Making the Case for Balanced Benchmarking of Services Spend
Buyers Meeting Point recently interviewed James Bouchard, VP of Operations for MedPricer, about the importance of effective benchmarks in the management of services spend. He provided a detailed overview of MedPricer’s Five FactorsTM that benchmarks need to address:
- Service Volume & Frequency
- Service Levels
- Unique Category Considerations
- Vendor Standardization Potential
These factors are actually present twice in the benchmarking process: once in the creation of the benchmarks themselves, and once in the evaluation of current services contracts against those benchmarks. The factors must align on both sides for procurement to get an accurate assessment of their contracts. For instance, if the benchmark is based on a national labor rate, you can’t compare it to a contract with localized one. This type of alignment is critical if the benchmarking assessment is to be accurate.
Assuming the benchmarking process is conducted properly, the company will learn that each services contract’s pricing is either higher, lower, or the same as the benchmark. The process forward from there – especially for contracts that are found to have higher costs than the benchmark – requires procurement to dig back into the five factors. In the post benchmark diagnostic process, procurement will need to determine why their contracts are more expensive and if there is anything that can be done about it.
Fortunately, suppliers can be an amazing source of information during the diagnostic process. They have a wealth of knowledge, not only about the current contract, but about what other companies are doing. Armed with benchmark data and supplier feedback, procurement can take swift and meaningful action to better manage services categories, taking a different approach in response to each factor that can be influenced.
In most cases, services are required where they are required – and nothing procurement or the supplier can do in the short term will have any effect on this. Differences in the cost of living and availability or scarcity of qualified labor will dictate geographically-driven service costs. Longer term, and usually based on decisions made outside of procurement, a company may make the decision to move the facility where a service is required to another city, state, or country.
For example… According to the Bureau of Labor Statistics, Home Health Aides made a mean hourly rate of $11.00 in May of 2015 (the most recent data available). In Texas, the mean for the same period and the same position was $9.59, and in New York the mean wage was $11.23. When the differences in these rates are extended across the total volume of the service delivered, the misalignment between the contract and benchmark will likely be significant.
This is an institutional advantage based on total demand that a supplier will either achieve or not. The concept behind this is that the more often a supplier performs a service, the more efficient they will be. The level of demand required to achieve a supplier-based economy of scale will vary by service. This is effectively the difference between working with the biggest supplier on the block, a company that has every opportunity to achieve internal efficiencies, and partnering with a smaller supplier that may be very effective but is not in a market-maker position.
For example… Comparing the cost per line to provide transcription services requires procurement to understand how many lines each supplier transcribes per year and what efficiencies that volume allows them to achieve. Also important is for procurement to understand what percent of the supplier’s business they will represent and how that aligns with their goals for the service category. A higher percent will get procurement more attention, but may come at the risk of stretching the supplier’s capacity. A lower percentage may come with the promise of significant savings, but will likely earn procurement little direct attention from the supplier.
This may be the most important cost-driving factor, as well as the one where suppliers can provide the most insight. Suppliers will price out what they anticipate it will cost them to meet buy-side requirements, plus a profit. If given the opportunity to point out how much additional cost is associated with requirements that are beyond the norm, the buying company can then make the decision if those requirements create enough incremental value to offset the additional cost.
For example… How much time does the supplier have to respond to a request and to deliver the service? The shorter the required response time, the higher the cost. Procurement may have a significant opportunity for improvement if they discover even some of their required response times are unnecessarily fast. By segmenting response times, and bringing the majority of response times into alignment with the benchmark, the cost savings may justify a change.
Unique Category Considerations
While geography and service levels are important factors in the delivery of a service, not all labor is the same. Some service categories have highly specialized requirements. There will be cost considerations, not to mention specifications, that apply to only one type of service, and in order to evaluate current contracts, procurement will need to understand those unique needs.
For example… Elevator maintenance: what are the unique requirements of each individual elevator versus the repair services associated with the category? Procurement will need to have a detailed service history of each elevator available to determine if the equipment will require more or less service going forward than the average.
Vendor Standardization Potential
This is procurement’s ‘bread and butter’ when it comes to controlling cost. Just as economies of scale are achieved on the product side of a business, having one vendor provide services across a number of locations creates an opportunity for the supplier to achieve service volume efficiencies – which should, in turn, lead to discounts for the recipient of the service.
For example… If procurement can either have one of their incumbent service providers cover the requirements of all locations or if a new, larger supplier is able to consolidate the demand of multiple facilities that have been serviced separately in the past, costs should be reduced and management of the service should be streamlined, simplified, and made more consistent.
Benchmarks can create a powerful advantage if – and only if – they are created and applied in a way that acknowledges the intricacies of the managed service in question. Procurement may have an understanding of their current contracts, but if they want to bring costs into alignment with industry benchmarks, they will need to capture the knowledge and respect the input of supply partners.
For more information on managed service benchmarks from MedPricer:
- Read Part I and Part 2 of Why Most Purchased Service Benchmarks Don’t Work & What You Can Do About It, by James Bouchard, on the MedPricer blog
- Listen to the BMP Radio podcast interview with James Bouchard on benchmarking
Medpricer is healthcare’s leading cost management platform for purchased services and offers the industry’s only comprehensive Purchased Services System to blend healthcare providers can realize an average of 24% savings and a 40% faster sourcing cycle while paying no out-of-pocket costs.