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The big question is, "Can outsourcing the supply chain drive meaningful financial change in a mature organization?" It is not like there has been zero focus on cost, or that finding less expensive contracts has not been on the docket of these systems. But, can an outside organization apply its experiences from other systems to the challenges of a system like St. Luke's Episcopal Health System (SLEHS)?

In 1997, St. Luke's Episcopal Health System was formed. The system, built around St. Luke's Episcopal Hospital, the "flagship," now has six hospitals and associated clinics in the Houston, Texas, suburban area. Its supply chain budget was $235 million in 2010 (see Figure 1). Like many providers, SLEHS had an ingrained culture of choice, with largely decentralized sourcing, procurement and supply chain management processes. Nurses, doctors and directors saw supply chain as a necessary evil, rather than a strategy for success. There was a need for a change in approach and in results.

SLEHS entered into a contract with MedAssets for supply chain management (SCM), which included guaranteed documented savings over a five-year period. Included in the agreement were savings levels defined for each of the first three years. As is often the case, the GPO fees that MedAssets received were contingent upon meeting these guarantees.

Signing up for outsourcing was a calculated risk for SLEHS. By outsourcing, it was not building inhouse capabilities, and was relying on MedAssets to deliver needed savings for the system. Failure would be as detrimental for SLEHS as it would be for MedAssets — perhaps worse as the dollars and the lost time would cost millions. The savings guarantee in an outsourced relationship is not driven out of thin air and is not just a "sign and be done event," but it has a combined risk element for both parties that takes commitment to the overall strategy and vision.

As a prerequisite for outsourcing, MedAssets requested, and SLEHS made, an $800,000 investment in value analysis personnel to help drive the changes. It strengthened the infrastructure of the value analysis teams across surgery, radiology, cardiology, lab and the transactional/contract team, as well. A total of 20 dedicated resources from MedAssets manage the supply chain at SLEHS, including all the management from manager level up, plus all contracting, value analysis and analytics personnel. The supply chain team reports to MedAssets' VP Bryan Manning, who manages the relationship on-site, with a hands on approach. Due to the tenure of the existing SLEHS staff and sensitivity to making sweeping cultural changes, MedAssets employed most of the legacy St. Luke's supply chain personnel in the outsourced organization. MedAssets had little ability to choose the transformational team at the outset of the partnership.

The timeline started in 2008, with the transition of staff to the outsourced model. After this step, the focus shifted to improving contract utilization, standardization and efficiencies across the health system.

MedAssets brought structured discipline to SLEHS in its approach to capturing data and measuring compliance across a broad array of supply chain metrics in medical surgical, pharmaceuticals, medical device and other nonlabor categories. These metrics were captured and benchmarked against MedAssets' outsourcing experiences at 125 other hospitals, nationwide, to ensure the best ROI was achieved. An aggressive contract methodology and clinical value analysis process were used to reduce or slow down the cost escalation of supplies. This process started with an "all call" for current contracts. The "all call" demonstrated clearly that the departments were contracting or buying from vendors, with little organized guidance from supply chain. A system of governance, accountability, standardization and measurement was implemented as part of the outsourced plan.

With MedAssets as an embedded part of the SLEHS team, the communication stream was more clearly delivered to the departments, and the value creation initiatives launched more effectively. To validate any "documented savings" under the contracted guarantee, appropriate leaders reviewed and approved any dollar amounts that MedAssets uncovered and implemented. For simplification, these savings toward the guarantee were booked the old-fashioned way — number of items utilized historically times (old price minus new price) equals savings realized. MedAssets' approach is data intensive and metric-driven — so many of these savings dropped to the bottom line and showed the progress made on supply chain costs as a percentage of operating expenses.

Outsourcing supply chain to MedAssets has saved a documented $20.2 million through the first three years of the agreement, including savings in capital purchases. So far, SLEHS is pleased with the progress and the savings, which are ahead of schedule. From 1Q08 (pre-MedAssets' outsourcing) to 4Q10, the supply cost as a percentage of operating expense declined from 22.5% to 20.2% (see Figures 2 and 3).

Productive outsourcing relationships, like those developed between SLEHS and MedAssets, are long-term commitments where communication and managing change together are imperative to the strategy. This outsourced agreement went live in March 2008, and despite a few first-year setbacks due to staffing changes and initial leadership, the right people from MedAssets and SLEHS came together to make things work. Through open communication and the assignment of two key people — Maggie Smith, "on point" assistant vice president at SLEHS, and Bryan Manning from MedAssets — the long-term agreement is tracking well.

According to Maggie Smith, in hindsight, SLEHS might have handled the transfer of responsibility of supply chain differently. "The decision to require MedAssets to hire all SLEHS supply chain employees may not have been the best decision," stated Smith. It took several months to determine who would be able to make the changes needed and who was tied to the old processes. Over the course of the three years, about 30% of the staff has been transitioned from the team.

The next two years hold additional challenges to demonstrate savings. With the improved culture and core staff, and with a two-year running start to continuously reduce costs, the next steps include better managing utilization and completing another more aggressive round of standardization. In addition, MedAssets is now measuring even more areas across the supply chain from the 2010 baseline, with the data that Bryan Manning has accumulated. Supply cost as a percentage of operating expenses is a trailing indicator, and Gartner would expect the dial to move again as it measures and gains control over meaningful metrics that matter in item master, contracting, exceptions, purchasing, Pyxis compliance and process documentation.

• Establish clear and aligned goals in the outsourced agreement.
• Commit strong leadership on both sides — an internal champion at SLEHS and a committed "workhorse" leader from the outsourcing company.
• Leverage supply chain metrics to determine what drives meaningful change in both behavior and performance.