Nearly every hospital department has an IT wish list. How can CFOs allocate their IT budget wisely?
Prioritizing IT investments has never been more difficult. In many hospitals, a constant flow of regulation, vendor technology upgrades, and new applications has created backlogs of hundreds of project requests, numerous vendor relationships, and sophisticated infrastructure and integration requirements.
At the same time, IT has moved beyond its origins in transaction-based systems to become mission-critical to key strategies such as patient safety, clinical quality, revenue management, and market positioning. John Glaser, in The Strategic Application of Information Technology in Healthcare Organizations (Jossey-Bass, 2002), notes that historically, IT capital requirements have claimed 15 to 30 percent of a health system's capital budget. With the new emphasis on clinical systems and the convergence of information, medical, and building automation technologies, some experts anticipate growth in IT capital spending over the next few years. Gartner predicts IT healthcare spending will rise from $34 billion in 2001 to almost $48 billion by 2006, making health care second only to the government in IT spending growth.
Yet many healthcare providers focus IT budget planning discussions on trimming expenses rather than delivering the best return on investment (ROI). CFOs have responsibility for designing the overall financial strategy and the associated capital planning process of the healthcare organization. Jointly with CIOs, they must ensure that IT investments support strategic objectives and offer the appropriate payback. Hospitals need rigorous approaches for comparing technology, facility, and clinical service-line requests and for governing and prioritizing IT investments.
ROI may mean different things to different people. To some it is a series of calculations focused on net present value, internal rate of return, and cash flow. To others, it is merely a document used to justify budget numbers. As part of a broader framework, determining ROI can be an essential step in a decision-making process that can accomplish the following objectives:
- Ensuring proper governance of IT at the board level
- Aligning IT strategy with the strategic plan
- Bringing IT and finance together to jointly develop a common process for prioritization and ROI analysis
- Creating solutions to business/clinical problems rather than focusing on technology for technology's sake
Board Governance of IT
At its foundation, governance has two purposes-delivering value to the healthcare organization's stakeholders and mitigating risks. IT presents exceptional opportunity for growth and transformation, but the very large investments required for success can present the potential for crippling risks. Boards of directors should apply to technology the same level of commitment and oversight they apply to the organization's financial standing.
Boards must become aware of the role of IT and its impact on the organization, align organizationwide strategies with technology strategies, review and approve IT investments, ensure IT-related risk transparency, and measure IT performance.
Therefore, it is essential that the organization's top financial executives present IT priorities to the board in a way that:
- Provides a clear rationale for decision-making
- Presents a distinct bottom-line cost of IT initiatives
- Boils hoped-for results of IT initiatives down into a few simple goals
- Details "hard" and "soft" dollars
Although specifics will vary, boards should understand three essential dimensions to IT priorities-strategic alignment, ROI, and risk. Strategic alignment. To deliver value, IT must enhance, enable, or support the organization's ability to expand market share, increase margin or cash positions, improve employee recruitment and retention, or drive relationships with patients and medical staffs. Ultimately, the IT investment must be in alignment with the organization's strategic and financial plans to create long-term sustainable value.
Let's look at a fictitious example of this lack of alignment. A financially challenged healthcare organization has a primary objective for the short term of improving financial viability and profitability. It has adopted strategies to increase net revenues, reduce operating costs, and restore creditworthiness. The organization decides to pursue an aggressive computerized physician order entry (CPOE) initiative.
Today, CPOE is recognized as relatively immature. A July 2003 report by KLAS Enterprises notes that fewer than 3.5 percent of hospitals nationally are using CPOE. Deployment can take years, and return on investment will be long term at best. In this example, the organization should probably shift its focus to projects with short-term payoff and more immediate alignment with its strategic goals.
ROI. Historically, the healthcare industry has focused on demonstrating ROI by reducing the number of full-time-equivalent employees. Often, IT systems are deployed for the purposes of automation without offering significant changes to processes. Given today's recruitment crisis and the challenges facing healthcare providers at the strategic level, a different approach is necessary. To achieve optimal ROI, technology initiatives should focus on processes or strategies. At the process level, technology can be leveraged across multiple departments to resolve inefficiencies or produce improved outcomes. Further up the spectrum, at the strategic level, even more significant ROI is possible.
ROI analyses involve both concrete calculations of hard dollars and development of metrics for intangible benefits. Intangible benefits may contribute significantly to strategic or operational goals such as improving brand/competitive advantage, management and clinical information, and process outcomes; "catching up" to standard or best practices; and achieving superior stakeholder satisfaction. "Intangible" should not be construed as unquantifiable.
Many familiar approaches can be used for calculating these metrics: benefit-cost ratio, net present value, break-even period, and more. True success, however, lies not in the formula but in the plan for achieving and monitoring benefits and savings. Many organizations spend extensive time creating financial models and ROI analyses. Actual results, however, come to those who manage the benefits and adjust their plans as needed over the long term.
Risk. Health care is generally a risk-averse industry. Many health systems have taken on new IT projects without fully understanding the risk involved or the work required to ensure success. Risk comes in many forms, including:
- Project-management risk-timetables and budgets, resource commitments, skills and knowledge, management commitment, and project dependencies
- Technology risk-vendor reliability, stability, and delivery capability; infrastructure and application compatibility; and customer-acquired/developed technology
- Organization/change-management risk-process and organization redesign, culture, leadership, education and training, and change readiness
Boards should establish a philosophy regarding how much risk the organization is prepared to assume. The board might encourage executive management to keep risky projects to a minimum or innovate in only one area at a time. If the organization is an early technology adopter, the board may encourage leading-edge thinking with proper preparedness. Or the board may emphasize implementing only mainstream, fully tested products in recognition of the impact of risk on costs.
Streamlining IT Project Requests
Most healthcare organizations have hundreds of IT-related requests and projects in the pipeline. Many healthcare providers have difficulty establishing priorities because they lack a screening process. IT projects should be carefully examined by the organization's leadership to ensure the project meets basic thresholds. With proper scrutiny, most organizations can identify unnecessary, unfocused, or no-longer-relevant IT projects that can easily be dropped, merged, or resolved via means other than technology.
The degree of rigor applied to screening IT projects depends on the project. Some projects require only small levels of technical support while others are more complex and require a detailed business case and budget analysis. Very large or strategic projects may require more formal analytics. Small projects should not be overburdened with unnecessary evaluation, while large projects should be reviewed extensively to determine expected deliverables and a plan for managing risks. A staged process for project review with go/no-go decisions along the way will highlight valuable projects and weed out those not fitting operational objectives.
Creating the IT Portfolio
Once projects have undergone initial review, multiple IT projects should be consolidated into broader IT initiatives. Typically, these initiatives are driven by the organization's strategic plan. For example, a health system with a strategy to improve patient safety may create an IT initiative that includes medication management, bar coding, and CPOE projects. The ultimate objective of this consolidation process is to create a portfolio of IT initiatives and associated projects.
Managing an IT portfolio is like managing a personal investment portfolio. Most people manage their personal portfolios to get them where they want to be at some point in the future, taking into account such factors as ROI and risk. Similarly, an IT portfolio consists of the IT initiatives that will move the organization to a particular place at a particular time in the future.
Prioritization of projects within the IT portfolio is different from individual project selection. Individual projects are often influenced by localized needs, whereas the portfolio approach seeks to balance the projects with the organization's strategic, financial, and operational objectives. Many health systems use a scorecard design for prioritization, customized according to their needs. Prioritizing IT investments requires both top-down and bottom-up planning steps. CFOs and CIOs must work together to streamline the number of projects, consolidate the projects into initiatives that affect the organization as a whole, and develop reasonable metrics and appropriate thresholds for decision-making.
Success in prioritizing IT depends on communication at the board, executive, and department-manager levels. It requires a systematic approach that is applied consistently and routine follow-up to measure results. By implementing these approaches to prioritization, your organization can adopt IT projects that support its strategic goals and bring the most optimal ROI.
Pam Arlotto is a healthcare strategist and partner with Chrysalis Health Strategies, LLC, Atlanta.
Questions or comments regarding this article may be sent to the author at email@example.com
Publication Date: Sunday, February 01, 2004