What Would Your IT Department Do With an Extra Half Million Dollars?
According to a recent Moody’s Investors Service, “U.S. Not-for-Profit Hospital Medians” report, the average American healthcare institution has a modest 2.7% operating margin. Said another way, a hospital puts only $2.70 to the bottom line for every $100.00 in revenue. With ratios like that, it’s little wonder that new investment budget dollars can be hard to come by. Got an idea for a new IT initiative? Get in line. While there is no dispute as to the increased reliance on technology to meet the strategic and tactical needs of an organization, the IT department is often seen internally as “the place where operating budgets go to die, not prosper.” That’s why VertitechIT’s (VIT) vision for IT monetization represents such a dynamic new concept in healthcare industry revenue generation. A new white paper report, presents a step by step review of the process required to market internal IT capabilities to clients outside of the health system.
Think about the money-making potential for servicing the hundreds of orbiting medical practices, clinics, and non-profit institutions located in proximity to an area health system. Consider the relationship-building aspect of adding IT services to Radiology, Laboratory, and other healthcare specialties to round out offerings and give these customers a one-stop menu of clinical and administrative services. When serviced properly, most practices do not shop for alternative providers on a regular basis because of potential switching costs and service disruptions. Once the customer relationship is secured, opportunities to add additional value-based services continue to grow revenue. We’re advising clients on how to form joint ventures, a New-Co that is a partnership between the hospital and a for-profit entity.
While IT leadership may be initially inclined to go it alone, a “New-Co” with an independent partner, well versed in the dynamics of meeting the needs of “paying clients,” is a more prudent path to success. To form a New-Co, the hospital and outside firm create a jointly managed independent for-profit business. Managed by the New-Co leadership (including a board of directors with equal representation from both organizations), the hospital transfers a percentage of current full time IT employees (help desk and desktop support teams as a start) to the joint venture, who in turn service the hospital at cost, maintaining current IT system operations in a net neutral expense fashion. Those employees, along with the outside firm’s personnel, form the nucleus of the new company with the ability to service external clients outside the hospital.
Once operating expenses are covered, net profits are shared on a negotiated ratio between the partners, allowing the hospital to maximize its significant investment in IT and personnel and transform its IT department from a technology cost-center into a strategic, monetized asset.
The typical steps towards achieving a successful New-Co include the following:
- Complete assessment of the Health System IT environment including all aspects of People, Process and Technology
- Identification of opportunities for short-term cost reductions and gaps that need to be addressed before an independent services business can be formed
- Establishment initial service offerings to be included in the New-Co
- Creation of pro-forma financial projections
- Buy-in approval from the hospital board and IT workforce
- Legal consultation regarding corporate formation and affect (if any) on non-profit status
- Identification of employees to be moved into the New-Co and consultation with human resources to establish a seamless transition plan
- Construction of a sales, marketing, and advertising strategy
Any managed service provider organization must be a separate for-profit business, independent of the hospital. Management must honor and accept that while the hospital will remain as the New-Co’s largest client, it will not receive preferential service treatment. Service level agreements (SLA) must be established that prioritize response times.
Help desk and desktop support personnel and their operations provide core MSP offerings of the New-Co. The hospital maintains current or achieves improved service levels at a savings or net neutral cost. Additional product offerings can expand as the New-Co becomes more established and if the institution has implemented and operates an optimized private/hybrid cloud hyper-converged network, with multi-tenancy capabilities within its datacenter.
- Personnel: These implementation efforts have resulted in more effective use of “people” capital, an internal reduction in time required for service provisioning and delivery, and the ability to redirect resources to other projects and needs. It is estimated that the existing staff will have 30-50% more capacity to provide services to outside clients, while maintaining current or superior service levels.
- Skills: Having broken down what had been “siloed” and narrowly-focused IT department structures, staff are provided the opportunity to attain skills in multiple disciplines, increasing their value as potential outsourced consultants/experts. These SMEs can be subcontracted by the outside partner to service other healthcare clients outside the area.
- Multi-Tenancy: Within a public, private, or hybrid cloud datacenter environment, the institutions have the capability to offer software and other resources (i.e. storage and computing) as a service to outside entities. Using its collective buying power and negotiating position with vendors, the health system is able to run one instance of a resource within its own environment, and allow for each tenant’s private use to be isolated and remain invisible to other tenants.
Health Systems often provide EHR support to a significant percentage of affiliated medical practices. This provides for an immediate opportunity for the New-Co to offer other IT services. In addition, there are numerous independent clinics and healthcare-related non-profit organizations in an institution’s region of influence that interact with the health system on a regular basis. By leveraging the New-Co business model, a typical Hospital or Health System will realize three distinct financial benefits. These benefits include
- Reduced costs for internal IT services through efficiencies gained by New-Co operations
- Shared revenue gains through New-Co services provided to external providers
- Shared revenue gains derived from New-Co expertise contracted with Health Systems in other geographic areas
The combination of these expense reduction and revenue generating outcomes from the New-Co business model will result in a significant reduction in the overall cost of the IT services for the Hospital or Health System. Download the new Guide to Healthcare Monetization by clicking here.
In an era of healthcare industry uncertainty, New-Cos are a viable means of monetizing IT investment.