Managing health IT ... (sigh)!

Can you relate to this feeling? It's one that's unfortunately all too familiar to many hospital leaders. As if it weren't enough of a challenge deciding how best to manage the delivery of health care, you also need to decide on the best IT solutions to support it. These are far from simple decisions, yet they are paramount to a hospital's business survival and core to its ability to remain competitive. Consider, for example, the increasing perception of automation as an essential and integral component of many quality and patient safety initiatives.

The inescapable fact is that the imperative for IT excellence in health care is growing. Yet if your facility is like many U.S. hospitals, you may be facing a need to update or replace your clinical and financial systems before you can come close to meeting that imperative.

IT outsourcing is an approach that many hospitals are pursuing or considering. Today, many hospitals are looking to outsource all or a significant portion of their IT operations. But is that really the best solution to this complex challenge?

To help providers better understand the associated success and challenges, and to learn how major outsourcing firms are performing in the healthcare industry, KLAS Enterprises, LLP, Orem, Utah, conducted a comprehensive study during the first six months of 2005 focusing on full IT outsourcing in hospitals in the United States and Canada.

The research focused on the following considerations, among others:

> Hospital full IT outsourcing market

> Why hospitals outsource IT

> Benefits of IT outsourcing

> Challenges of IT outsourcing

> Why providers discontinue IT outsourcing

> What providers would change if starting over

> Outsourcing IT leadership

Hospital Full IT Outsourcing Market

As of June 2005, 100 healthcare provider organizations (not including federal or prison facilities) in North America had fully outsourced IT. The U.S. organizations in this group comprise 315 hospitals and 80,642 beds--or about 6 percent of hospitals and 10 percent of beds in the United States, based on hospital statistics published by the American Hospital Association.

Although healthcare organizations of all sizes outsource IT, hospitals with 201 to 500 beds seem most inclined to pursue full IT outsourcing, with 46 percent of all the fully outsourced healthcare providers falling in this bed-size range.

The study also looked at the firms that provide IT outsourcing services to the healthcare industry. In general, four types of firms were identified: systems integrators, health IT software vendors, consulting firms, and hospital-owned firms. Perot Systems has the largest piece of the full IT outsourcing market share based on the number of hospitals outsourced, followed by CSC and Siemens. The "other" category includes ACS (not including the ACS/Superior Consultant partnership), Capgemini, InfoHealth Management, Phoenix Health Systems, and SAIC.

Why Hospitals Outsource IT

Among the participant organizations that chose to outsource IT, the top reason cited was to improve the talent level of their internal IT staff and retain top performing people. This perspective was typified by the comments of a CFO from a small hospital located in a rural area in the northeast: "The main reason we chose to outsource our IT operations was that we were unable to find competent IT resources on our own. We had a limited management team, and IT was taking up more and more of our time. We just did not have the necessary expertise to manage it ourselves."

The second and third most often cited reasons for IT outsourcing--cited by 33 percent and 32 percent of participants that opted for outsourcing, respectively--were to improve services and operations of the organization's systems and to reduce costs and capital outlay. A CFO from a large integrated delivery system said, "Our biggest driver was financial. We were in a turnaround situation and we needed to trim our IT operations by 15 percent quickly.... Outsourcing for us cost 10 percent to 15 percent less than getting our own resources."

Twenty-five percent of the organizations that had chosen to outsource IT said they did so to ensure the successful implementation of major systems. They wanted to protect their investments and ensure a successful outcome.

Benefits of IT Outsourcing

The study disclosed a number of benefits of outsourcing IT. The most frequently mentioned benefit, cited by 40 percent of outsourced providers, was improved services and service levels. When asked if the level of service had improved, stayed the same, or declined, 80 percent of the outsourced providers indicated that it had improved. A CIO from a Midwestern IDS said, "Today we are much more organized, and our own internal satisfaction scores with IT have increased significantly. Our IT operations are run much more smoothly than before."

Depth of resources was the second most often cited benefit, reported by 33 percent of the outsourced providers. Hospitals liked being able to leverage resources and knowledge outside of their domains for concerns such as assisting with an implementation or to solve a technical problem. A CIO for an organization on the West Coast offered the following comments: "The breadth and depth of our outsource partner's IT skills and knowledge around health care have exceeded our expectations. Obviously, they have a large client base of healthcare organizations, and they have the mechanism and the structure to reach deeply, widely, and broadly for skills that are necessary for our organization. If at some point, we recognize that we lack a necessary skill for a particular project, they can reach back, find that skill, and bring it here. Then that skill goes away when we no longer need it."

Lower costs/capital outlay was the third most mentioned benefit, cited by 30 percent of out-sourced participants. A CFO from an eastern U.S facility with fewer than 300 beds observed, "We got all of the capital costs off of the balance sheet, which enabled us to make a number of major purchases and installations."

Other cited benefits of outsourcing included having a more professional IT organization and stronger IT staff and leadership.

Challenges of IT Outsourcing

All is not perfect with outsourcing. The challenge most frequently mentioned by outsourced organizations (23 percent) was dealing with resource staffing issues. This potential pitfall is in direct contrast with the main reason provider organizations decided to outsource in the first place, which was to attract and retain better people. A director from a midsize hospital on the West Coast observed, "Our outsourcer did not have the right staff to meet our needs; it has been a continual fight regarding roles and responsibilities." Expressing frustration regarding frequent IT management changes, this director also said, "It seems like we have IT management changes every six months or so."

The transition from hospital-run IT to outsourced IT and internal cultural changes/issues were mentioned by 16 percent and 11 percent of out-sourced organizations, respectively. A CEO from a 300- to 400-bed hospital noted, "Our biggest surprise was with how resistant our employees were to transition from being hospital employees to outsourced employees.... They had a struggle with the transition initially."

Thirteen percent of outsourced participants cited problems and issues with the agreement between the hospital and outsourcer as a challenge. A CIO from a large IDS in the East said, "Managing the agreement has been difficult because we did not take time to spell out the details, such as service levels, in the agreement. For this reason, the project was out of scope in a short time and had to be restructured."

Why Providers Discontinue Outsourcing

For the study, KLAS also interviewed 14 provider organizations that were fully outsourced and have since discontinued or materially changed their outsourcing program. When asked why they decided to discontinue outsourcing, 64 percent of these providers indicated that the outsourcing firm did not deliver as expected. A senior executive from a midsized IDS indicated that the primary reason for discontinuing was the performance of the out-sourced IT team, which ranked 37th and 38th of 40 departments in the IDS's performance rankings.

Twenty-nine percent of the organizations that had discontinued outsourcing indicated that they did so because of the costs. In the words of a CIO from a small hospital in the East: "The idea that it would be less expensive over the long term proved to be inaccurate. It was effective in getting us organized and operating like a professional IT organization, but after a couple of years, it was obvious that the costs would now go up significantly."

Twenty-one percent of the participants that discontinued outsourcing said they did so because of lack of control, objectives not aligned, and poor cultural fit. A director from a midsized hospital on the West Coast observed that there was a cultural clash between the not-for-profit hospital organization and the for-profit outsource corporation. "They must make their numbers each quarter and try to grow revenues from their existing client base," the director noted. "They cannot give things away for free and make their objectives, and a not-for-profit (healthcare) organization cannot deal with budget increases that way."

What Providers Would Change if Starting Over

Participants from provider organizations that are currently outsourcing IT were asked what they would change if they were to start over. The most common response involved the service agreement. Several respondents indicated that they would focus more attention on contract details and negotiate better service levels, and some indicated that they would bring in a third party to help negotiate the contract.

"We would have spent more time on a detailed agreement with legal counsel," commented a hospital leader in the Midwest. "The details of the agreement would have spelled out the 'service levels.' The agreement should have also taken into account any reduced costs and ensured that those costs were passed over to us. We lost control of IT management and IT budgets."

The second most common response was to change nothing--a response that also provides additional insight into the satisfaction level of a number of the providers.

The third most common response was to keep key IT leadership in-house. A COO from a 200--to 300-bed facility said, "We would keep the CIO and the project managers as hospital employees from the very beginning. The message is clear. We have to have someone at the hospital who is an expert and is overseeing and setting the direction for the hospital's IT area. If we were to leave it up to an outsourcing company, it becomes their vision as to where IT needs to go, which is going to be toward their company.'"

The exhibit on page 95 provides additional details regarding responses received from outsourced providers.

Outsourcing IT Leadership

IT leadership and staff play a critical role in the success of a hospital's IT operation. Forty-five percent of study participants that have opted for outsourcing have also outsourced their CIO. The findings also suggest that smaller organizations are more likely to outsource their IT leadership than are larger organizations. In some instances, especially for hospitals in rural areas, outsourcing the CIO enables the organization to get better talent at the senior IT position. Thirteen percent of outsourced organizations indicated that lack of IT leadership was a key reason they chose to outsource IT, and 21 percent indicated that a key benefit of IT outsourcing was a stronger IT staff and leadership.

Conversely, many organizations that outsourced their CIO questioned the CIO's ability to "serve two masters." They found the CIO was often placed in a situation where he or she needed to generate profits for the for-profit outsource company while meeting the needs of the not-for-profit hospital. As mentioned previously, 16 percent of the outsourced providers interviewed indicated that if they were to do it over again, they would keep key IT leadership in-house. Also, 14 percent of the respondents that had discontinued outsourcing mentioned IT leadership issues as a key reason for discontinuing outsourcing.

No More Sighs

An increasing number of healthcare organizations, both large and small, are outsourcing their IT operations. And many outsourced provider organizations have been happy with their overall experience. IT outsourcing is not without its challenges, however, and it may not be the best choice for your organization.

If your organization does decide to fully outsource IT, you should keep in mind the lessons from the KLAS study, paying close attention, in particular, to the items that outsourced providers indicated they would change if they were to do it over again, including focusing more attention on contract details, negotiating better service levels, keeping key IT leadership in-house, checking references and ensuring outsourcing experience, and focusing more attention and energy on the selection process. Such an approach is the best way to achieve a result that brings confidence and peace of mind, instead of more sighs and uncertainty.

AT A GLANCE

Provider organizations outsource IT functions primarily to:

> Attract and retain better people

> Improve services and operations

> Reduce costs and capital outlay

> Ensure successful implementations and utilization of major applications

ABOUT THE KLAS STUDY

For its study of full IT outsourcing in the United States and Canada, KLAS Enterprises, LLP, interviewed participants from healthcare provider organizations that are currently fully outsourcing IT, as well as organizations that have discontinued full IT outsourcing. Full IT outsourcing was defined as an engagement in which the provider had outsourced the majority of its IT staff to a third-party organization. Most provider organizations included in this study outsourced, at a minimum, their IT operations and application support. Many also outsourced IT strategy, which included outsourcing the CIO and key IT leadership.

The study was conducted between January and June 2005. Almost all survey participants were senior executives of the hospital. Those who were not senior executives were either referred by a senior executive or were director-level employees who worked directly with the outsourcing firm.

About the authors

Karen Ondo is executive vice president at KLAS Enterprises, LLP, Orem, Utah (kondo@healthcomputing.com).

Mike Smith is research director, professional services, KLAS Enterprises, LLP, Orem, Utah (msmith@healthcomputing.com).

BED SIZES OF ORGANIZATIONS
WITH FULLY OUTSOURCED IT

IDS             31%
100-200 Beds    15%
201-500 Beds    46%
501-1,000 Beds   8%

VENDOR FULL IT OUTSOURCING MARKET SHARE
BY PERCENTAGE OF HOSPITALS

CareTech        5%
Eclipsys        8%
FCG             8%
McKesson        7%
Perot          27%
Siemens        10%
CSC            23%
PHNS            3%
Other           5%
ACS (Superior)  4%

Note: Table made from pie chart

WHAT PROVIDERS WOULD CHANGE IF STARTING OVER

Focus more attention on contract details                       26%
Change nothing                                                 22%
Keep key IT leadership in-house                                16%
More clearly define/negotiate better service levels            12%
Better communication w/outsourcer                              10%
Check references/ensure outsourcing experience                 10%
Focus more energy on RFP/selection phase                       10%
Better internal communication                                   9%
Bring IT group in-house                                         5%
Select single outsourcer that can integrate all applications    5%
Bring in outside help to negotiate contract                     3%
Get clinical system input from outsourcer                       2%
Simplify the contract                                           2&

Table made from bar graph