start when asking the question of who should receive weekly reports. But there may be others who need to be equally apprised of the project status. Identify early on in the process who those people are.

To determine that what of reporting, you’ll need to establish different critical drivers during the process and what milestones are important.

Take the earlier example of the orthopedic analysis. If you’ve identified a million dollars in orthopedic cost savings in a period of four months, but in month two vendor negotiations haven’t even started, that needs to be reported as a potential problem. Because remember, negotiations can take a month or more to get done once you’ve factored in all the back and forth in the process.

I’m a big proponent of self-management reporting. When initiatives are established, complete with timelines and goals, there’s an expectation that they will be achieved. If they’re not being achieved, the stakeholder needs to be able to explain why things aren’t working and what they’re going to do differently to get reach the desired outcome. This is vitally more important than merely pushing a report out for an already-busy CFO to sift through and come up with the right questions to try and resolve the problem. By regular self-managing, there are few surprises when the milestones come due and the project continues to move forward even when faced with hiccups along the way.

The seventh and final component for developing an agile cost transformation structure for long-term sustainability is how you’re going to measure the efforts of the organization, starting with looking at real numbers based on actual utilization. I’m talking about taking time in the 13th month after the launch to look back at the 12 previous months.

Sometimes you’ll find that you missed the mark. Perhaps the analysis was wrong, or product utilization was different than anticipated. You may also find that the savings was even greater because of higher utilization. But by going back and looking at the real outcomes, you can identify the true impact of the plan.

Another idea for measurement is to set up a template during the project management process to allow you to take a monthly or quarterly look at things like pricing, specific products or category spend.

Category spend is actually a nice way to begin. Take, for example, your AP spend. You can categorize the data, but you also need a way to look at the specific line item details. The specifics – not the summary data, not the category data – will drive all the initiatives.

Some hospitals want to look at the results monthly, but I’ve found that given fluctuations in supplies, technology and physicians, the quarterly view gives a much clearer picture of how the initiatives are performing. Furthermore, it allows you to look at a fair comparison of how the quarter performed year over year and determine whether or not it’s time to revisit the initiative.

It’s great when stakeholders are measuring supply change because it means they’re engaged in the initiative, but it’s even more important for finance or some sort of independent analyst – typically someone who was not responsible for implementing the initiative - to take a lead role in measurement. Ultimately, their role should be to provide unbiased proof that the initiatives were performed and that the numbers that were put forth as savings are actually being validated.

The outside view is important because it provides an opportunity to find even more opportunities for saving or may even point out something that has been overlooked previously.

In the end though, no matter what those results look like, your results need to be tied back into the overall mission of the organization. Every single dollar saved goes back to the community and goes back into healthcare.

Reach out to me if you would like to have a conversation about VIE's cost optimization services and how we are rapidly achieving cost savings for our healthcare clients in 2022.