Martyna Julia Wronka[1]
Innovative methods of management: use of outsourcing
in modern health care sector[2]
Introduction
Nowadays, it is hard for
companies to stay alive in tremendously intensified competition on world
markets and sudden changes of production technologies and labour organization
in general. That is why they must search for new ways of doing business
effectively and achieve targeted business goals. Quite a lot of international
companies are becoming conscious that the tactics that lead to survival and
development comprise both concentration on activities that add the most value
and elimination of other activities [Lendzion, Stankiewicz-Mróz 2005, pp. 201]. In a world of fast and
ground-breaking changes, business subjects must adapt to those changes in a
quick and capable manner. But at the same time have to keep or improve the
quality of their products or services, and dropping their costs. This state of
affairs puts great pressure on company managements, demanding of them to
fruitfully lead their companies through all these changes. But unfortunately in
most cases, they can afford neither enough time nor resources to do this in a
satisfactory way. Seeking for solutions for such problems, companies are trying
out a variety of managerial tools and hope they will help them solve the
problems and adjust to the changes. [Niemczyk 2000, pp. 108]. So when everybody around is innovating, how do your company stays ahead?
The answer: by outsourcing because the time is right for outsourcing
innovation. Although the word "outsourcing" became a popular buzzword
in business and management in the 1980s, this concept has already been known
before. It was Henry Ford who said in 1923 that: if there is something we can’t do more efficiently, cheaper
and better than our competition,
there is no sense doing it and we should employ someone to do the better work
for us.
Outsourcing is an act of
transferring nonessential internal activities to outside providers, and
focusing on core (main) company activities [Greaver 1999, pp. 3]. It is currently the only existing tool that
allows focusing on core activities (that companies do best and is recognized
by) and the abstraction of significant but non-core activities that do not
stand for the driving force of the company, while simultaneously improving the
quality and cutting costs of performing those activities [Bendor-Samuel 2000, pp. 22]. It simply means outside resource
using and gives possibility to use independent, outside subjects as deliverers
of goods and services instead of developing these branches of activity inside
the company [Niemczyk
2000, pp. 105]. The
concept also refers to well-know statement that if it is possible to pay less
for buying something than for producing it, it should be bought [Czakon 2005,
pp. 57-58].
The practice of this
managerial tool has been chiefly increased in the last 10 years because of
certain changes in the conditions of making business. The most significant
changes that allowed outsourcing to be embraced as an important restructuring
tool as follows [Greaver
1999, pp. 3]:
·
Large
organizational size is no longer a competitive advantage
·
Small,
agile niche competitors can now change industries and cost structures overnight
·
Product
and service cycle times have reduced considerably and time based competition
demands a faster response
·
Investors
demand a focused management that delivers
·
Significant
operating and financial performance improvements are critical for success and
long-term survival
·
Supplies
of technical specialists are reasonably plentiful; thus, employing them
internally is unnecessary for their availability
·
Cutting
edge technology and knowledge are now recognized as competitive weapons, but
are expensive to acquire and successful results are often elusive when
implemented internally
The relationship between
outsourcing partners is only likely to work if the following are in position [Gay, Essinger 2000, pp. 78]:
·
a
definition (in the form of a contract) of the nature of the relationship with
the supplier
·
a
boundary defining the responsibilities of the service provider and the
responsibilities of the organization that has appointed the service provider
·
a way
of measuring the success of the outsourcing initiative.
According to Trocki aims outsourcing
can be gathered in five groups: (1) strategic: concentration on strategic
problems, enhancement of strategic freedom of activity, enhancement of
effectiveness and efficiency of activities and enhancement of elasticity of
activities; (2) market: improvement of the competitive position, increasing a
scale of action and diversification or concentration of the activity; (3)
economic: increasing an income, reduction of expenses, improvement of economic
effects and limiting of the economic risk; (4) organisational: slimming/leaning
of the organizational structure and simplifying structures and organizational
procedures; and (5) motivational: objectification of economic effects,
disseminating economic thinking and action, development of the entrepreneurship
and stronger motivation [Trocki 2001, pp. 52]
In history, outsourcing
was used only when organizations could not perform due to ineffectiveness, lack
of competence, financial pressures or technological failure. Today, it is no
longer about the costs, even though they are still the main motive for conducting
outsourcing. Nowadays organizations recognize that management’s undivided
concentration on building core competencies and serving customer needs is
fundamental. Anything that distracts from this focus will be considered for
outsourcing. Outsourcing starts on with processes furthest from the core and
then moves toward it [Lendzion,
Stankiewicz-Mróz 2005, pp. 198-207].
Application of
outsourcing is connected with the reappraisal of supply function as well as
services provided in a company so as a result it saves costs. Traditionally all
components parts and spare parts were manufactured on the spot while components
and semi-finished articles were imported from outside, mainly from the local
markets. Outsourcing, as it assumes concentration on key areas of a company
which leads to giving up majority of manufacturing and buying components from
carefully selected partners. Moreover, the supply
of scientists, technologists and knowledge workers
has skyrocketed, as have knowledge bases and access to them so the companies are buying from their partners not
only components, but also know-how [Quinn 2000, pp. 16-17]. Outsourcing, as it assumes concentration on key areas of a company which
leads to giving up majority of manufacturing and buying components from
carefully selected partners. Moreover, the supply
of scientists, technologists and knowledge workers
has skyrocketed, as have knowledge bases and access to them so the companies are buying from their partners not
only components, but also know-how [Quinn 2000, pp. 24].
So this
intellectually-based concept contributes not only to lower expenses of
contracted work or improvement in outcomes of the company, but also offer:
·
achieving cross-divisional coordination and
shareholder value gains that the company
— for internal structural or political
reasons — could not otherwise achieve [Quinn 2000, pp. 19-24].
Barriers
to implementing outsourcing as a tool of
effectiveness enhancement
Although outsourcing has
become a large trend in today’s business-world, especially in the USA (where it
is currently used by more than 90% of the companies), Japan and Western Europe,
with a tendency of further progressive expanding, it has also its criticism [Zieniewicz 2003, pp. 54]. It turned out that successful
companies do not use it as they prefer to have higher share in a final product,
probably because partners are not able to provide expected quality. Because
"outsourced" staff is not in fact paid agents of the company, it has
been argued that there is less incentive for the agent to prove loyalty or work
ethic in its representation of said company. Hence, it has been argued that
quality levels of customer service and technical support of outsourced tasks
are lower than where they have remained 'in-house'.
On polish ground
outsourcing is being used mainly as one of restructuring process elements in a companies with bad financial situation. That is probably
why such a distrust for this method exists. Moreover, outsourcing is sometimes
implemented without proper preparations and usage of adequate methodologies
which increases the chances that a project would bring more harm than benefit
to the company [Lendzion,
Stankiewicz-Mróz 2005, pp. 210]. Opponents are bringing forward high social costs of this method
and threat of becoming dependent on outside companies which are not always
solid. These companies may increase prices for their services in future. In
some cases long-term cost of depriving oneself control of some processes and
its quality can become bigger than potential savings. Furthermore, companies
often fear of revealing secrets connected with products or processes. Strategic
outsourcing is a special challenge for responsible for risk management.
Potential threats can be tied into four groups: (1) strategic threats (loss of
competence and dependability on service provider), (2) financial threats
(impossibility to accomplish planned savings), (3) legal threats (long-lasting
time of binding of the agreement and transfer of people, the licenses,
resources) and operating threats (loss of the control of the assigned range of
services and data
safety) [Lendzion, Stankiewicz-Mróz 2005, pp. 211]. Surveys conducted in the area of
outsourcing are that decisions in this field should be made with good judgment and without haste. If they are
aimed on transitory reduction of costs instead of strategic advantage, it may
bring disappointment.
Therefore, outsourcing should be understood as a strategic choice by means of which a company resigns from independent performing of certain activities. The company in question is described within formal and legal, but not economic scope and the activities are performed for the company.
The reason why more and more companies choose outsourcing is because of the many
advantages that go with it. However, certain potential imperfections and risks,
which could become a reality if not approached in the right way, should also be
taken into consideration.
Outsourcing in public health care sector
In the last two decades
fundamental changes that are transforming societies all over the world can be
observed. These changes incorporate not only the expansion of a global economy
but also the fast development and widespread adoption of information
technology. The public sector as well is being transformed, leading to the
emergence of what has been called the New Public Management [Schedler, Proeller
2002, pp. 15-16]. However, this is not a simple recipe but rather a process to
find an equilibrium between law and public interest in order to attain economic
efficiency, enhance effectiveness and promote private sector partnership in
public governance. New Public Management concept highlights orientation of the
public sector on entrepreneur, managerial and economic actions at the same time
eliminating the emphasis of admistrative interactions [Gregory 2001, pp.
231-258]. What is necessary here is the adaptation of modern management
techniques by using experience from private sector concerning functioning on
the market and usage of good practice
i.e. applying such solutions that have already brought positive and measurable
effects to other organizations [Schedler, Proeller 2002, pp. 17]. Besides,
public administration should offer the society certain goods or services, but
if it is not essential for the organization to offer them itself, a chance for
outsourcing emerges.
Outsourcing, used formerly to only vend a
variety of functions, has become increasingly popular as a strategic management
tool in recent years. Since the Industrial Revolution companies have been
struggling with how they can exploit their competitive advantage to increase
their markets and their profits, so previously, outsourcing was perceived first
and foremost as a cost-cutting measure [Gay, Essinger 2002, pp. 16-17].
Afterwards, organizations endeavoring to compete worldwide in the 1980s had to
face a barrier in the form of lack of agility that resulted from bloated
management structures. To increase their flexibility and creativity, many large
companies developed a new strategy of focusing on their core business, which
required identifying critical processes and deciding which could be outsourced
[Fischli 1996, pp. 20-21]. Nowadays, however, managers are recognizing that
smart outsourcing can result in the development of an organization’s capability
to satisfy customers’ needs and enhance effectiveness. Traditionally, the
business literature has discussed outsourcing as a question of commodities in
opposition to core function. By definition a core function is “one of a limited
number of functions that provides strategic advantage to the company. A core
function is one that evolves slowly through collective learning and information
sharing, cannot be quickly enhanced through additional large investments, and
cannot be easily imitated or transferred to others” [Saunders, Gebelt and Hu
1997, pp. 63-78]. Commodities, on the other hand, are purchasable items –
functions necessary to run the business but not distinctive to it. Outsourcing
is not an easy issue, it is a compound procedure that involves new sets of
behavior on the part of managers, who have to examine all aspect of their
business in a critical manner. They need to develop
a consistent outsourcing strategy that concentrates on the needs of their
distinctive customer base in terms of product, price, and means of
distribution.
Private sector has broad experience with
outsourcing functions that fall outside of the firm’s core competence. Both
privatization and outsourcing are nationwide business trends that are now getting
more and more significant to public-sector managers. Given its confirmed proof
of success in many diverse contexts, outsourcing has become something of a
mantra in modern public management. Since the issue of Reinventing
Government and other works emphasizing “entrepreneurial” government,
outsourcing has grown extremely popular as a means of reducing costs,
increasing efficiency, and improving overall quality of service in public
sector organizations [Osborne, Gaebler 1993 pp. 23-24]. All the way through the
development of this new perspective, we have learned a great deal from
observing private sector outsourcing practices. The existing work on the
private sector outsourcing practices and possibility to implement it within
public sector organizations has provide a number of significant implications in
order to guide the outsourcing decision-making process [Goodman, Lovemand 1991,
pp. 26-34]. The initial step in the process is the decision to outsource is
linked with a need to answer a number of important questions about an
organization’s core competencies and policy goals, together with the
availability of service providers, contract negotiations, and other
considerations. The principal logic is simple – any function the organization
performs that is not essential to its mission, can, in theory, be outsourced.
However, it is important to note that unless a qualified provider can be
identified for a specific function, there may be no value added in considering
an outsourcing plan for any function. Without a doubt, core competency
assessment in the public sector is much more confusing, and as a result, much
more complicated to carry out. It is essential to remember that private firms
are driven by the profit motive. After the decision has been made to outsource,
there are a number of issues that arise regarding the transition toward
outsourcing. Evidence throughout the literature emphasizes the importance of
establishing a plan for moving forward on the outsourcing decision [Gormley
1992, pp. 841-843].
Outsourcing was
introduced to healthcare as a method of management streamlining functioning of
outpatient clinics and enabling them to concentrate on the basic activities. As
a result of health care reform in Poland in the late nineties significant
changes concerning financing of outpatient clinics occurred [Siwińska
2005, pp. 30-41]. The majority of medical posts are now continuously seeking
for solutions to improve their financial condition. On of the possible
solutions to this issue is decrease in expenses by using outside resources
instead of acquiring them. So it can be one of the methods of curing financial
condition of outpatient clinics provided that outsourcing agreements are drawn
up as a result of well-considered strategy. Application of outsourcing in
healthcare unit often brings diversified benefits comprising both increase in
quality and reduce in expenses related to efficient realization of particular
processes. The
healthcare sector all over the world has been experiencing considerable
changes, and Poland is no exception. In this country, as elsewhere, major
changes are because of number of reasons, including the following: remarkable
reductions in patients staying overnight, important advances in diagnostic
imaging techniques, new surgical practices and procedures, major improvement
and advances in ambulatory. Related health
care units development and modernization has also occurred in our
country, as they try to evolve and adapt to
a changing environment in various ways:
·
by changing the statutes of public units, even through
privatization
·
by contractual agreements between the national health
services and the for-profit and not-for-profit private sector
·
by the development of outsourcing.
As it was explained previously, is
the process of contracting an outside company to provide a service previously
performed by staff. The health care industry, the world over, has used
outsourcing for at least 25 years, but the practice has become especially
popular in recent years. Survey results from 153 health care executives
nationwide showed that the health care industry used 17 percent of its
operating budget for outsourcing in 2001. That figure is projected to
increase25 percent in 2008, indicating a serious percent growth in outsourcing
budgets [Olenchek 2002,
pp. 4; BISER Domain Report (2004) Healthcare in the Information Society – the
Regional Dimension].
Support services such as
laundry and housekeeping are the most heavily outsourced services in the health
care industry, although an growing number of organizations nationwide are
outsourcing services in a straight line related to patient care [Olenchek 2002, pp. 5-6]. Some health care units are hiring
outside firms to provide such services as psychiatric care, rehabilitative care
and clinical equipment maintenance. It is quite understandable that this trend
has already started to emerge in Poland as well. In many cases, outsourcing
involves a transfer of management responsibility for delivery of service and
internal staffing patterns to an outside organization. Subcontracting,
contracting out, staff augmentation, flexible staffing, employee leasing,
professional services, contract programming, consulting, and contract services
are all terms which refer to outsourcing [Sarpin, Weideman 1999, pp. 18-21].
These days everybody is
trying to reduce healthcare costs and enhance effectives so providers are
turning to outsourcing in new ways in an effort to maintain high standards of
care paying attention to current economic realities at the same time.
Particularly, in order to become more professional, a number health care units
are starting to outsource some key areas in which they consider that
subcontracting firms are either more professional or cost effective than the
health care unit itself can provide. A number of health care units service
areas are observing the subcontracting of services throughout the country. In
particular, these include: information management systems, hospital
administration and financial management services, diagnostic imaging services,
different clinical specializations within the hospital, laboratory services,
and intensive care units (ICU’s) [Sarpin, Weideman 1999, pp. 19-22]. But basically speaking, services provided to
health care units can be divided into three groups, as it can be seen in the
table below:
|
Option |
Responsibility |
|
Outsourcing nonclinical
support services |
Providing nonclinical
services (cleaning, catering, laundry, security, building maintenance) and
employing staff for these services. |
|
Outsourcing clinical support
services |
Providing clinical support
services such as radiology and laboratory services. |
|
Outsourcing specialized
clinical services |
Providing specialized
clinical services (such as lithotripsy) or routine procedures (cataract
removal). |
Table 1 Outsourcing support services in
healthcare
Source: Hall D., de la Motte
R., Davies S., Terminology of
Public-Private-Partnerships (PPPs), March 2003, European Public Services Union;
http://www.epsu.org/a/86
Outsourcing is also
growing as an answer to trends in the industry that are changing the way
administrators perceive their organizations. It is considered as a possible
response to demands created by such issues as market pressures, requirements of
managed care organizations, mergers and acquisitions, and competition within
the industry. Furthermore, outsourcing seems to smooth the progress of
flexibility at a time when change seems to be the only constant. The structure
of healthcare organizations is evolving as they shed the role of providing all
services to providing only carefully selected clinical services. The emerging
structure consists of a network of services that are performed by entities that
operate as autonomous units. This structure seriously increases an
organization’s capability to respond to persistent change. Many surveys point
out that more and more public health care units are outsourcing and escalating
their outsourcing contracts beyond usual support functions, such as food
service, housekeeping, and laundry, to functions such as information systems,
nursing staff, patient transport, and pharmacy [Stockamp 2006, pp. 84].
Conclusions
The six reasons for
outsourcing in public sector generally focuses on the need to reduce costs,
focus on core competitive advantage, introduce workforce flexibility, hold on
to government ideology, satisfy decision makers' personal objectives and
improve industrial relations problems [Young 2002, pp. 244-269]. However,
specific decisions about which areas were to be outsourced were made on the two
main bases - specifically on the desire to reduce costs and nature of
industrial relations. Both complicated nature of the health system and its
political character imply that the complications are bigger than those that can
be found in the private sector. Economic theories putting emphasis mainly on
costs and efficiency, do not always confine the density of public sector
management where adding a political perspective is needed [Eisenhardt 1989, pp.
57-62]. This political perspectives in public sector management come up from
the fact of working within the expectations of government, communities or other
stakeholders. It is obvious, that public sector organizations dependence from
government funding create tension between those who “make” a policy and those
who put it into practice. That is why like any decisions made by public unit,
the outsourcing decision might be very often a part of a political process,
where public perception of the role of a public sector organization needs to be
taken into account. Therefore, the ability to cope both with government and
community expectations, while making decisions based on economic criteria
within a decreasing funding environment, is undoubtedly difficult. Both policy
makers and health service managers should ensure a total comprehension of the
economic and political factors that might have a possible influence on any
outsourcing decision. It is also important for the managers to realize that the
complexity of the factors pertaining to the decision needs to be understood as
the whole, to make an objective decision that succeeds in meeting their
objectives as well [Ferlie, Hartley and Martin 2003, pp. 1-14].
Within today's difficult
healthcare market many organisations admit that they cannot perform all
the functions necessary. As health plans and risk-bearing provider organisations struggle to address increased
demands for service, provide quality care, and ensure patient safety and
satisfaction-all while controlling costs-they have cast aside their former
reluctance to outsource and are taking a closer look at the cost-effective
external resources now available [Alper 2004, pp. 14]. As a result of contracting out functions that
are not core to healthcare organizations, they achieve increased savings and
benefits that can in turn be hand over to purchasers, employers, and their
employees, and even as additional compensation to providers. The most crucial
is to recognize where outsourcing solutions can successfully be applied and
what must be considered in strategic outsourcing relationships to guarantee
success. Many healthcare providers still have paper-based and manual business
processes, resulting in high administrative costs, inefficiency, and increased
levels of administrative and medical errors. Now they are turning to external
resources to reorganize their workflow and reduce overhead. So in reality,
outsourcing is a reasonably new name for an activity that existed since the
very beginning of business. Only few organizations have ever been so vertically
integrated that were able to supply themselves with all the goods and services
they need. Recently, organizations of all types and sizes have increasingly
focused on their core competencies and contracted or partnered with specialized
providers to purchase needed goods and services outside their core value
stream. Outsourcing lowers costs, generates greater efficiencies, frees up
resources, and usually results in better quality [Doodly 2007, pp. 120].
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[1] Martyna Julia Wronka, M.Sc., M.A.,
Department of Entrepreneurship and Innovative Management, The Karol Adamiecki
University of Economics, Katowice, martyna@ekonom.ae.katowice.pl
[2] Research process carried out in research Project Nr. 115 030 32/0884; “Pomiar efektywności organizacji publicznych na przykładzie sektora ochrony zdrowa”