Sunday, December 15, 2013

Outsourcing as an element of the private equity model

One of the things to consider about private equity ownership of a hospital system--given the inevitable desire of the investment firm to flip the system--is what it is has done to the cababilities of the organization during the holding period.

For example, one such firm has a policy of outsourcing as many of the hospital functions as possible.  It removes staff from the payroll and shifts their functions to a third party.  Examples are campus security, food service, mechanical engineering (the people who maintain medical equipment), and laundry.

What does this do? Well, if the goal is to attract as a potential buyer of the system a for-profit hospital chain that has a central services organization, that buyer would not need to worry about taking on as many of the staff of the hospital system it is purchasing.  It would avoid the discomfort of layoffs and also obligations like unemployment tax, accumulated pensions, and the like.  It could also provide these services with little incremental cost from its own central services department--simply cancelling or not renewing the local third-party contracts that have been in place.

In summary, outsourcing avoids costs and obligations and therefore enhances the likely purchase price in the flip.

But what if the original private equity owner had made promises of enhancing the capabilities and professional advancement opportunities of the local workforce? Well, that's a commitment that goes by the board.


Anonymous said...

Um, that's not limited to private equity ownership. My nonprofit hospital system outsourced all the identical elements, and last I heard was working on outsourcing certain physician services also. Too bad they can't outsource the administration ((:

Presumably the employees of the outsourced companies are also part of the local workforce. However, I have always had reservations about the wisdom of outsourcing. For every advantage there is a disadvantage, as I think some U.S. companies are discovering.


Anonymous said...

There is no right or wrong about in sourcing versus out sourcing. It depends on the longer term costs and benefits and also application of management attention - where does management want to devote its limited attention?

Some of the best managed firms in the U.S.A have outsourced significant parts of their operations successfully. A good recent example is Apple Computer.

In the early days of industrialization it was thought that everything should be done by one firm. So, for instance Ford Motors mined its own iron ore and coke to make steel for its own cars.

As our economy has become more sophisticated, it has been "accepted" that more could be safely outsourced.

Management Consultants and managers of firms generally try to look at what is "core" to a firm's success. When things are not central to success then cost benefit analysis is done. Is it cheaper to do it in house versus outsourcing? And does management want the headache of a service that can be outsourced?

So for instance, does management want to hire its own food service workers, or janitorial workers etc etc...

Guess I do not see the controversy. To me it is just smart management.

Anonymous said...

One additional positive element from a hospital managements stand point?

Service workers who are outsourced are someone elses "Union" headache. Many workers try to unionize and thereby raise cost. But outsourced functions have to unionize the oursourcer or possibly many oursourcers.

If an oursourcer is unionized, and that is a problem, then a new one can be found.

If you were referring to De La Torres organization in your article then his unionized employees are thereby reduced.

From a management standpoint, if the objective is to control or lower costs, seems smart.

Anonymous said...

I am struck that the above comments are oriented to the financial advantages. Our hospital system had great difficulty with its outsourced housekeeping company. It was known within the community that the hospital was 'dirty', with communal bathrooms yucky and even hospital rooms inadequately cleaned. They switched to another company with marginally better results, but in the meantime their reputation was severely damaged - nothing much worse than a dirty hospital.
As I said above, there are distinct disadvantages as well as advantages to hospital outsourcing.


Anonymous said...


My experience is that those who have to compete generally provide much better service than those who do not.

Do we have to mention the DMV or Soviet "service companies"?

Unionized work forces are more difficult to manage and often worry more about "union rules" than what helps improve service or lower cost, the latter being a key health consumers today.

Outsourcing does not work for every vendor, but it is more easily corrected as you rightly point out. If poor quality is caused by a recalcitrant boorish unionized work force where it is difficult to fire people, that is not as easily correctable as outsourcing and finding a better high quality vendor.