Car dealers make a little money selling you the car and a great deal of money servicing it. As a matter of fact Henry Ford stated when he was criticized for offering his new cars at such a low price, "I'd be willing to give the cars away for a guarantee that I would be engaged to service them and provide parts!" Like the car industry, the equipment maintenance market is an area where organizations invest significant portions of their expense dollars.
It's not uncommon for a medium size facility to spend $5 million per year on equipment maintenance and an average system to spend $50 million. The problem with any of these figures is that most organizations don't really know what they spend on an annual basis when all elements are considered and there is a fragmented location of the information and responsibilities. Total costs should include maintenance contracts, biomedical costs whether on site or outsourced, independent service organization (ISO) costs, original equipment manufacturer (OEM) costs, parts sourcing and internal labor to name a few. Step one in a best practice process is to perform an inventory of equipment and current practices and consolidate information and responsibility into one centralized location.
Performing the Assessment
This process involves taking a complete inventory of every piece of equipment that you have in your facility--or you think you have. Is it possible that you pay for a maintenance contract on equipment that for whatever reason, no longer exists in your organization? This happens every day. Recently, a large medical center in the Midwest revealed that they had more than $300,000 in equipment they paid to service and they couldn't find evidence that the equipment existed. Want more proof? Pause for a moment the next time that you're at "Memorial Hospital" and you see someone wheeling a patient down the halls in a wheelchair that says "St. John's Hospital" on the back of the chair.
The assessment is more than just an equipment inventory. Analyze the current policies and protocols used to maintain your fleet of equipment. This involves interviews with key stakeholders to determine the current use of maintenance contracts, preventive maintenance policies/procedures, availability and capability of on-site biomedical support and use of independent service contractors. This will allow you to not only put a dollar figure on your current costs, but analyze the effectiveness of current service operations. Once you accomplish that, creating a system to electronically centralize this information, managing contracts and assigning responsibility will go a long way in developing an efficient, cost effective process. If you can measure something, you can monitor it, which allows you to best manage it.
Sleight of hand and the fear factor
Would any of us sign a five-year contract to buy groceries at the local grocery store for a guaranteed discount of 10 percent off of everything that you buy, but if you want to buy something somewhere else there is a 50 percent penalty? No--because five years is an eternity in today's ever changing world--what guarantee would you have that this would be a good deal over time and what if you want to shop somewhere else for a better deal, product or service? We may not do that in our personal lives, but it happens in the equipment maintenance world all the time. It is sleight of hand with golden handcuffs. Other maneuvers to lock in business include adding the year to and beyond service contract costs into the contract to purchase the equipment. Companies want to get you locked in to their high-profit service contracts from the date of purchase. Then they construct contracts that have automatic renewal clauses that require close monitoring of important dates to terminate in the event that you want to make a change. In other words, they have you continuously opted in unless you watch very closely how and when you can opt out.
Why do we do this? It's not in our best interest. The answer is either the fear factor or lack of awareness. We believe that unless you have a maintenance contract on every piece of equipment, you will incur huge repair costs. In fact, if you are knowledgeable about the repair actuarial tables of certain equipment, you can make safe, logical decisions about when to go at risk and when to have a contract. Another common fear factor is that an ISO cannot service equipment with the same quality as the OEM. If you want to test the validity of that statement, simply ask an employee of an ISO where he previously worked. The answer commonly is with one of the OEM's that made the equipment he's working on. These are highly competent and skilled people who can not only service equipment well, but may provide better customer service and more individual attention than the OEM for the equipment. And just in case you believe that this article simply bashes OEM's, there are undoubtedly situations where the best equipment maintenance solution is the OEM, particularly if the equipment is very unique or highly proprietary.
We have a guy...
A common response for organizations is, "We have that covered because we have a guy down in biomed that has tremendous experience, knows everyone and is extremely knowledgeable." Although that guy has 30 years of experience, is very personable and has great knowledge of his area, executives should ask the following questions:
- Do we have a centralized, electronic inventory?
- Do we have a process to manage contracts and a centralized area of location and responsibility?
- Are we locked into any long term maintenance agreements?
- What do we currently spend per year on all aspects of equipment maintenance?
- What was the cost reduction percentage and dollar figure last year?
That guy, no matter how confident and personable, likely will not have good answers to those best practice questions.
The market changed and competition is fierce
In past years, I was involved in vetting best practice solutions that were effective and created very attractive 10 to 15 percent cost savings. The market in the past 18 months changed dramatically using best practice methodologies that are now realizing 30 to 50 percent cost reductions. Hospitals can accomplish this using a client-centric, vendor neutral-approach that establishes a customized request for proposal (RFP) that is designed by an industry expert in conjunction with the client organization. This approach creates a fierce competitive environment that results in dramatic cost reductions and service enhancements. Using an industry expert with aligned financial incentives, but no bias on who the winner should be (vendor neutral) is a demonstrated best practice in today's environment. They know who to invite to participate and how to structure a document to mitigate the common ways that equipment companies hide costs, reduce coverage or otherwise confuse the client. The client is in total control of the decision making process and simply selects the best possible solution for their needs at the lowest cost.
Case study
A prototypical 300 bed hospital in the Midwest had a baseline equipment maintenance spend of $5 million. It completed an assessment that allowed it to determine its spend, consolidate contracts and establish an accurate inventory. The RFP process resulted in bids ranging from $2.8 million to $4 million. The hospital participated in establishing the criteria for the RFP in conjunction with an industry expert which provided for a customized process of meeting their specific needs. The hospital chose not to go with the lowest bidder, but to select a company that they had experience with that had demonstrated a track record of service excellence. As stated previously, the client is always in charge of the decision making process. In this case, in addition to selecting a company based on familiarity and service, it chose a winner that bid $3.2 million on their book of business representing a 36 percent decrease in cost.
Here is one quick way to get to the heart of the matter of equipment maintenance cost reduction opportunities: If your guy does not want to pursue the industry expert driven RFP process that is described above, ask him for his alternative 30 percent cost reduction plan and hold him accountable. You'll quickly gain consensus on not protecting the status quo because he will not have an alternate plan of this magnitude. Good luck and let me hear your thoughts on this subject.
Kevin L. Shrake is the executive vice president and COO of MDR™, based in Fresno, California. He is a 35 year veteran of healthcare, a fellow in the American College of Healthcare Executives and a former hospital CEO.