Blog Post

What you need to know about IT sourcing: Part 3 of our 2019 update on the hospital purchasing process

November 26, 2018

    Editor's note: This post is the third in a three-part series about shifts in hospitals' service, product, and IT sourcing processes.

    Over the last month, we touched on recent changes to providers' service and product sourcing processes. For the final installment in our purchasing series, we spoke with Ernie Hood, a Senior Research Director and former Chief Information Officer (CIO), to learn more about how provider organizations are thinking about and investing in health IT.

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    In the Q&A that follows, Ernie explains the current state of IT purchasing with a focus on three key trends: the shifting balance between operating and capital expenditures, simultaneous emergence of centralized and decentralized purchasing processes, and providers’ growing preference for integrated over best-of-breed IT solutions.

    Jessie Goldman: Let's start with the basics. What changes do CIOs anticipate for their budgets and expenditures in 2018 and beyond?

    Ernie Hood: Over the next year or so, most CIOs don't anticipate drastic changes in their operating or capital budgets. It is worth noting that on top of the CIO's budget, a growing number of health care organizations are also employing Chief Digital Officers and/or Chief Innovation Officers, who may also have significant funds to spend on innovations in digital health.

    Between investing in new and upgrading existing IT assets, most CIOs have more projects in their queue than they have the resources to complete. Our most recent survey of health system executives found that over 50% of providers' IT capital is spend on refreshing existing assets. But interestingly, in the longer term, we expect a new trend towards greater operating expenses (vs. capital expenses) as providers invest in more services and apps offered through cloud or hosted models.  

    Goldman: Who's involved in the IT purchasing process and how does this differ from what we may have seen a few years ago?

    Hood: Before answering this, let's parse out what we mean by an "IT purchase or investment" and how that's changed over the years. Historically, most IT purchases were high-dollar, capital expenditures—all run through a purchasing process overseen by the CIO. Now, in addition to high-dollar capital initiatives, many IT-enabled investments are relatively less expensive, non-capital purchases (for example, digital apps) that may be purchased at the department level without CIO oversight.

    In line with this shift, we've seen two seemingly contradictory purchasing processes emerge: one decentralized process that's accommodating the shift in the scope of IT investments, and one centralized process that's accommodating systems' need to keep capital expenditures in check.  Whether the product/service is run through the centralized or decentralized process depends on its price tag.

    Below a certain cost threshold (which varies by organization), any department leader may take the reigns over the purchasing process. Above that threshold, the product or service will be evaluated by one or more multi-disciplinary committees staffed with clinical, technical, and financial leaders. Larger purchases also typically require sign-off from a purchasing authority, whether the CFO or another purchasing department leader.  

    Goldman: What should IT firms keep in mind when working with these centralized purchasing bodies?

    Hood: First, have patience. Purchasing agents add more time, and paperwork to the process. And while purchasing leaders have extensive contracting expertise, fewer will understand the technical ins and outs of these products. To avoid losing out to another vendor purely based on price, IT companies should push to include technical reps from both the provider and supplier organizations to drive more productive dialogue about the product or service benefits.

    Second, while it's easy to fall back on standard contract terms and pricing models, purchasing agents will gravitate towards those vendors that offer the most flexibility. For example, I have seen some organizations include risk-sharing agreements as part of a tiered pricing model. While not without their own difficulties, these types of agreements can help demonstrate a vendor's willingness to meet providers where they are, and to move from a customer-oriented relationship to a more partnership-oriented relationship.

    And third, vendors need to keep in mind who they're talking to across the evaluation process. CIOs want you to speak their language and will hone in on the operational implications of the software. But almost all of their non-IT counterparts will lack the same technical knowledge and want someone to connect the dots between the solution and their goals—whether that's creating a more efficient med rec process or improving patient experience.

    Goldman: Have you seen any shift in providers' desire to consolidate vendors? Why or why not?

    Hood: Yes—on the whole, the industry-wide push towards system-level integration is encouraging more providers to consolidate vendors. After years of piecemeal purchasing, CIOs are trying to figure out how to move from a best-of-breed to more integrated suite strategy. Some organizations may tackle this over a long period of time—as contracts come up, they'll gradually standardize vendors—while others may try to standardize in one fell swoop. In either approach though, providers will start with the EHR.

    Takeaway for vendors: Whether trying to keep or gain new business, be prepared to discuss whether and how easily your product or service can integrate with the organization's EHR of choice.

    Goldman: What is the biggest pitfall you've seen IT companies—and in particular their commercial teams—fall into?

    Hood: Selling a solution without understanding the customer's goals. I know that it can be tempting to celebrate a sale as a sale, but I can't emphasize enough how important it is for vendors to really push on what the organization is trying to accomplish and map out whether and how their solution can help achieve those goals. If both parties are not clear on the project objectives, timeline, and criteria for success, there's a high chance the proposal will stall. And potentially even worse, there's a chance the vendor will get unfairly blamed when the provider doesn't see a blanket return on investment.

    Goldman: Are there other trends in the IT space that vendors should be aware of?

    Hood: I've seen some digital health leaders looking to partner with startups or venture capital firms, which can entail everything from offering funding to agreeing to be a pilot site for new ideas. If I were a smaller vendor in the health care space, I'd look out for opportunities to partner with health care organizations as product/service beta testers.

    And overall, I'd just encourage IT solutions firms to stay alert to the how the see-saw between capital and operational expenditures, centralized and decentralized purchasing processes, and integrated and best-of-breed vendor strategies is playing out in any given system or market.


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