Expert view: Paul Michaels

Paul Michaels

With concern about the size of the government’s deficit growing, public services are under pressure to slash operational costs. This year’s Operating Framework for the NHS in England says the health service alone is expected to cut managerial and administrative costs by up to 30% by 2013-14.

In many cases, chief information officers and procurement officers are facing a moratorium on new investment, with existing programmes being cancelled, frozen, reviewed or delayed. Many of these, ironically, are strategic, such as regional information and shared service hubs, designed to deliver greater efficiencies and cost savings.

For those IT projects earmarked to proceed, every step of the procurement process is under the microscope, with strong-arm tactics being used on solution providers and outsourcers to drive down costs.

And there are often internal conflicts. The finance director will say: “You have to find savings of up to one-third of your budget” while the CIO says: “I have two more years on my outsourcer contracts and can’t afford to reduce any of these services.” The solution? To hand the problem over to the outsourcing suppliers and to expect them to find ways to trim their costs without reducing service levels.

How far can you squeeze suppliers?

Of course, outsourcers can always find ways to save costs if pushed. And many would argue that passing the pain onto outsourcers is only fair, since they’ve had things their way for a long time. Yet there is a danger that pushing suppliers into a ‘utility’ or commodity-level contract may drive out the value.

That is, if they are pushed too far, they will stop doing the extra good-will, value-adds that are needed to ensure a best practice service and ‘work-to-rule’. Or they will substitute the ‘A Team’ for less-experienced and less knowledgeable staff. That, in turn, increases risk of error – which may have greater cost and reputation implications than the money saved.

Negotiating outsource contracts

Much of our work is assisting CIOs to identify where cuts can be made across the trust’s IT services, from the front to the back office and out into the community. This is done by analysing cost and productivity ratios, legacy system complexity, levels of operational maturity, rationalising and shared services and comparing in-house and outsourcing costs for best value in any given component.

It is a fallacy to think a whole IT environment must be handled either internally or externally – some services are more cost-efficient managed in-house, while others are best handed over to an outsourced centre of excellence.

Where outsourcing is the better option, supplier contracts must be negotiated carefully. Each service should be itemised, service levels should be transparent and safeguards the customer from additional downstream ‘cost creep’.

Unnecessary services, or higher-than-required service levels, are often responsible for inflated costs. For example, a ‘platinum-level’ 24/7 service may have been contracted, where a standard 5/10 (weekday/10 hours a day) service would suffice.

The key is to identify those IT services that need premium support and those that don’t. Utility back-office administration may only require basic support, while an ERP (Enterprise Resource Planning) that requires complex integration and data customisation may need premium professional services and mission-critical support.

Data management: the true costs

One area where IT costs are rising dramatically is in data storage and management. Government departments are generating ever more information, because of ever cheaper computing power and the increased ability to capture point-of-service information (in the NHS, this comes from the use of new devices such as whiteboards in theatre or mobile devices in the community).

This information is regarded as more or less free. However, all this information needs sorting, integrating, analysing, sharing, storing and retrieving. So the more we generate, and the more we do with it in terms of analytics and reports, the higher the processing costs.

Given the increased volumes and the regulatory need for public services to retain records for seven years, data storage costs threaten to explode. Whether handled in or out-of-house, data management is an area where finding inexpensive alternatives will have in increasing impact on IT savings.

Lost opportunity costs

A mandate to reduce healthcare IT budgets typically results in suspending new investment or freezing projects in mid-implementation. While this may reduce short-term pressure on the bottom-line, it can have unintended consequences.

There can be substantial additional costs to re-starting a mothballed programme at a later date. There will be new regulations to comply with, technology will have advanced and so a partially-installed system will have to be reconfigured to comply with these updates. This cost will most probably involve many man-days of expensive professional integration and data transformation services, not to mention higher overall labour costs.

The worst case is that the half-implemented project may no longer be relevant, which means all capital and implementation must be written off. Just as costly, but more difficult to quantify, are the lost opportunity costs of not having had an application in production that might have paid for itself early by delivering extra operational efficiencies or supporting better patient services.

About the author: Paul Michaels is a business consultant who has been working with NHS Scotland and some London trusts to find ways to reduce their IT costs without sacrificing services.

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