Jim McDowell

A study of U.S. integrated delivery systems that used shared services centers found significant reductions in labor costs in key administrative areas.


At a Glance  

 

  • A study of more than 30 U.S. integrated delivery systems (IDSs) found that implementing effective shared services centers can drive significant cost savings in human resources, accounts payable, and procurement.  
  • Many IDSs have not adopted effective shared services strategies.    
  • Implementing administrative shared services involves low risk and a relatively low start-up investment.    

Integrated delivery systems (IDSs) that use shared services centers are achieving significant administrative efficiencies while reducing costs. A recent analysis of some of the largest U.S. IDSs found that the model is helping them save millions of dollars in key administrative areas.

Integrated delivery systems (IDSs) that use shared services centers are achieving significant administrative efficiencies while reducing costs. A recent analysis of some of the largest U.S. IDSs found that the model is helping them save millions of dollars in key administrative areas. 

Between 1990 and 2005, many U.S. hospitals formed or joined IDSs as a major competitive strategy to help deal with increasing payment and operational cost pressures. Although some succeeded in migrating to common IT platforms and implemented efficient shared services center models, others failed to operationalize well-designed administrative shared services centers and the significant savings they offer.

The recent U.S. economic crisis, with its severe impact on hospital operating margins, however, has fueled a renewed interest in proven methods of cost reduction, including shared services environments, to drive critically needed cost savings.

Over the past four years, a research team conducted detailed process improvement analyses with more than 30 of the largest U.S. IDSs, encompassing more than 270 hospitals (many regionally organized) and 73,000 combined staffed beds. The team looked at overall efficiency drivers in key administrative areas, including supply chain management, human resources (HR), and financial management processes. Through detailed process and performance metric reviews across this broad group of organizations (including interviews with more than 100 C-suite executives and 600 administrators), the researchers mapped a number of administrative suggested practices for improving operations and financial performance. (See detailed results of the study in "Achieving Strategic Cost Advantages by Focusing on Back-Office Efficiency," McDowell, J., hfm, June 2010, pp. 98-104.)

Although several suggested practices were identified in each key process area (supply chain, HR, and financial management), the use of administrative shared services centers stood out as the single most important efficiency driver across all three functions. The team's analysis showed, unequivocally, that hospital providers making greater use of administrative shared services centers achieve a significantly greater level of efficiency-25 to 60 percent-in these key back-office functions than providers that did not use shared services models. Depending on the size of the IDS, organizational savings can range from $1 million to more than $10 million annually, according to the findings.

Key Research Findings and Their Implications

The IDSs included in these observations ranged from those operating as few as three hospitals (plus associated entities) to those with 35 or more. Some larger organizations contained regional entities, which operated as nearly independent business units (often acquired as a previously freestanding enterprise). Where these organizations had distinct business processes (including shared services practices) and supporting information systems, they were included as separate entities in this study. All but one of the organizations were not-for-profits.

For the purposes of this study, shared services users were defined as those that had done the following:

  • Centralized the management and processing of a group of common business transactions under a single department or service (Co-location was not required, but was present in all cases studied.)
  • Implemented a common information system environment and standardized operational processes for the target services
  • Operated fully as a shared service for at least one year

Organizations studied that did not meet the above criteria for shared services users are referred to as peers in the data and exhibits.

Finding No. 1: A significant number of IDSs have not adopted effective shared services strategies. Despite considerable agreement among IDS leaders that shared services can drive organizational cost savings, many decision makers have yet to reconfigure their infrastructures to enable this model. The study found that fewer than 30 percent of the 30 IDSs analyzed operated an effective shared services configuration for management of key administrative areas, including procurement, HR/payroll, and finance. Upon inquiry, the reason most frequently given by organizational leaders for not moving to a shared services model was that such a restructuring was a lower priority than other "more pressing" organizational needs, such as capital expenditures for physical plant maintenance/improvement, clinical systems, and legacy system conversion.

Increasing pressures to reduce costs may make the need for reorganization and consolidations in healthcare organizations more acute. As such, IDS executives may want to renew their focus on shared services strategies to maximize economies of scale in their growing organizations.

Certainly, many organizational hurdles, such as change management and relocation challenges, should be considered when implementing organizational change that affects the entire organization and its administrative processes. However, as outlined below, the cost benefits of moving to a shared services environment are significant and set a foundation for more efficient growth going forward.

Finding No. 2: HR and payroll achieve significant labor savings. As shown in the top exhibit on page 120, IDSs that implemented HR and payroll shared services centers realized improved labor efficiencies of 19 and 61 percent, respectively, over peer organizations that had not implemented shared services models. When researchers carefully compared the top performers with the average for the groups, they found that some IDSs were achieving metrics three times greater than their peer organizations' average.

Although the researchers could postulate that only the largest IDS organizations can achieve higher savings levels, they witnessed IDSs (or sometimes regions within larger organizations) with as few as three or four facilities and 10,000 to 20,000 total employees achieving top quintile performance. In payroll, for example, the absolute top performers were able to maximally standardize pay codes and practices in addition to implementing shared services. Also important was the drive to create a standard, uniform payroll process for all entities rather than simply locate multiple disparate practices in a shared physical center.

Exhibits 1-3

f_mcdowell_exh1-3

There is no question that implementing standardized pay codes and practices in large, complex organizations is a tedious process. The related payoff, however, appears to be substantial. Similar administrative process and system standardization factors were important in achieving savings in the areas of employee recruiting, on-boarding (the initial employee data gathering, training, and orientation), and benefits administration that contributed to improved overall HR administrative staff ratios. In addition, an important underlying factor in realizing these benefits was the existence of a common enterprise resource planning (ERP) platform (the core financial management, procurement, and human resource system) in each process area.

Finding No. 3: Accounts payable (A/P) and general ledger (GL) are ripe areas of opportunity. As one could expect for any transaction-intensive area, implementing a shared services model in both the A/P and GL areas also had a significant impact on efficiency. As shown in the second exhibit from the top at left, organizations using shared services configurations processed 45 percent more invoices per FTE and had 74 percent fewer GL FTEs per staffed bed.

Similar to the study's findings for savings in HR and payroll areas, the researchers found the absolute top performers in A/P and GL were achieving nearly double the "average" shared service group results. The absolute highest performer that researchers observed was using best practices across the board and processing more than 42,000 invoices per A/P FTE annually.

Finding No. 4: Significant savings were achieved in procurement labor efficiency. As shown in the bottom exhibit above, IDSs that deployed organizationwide shared services centers for procurement managed 25 percent more total annual spend per buyer than their peers not using shared services.

Exhibit 4

f_mcdowell_exh4

Although not quite as large as the transactional processing improvements achieved in A/P, a demonstrated 25 percent reduction in procurement labor still represents a significant savings. As with other administrative process areas, the existence of common platforms and standardized processes combined with optimal rationalization of vendor and product/item masters contributed to maximum improvements. Absolute leaders, once again, were achieving results significantly above the shared services group average.

Summing Up the Savings Potential

The efficiency improvement opportunities outlined in each of these individual back-office administrative process areas is clearly significant as expressed in standard performance metric terms. However, what does this mean in monetary terms?

Applying the metric improvements achieved by shared services users to average transaction volumes and employee counts for IDSs of three size categories provides reasonable estimates of the annual organizational savings attainable, as shown in the exhibit above. For example, a small IDS (with revenues of less than $1 billion annually) could save $1.25 million annually by implementing shared services across supply chain, HR/payroll, and financial functions. On the other end of the spectrum, a large IDS (with revenues of more than $10 billion annually) can save up to $12.5 million annually across these three process areas. Top-performing IDSs roughly doubled these savings.

Although other infrastructure models, programs, and service opportunities offer equal or greater potential for annual cost savings, few have the low-risk (because of the ability to accurately project potential savings) and relatively low-investment profile associated with implementing administrative shared services. The range of investment needed to implement shared services varies widely based on an organization's starting point (especially regarding uniformity of the underlying ERP systems across the organization). Total costs, however, rarely exceed the equivalent of one to two years of the annual savings provided.

Additionally, IDS executives should strongly consider the long-term, structural operational efficiency benefits to their organization beyond the simplistic view of annual cost savings. Because most IDSs will continue to grow in the coming years, it is reasonable to assume that every core improvement to structural efficiency that can be made as these organizations expand will pay increasing dividends in managing this growth-whether organic or via additional consolidation.

"But Health Care Is Different" Does Not Apply

Without a doubt, healthcare providers face certain unique challenges in running efficient organizations that other industries don't have. However, in terms of the ability to drive cost savings in purely transactional processes via shared services, health care is no different than other industries.

In a brief industry comparison, the research team found that other industries have adopted administrative shared services centers as a core economy-of-scale strategy for many years, and industry analysts have documented their resultant savings.a  

A shared services benchmark survey conducted by the Hackett Group found key metric gains for shared services users across Fortune 1,000 companies. For example, users in Fortune 1,000 companies had 50 percent lower finance costs, 47 percent lower payroll processing costs, and 20 percent lower procurement costs than their peers that did not adopt this approach. It is striking how closely those cross-industry results from the Hackett Group study lined up with results for IDSs. This strong correlation between cost savings and administrative shared services centers observed in U.S. IDSs should help to put an end to any impression that efficient processing of basic HR/payroll, procurement, and accounting transactions is significantly different, or more complex, in healthcare organizations than in other industries.

In addition to the pure cost advantages of shared services processing, industry research has shown important quality and service delivery improvements, including reduced error rates, improved service response times, and improved consistency of customer experience-all of which can have sustained business benefits.

A 2005 Hackett Group study of large organizations that used shared services centers found that 44 percent of respondents experienced productivity increases of more than 20 percent from shared services.b Nearly 80 percent of respondents experienced quality increases of more than 10 percent, while almost 40 percent of respondents reported quality increases of more than 20 percent with shared services.

Enabling Technologies

'The more sophisticated, newer ERP environments deployed today normally contain the core technologies required to implement sound shared services centers in the key areas that the researchers reviewed, assuming the entire organization is using one platform. The core HR/payroll, procurement, and finance applications serve as the backbone of the transaction processing layer, and supporting technologies-such as workflow automation, rules engines, self-service tools, and online messaging-provide the means of efficient information exchange between entities. If the organization is not uniformly using the same ERP platform, of course, other technologies might be required.

In addition, analytics tools play an increasingly important role in the shared services environment as established centers drive toward continuous improvement.

A Winning Proposition

Healthcare finance executives today face greater operating margin pressures than at almost any time in recent history, and 2008 and 2009 were particularly difficult years. With national healthcare reform promising to squeeze even more costs out of the system, IDS organizations will be seeking every possible opportunity to improve operating efficiencies and preserve precious resources for patient care. As this research demonstrates, implementing appropriate administrative shared services strategies in common transaction-oriented, back-office functions can make a significant contribution to cost savings initiatives with little organizational risk-a winning proposition for today's IDS.


Jim McDowell is senior director for healthcare insight and industry strategy, Oracle Corporation, Phoenix, and a member of HFMA's Arizona Chapter (james.mcdowell@oracle.com).


 

Footnotes

a. "Shared Services Perspectives Series," The Hackett Group, 2005 and 2008; and "Shared Services Within the Healthcare Provider Community," Deloitte Consulting, 2006.

b. "The Future of Shared Services," The Hackett Group, 2005.
 

Publication Date: Wednesday, June 01, 2011

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