Solving the IT Investment Paradox

Transcription

1 WHITE PAPER Solving the IT Investment Paradox Authors: Parrish Aharam and Greg McGovern

2 Solving the IT Investment Paradox There is a constant debate between health system leadership about how much to invest in IT. On one side, there is concern about the organization s ability to maintain or increase investments in light of tight margins and increased margin pressure. Alternatively, others believe that lowering the investments will negatively impact the value delivered by IT and reduce its ability to enable the organization s strategy. THE REALITY IS BOTH GROUPS ARE RIGHT and the answer is to address both perspectives by delivering maximum strategic value through IT while meeting cost constraints.

3 The IT Investment Paradox Undeniably, there is an increased demand for technology to advance organizational strategy. Growing demands for technology to enable, and in some cases, drive organizational strategies around innovation, consumerism and care model transformation often require additional IT investments. At the same time, many healthcare providers are reducing costs to address lower profit margins. Operational budgets are leaner than ever, and the extraordinary pressure on margins is expected to escalate. The median operating margin for not-for-profit hospitals in 2016 was a thin 2.7 percent, notably lower than the 2015 margin of 3.5 percent and significantly below the sustainable level. 1 The continued and escalating margin pressure is causing health system leaders to focus their attention on IT given the historically sizable investments approximately four percent of the system s operating expenses. Alongside margin pressure, the uptick in IT cost/value scrutiny is also a result of the impact of multi-million-dollar electronic health record (EHR) implementations, an increase in mergers and acquistions activity without corresponding economies of scale from practice convergence and IT standardization, and the inability to deliver and demonstrate the value of IT commensurate with cost. Many leaders find themselves asking: z Our IT costs have increased substantially since we installed the new EHR; will this continue to escalate? What is a sustainable cost profile? z How do we control the insatiable demand for IT? z Are we driving commensurate value from our IT investment? z How do we ensure future IT investments are aligned with strategy? z Why are IT operating costs so expensive do we need to spend this much? z What level of IT investment is appropriate to achieve our strategic priorities? z How does our IT spending compare with competitors in our market, others on the same EHR platform and other industry leaders? 1 Moody s Investors Service Page 2

4 To complicate this further, it has been challenging to achieve and maintain consistent alignment between operational and technology leaders in the organization. Oftentimes, operations may not be aware of the total cost and long-term implications of a technology investment. Further, ineffective IT governance structures and processes often fail to engage operational leadership and ensure operational accountability for realizing the benefits of the technology investments. Answering the above questions, addressing the disconnects between operations and IT, and aligning IT investments to drive optimal organizational value is essential. It starts with understanding the drivers of IT cost and addressing the areas that can deliver the most value while honoring organizational cost constraints. Oftentimes, the initial reaction is to turn to traditional cost reduction measures. Traditional Cost Reduction Measures are not Effective Instead of evaluating IT cost drivers and aligning IT investments with organizational strategy, many organizations working to address margin pressures are applying traditional cost reduction techniques such as targeted FTE reductions and lower discretionary spend. However, this approach is short-sighted and will only provide temporary relief to reduce costs and will not improve value. It is also likely that the fundamental aspects that increase IT spend will be overlooked. There are several factors not typically addressed through traditional cost reduction: APPETITE FOR TECHNOLOGY AS A STRATEGIC DIFFERENTIATOR The organization may have a substantial need for technology investments (e.g., competitive forces, regulatory requirements, at-risk contracting and pent-up-demand from large implementations). Reducing FTE support or investments may be counterproductive to achieving these goals. DEGREE OF STANDARDIZATION Oftentimes, health systems have a large volume of applications managed in-house that potentially serve duplicative purposes. There is tremendous potential to reduce IT s cost footprint through application consolidation. ORGANIZATION VARIABILITY Operational process variation can play a significant role in driving up IT costs; it can be challenging to truly understand resource time spent managing existing assets or supporting unnecessary customization. Ultimately, the performance of IT is measured on its ability to generate the anticipated value acknowledging that expectations and spending can vary greatly between organizations. Page 3

5 Understanding the Drivers of the IT Cost Bubble Evaluating all factors that influence overall IT spend is key. Typically, up to 60 percent of a health system s IT operating investment is attributed to the applications and infrastructure that support the environment. As depicted in the chart above, the IT cost footprint sometimes referred to as the IT cost bubble will continue to grow based on the organization s strategic needs, ad-hoc needs and organization variability: z Clinical care, research and ongoing operational needs drive the purchase and ongoing support of software applications and associated infrastructure. z Analyzing demand, minimizing variation and optimizing existing versus purchasing new systems helps to manage the IT cost footprint. z Current application portfolio and infrastructure determine the ongoing labor and maintenance costs to support the environment. TYPICALLY, UP TO 60% OF A HEALTH SYSTEM S IT OPERATING INVESTMENT is attributed to the applications and infrastructure that support the environment. Page 4

6 A Programmatic Approach to Drive IT Value The framework to the right describes a programmatic approach for managing IT costs and identifying value delivery and cost reduction or efficiency improvement opportunities. Page 5

7 The table below further describes each element of a programmatic approach, with examples of effective cost management and those that increase costs. Program for Driving IT Value Definition Example That Increases Costs Effective Cost Management Example IT Governance Ensures IT investment decisions across the entire organization are driven by operational and clinical leaders, and aligned with strategy and bring value to the organization. Lack of clarity on decision rights. IT left to prioritize as requests come in. Portfolio managed structure with investment and resource utilization thresholds for new work. Portfolio and Demand Management Prioritizes based on operational and clinical need, balances incoming demand with capacity and drives project execution through value realization. Limited to no control over new IT demand. Limited follow-up to ensure value expected is realized. Operational and clinical prioritization based on value with clear accountability and sponsorship for achieving measurable ROI or value. Application and Infrastructure Management Manages applications through their lifecycle and plans infrastructure to take advantage of new or more efficient technologies. Multiple applications serve the same purpose; a consistent contract review process is not in place. No multi-year infrastructure planning. Ongoing application portfolio management, contract management and technology road-mapping. Staffing, Oversight and Reporting Ensures optimum service delivery through consistent processes and tools in service, capacity and resource management. Varied or inconsistent service levels within IT. Minimal ability to forecast capacity or report on resources. Standard processes in incident, change and problem management. Mature processes and reporting on resource commitments and availability. Solving the IT Investment Paradox Delivering increased strategic value through IT while meeting cost constraints requires a holistic approach utilizing the four aspects of IT management that drive value. Pragmatic action steps include: 1. Assessing the IT cost footprint and alignment of the IT plan and budget with organizational strategy. Benchmarking with similar peers can be a valuable starting point but varying strategic priorities, market dynamics and the IT landscape must be considered. 2. Creating an effective governance and demand management structure to prioritize investments, and holding operational and IT leaders accountable for the value IT investments will bring to the organization. 3. Leveraging asset management leading practices and supporting tools to become more agile and responsive, reduce variability and effectively rationalize technology assets. For example, application or infrastructure rationalization efforts can sometimes uncover millions of dollars in unwarranted maintenance fees, staff support costs and infrastructure investments. Page 6

8 KEY CONSIDERATIONS Using these leading practices, organizations will better understand the true cost of IT and identify areas where driving additional organizational value is feasible and achievable. It is important to keep the following considerations in mind: Focus on the Big Money. Efficiency opportunities likely exist in most IT departments. There is no shortage of optimization or investment requests; they are all likely good ideas, but are they the right ideas? Focus investments on what will drive strategy and provide a true return to the organization. Enhance the Operational and IT Partnership. A joint effort across the organization will help raise mutual awareness and ensure the right cost optimizations or efficiency improvement decisions are made. Create Transparency. IT spending should not be a black hole. A clear understanding creates transparency, accountability and awareness among health system leaders and IT. Benchmark Carefully. Traditional benchmarks such as FTE comparisons or IT vs. operational spend do add value, but it should not be solely relied upon. Rarely are apples-to-apples comparisons possible. Caution Traditional Reduction Methods. Unless absolutely warranted, be conservative when it comes to FTE reduction. Dramatic measures will not only impact the pace of progress but will also affect the ability to retain or attract new talent. Use a Pragmatic Approach. It is highly likely new processes will come out of this effort. Any change must be kept simple to increase adoption and reduce unnecessary work. Evaluate Right-Sizing and Right-Sourcing Alternatives. Short- and long-term savings may be readily available by reducing the infrastructure footprint (e.g., application rationalization) or outsourcing certain services (e.g., disaster recovery). Develop the Right Implementation Plan. Create a realistic, pragmatic plan with immediate and near-term milestones to ensure improved value delivery and cost reduction targets are fulfilled, risks are identified and a longer-term plan is established to implement and enhance the IT controls that are critical for managing IT costs. Given the competitive environment, market pressures and the evolving political and reimbursement landscape, now is a pivotal time to solve the IT investment paradox. By understanding what drives IT costs and taking a programmatic approach, organizations can deliver optimal organizational value. Page 7

9 About the Authors Parrish Aharam Principal Parrish Aharam is a Principal in the Informatics and Technology practice within The Chartis Group. He has 15 years of experience in consulting with a focus in both the provider and payor sides of healthcare. His range of experience includes large-scale IT implementation program management, strategy and planning initiatives and advisory services. Most recently, his focus has been helping health providers with their IT strategic planning and effective cost management efforts. His work experience includes premier academic medical centers, multi-facility/regional integrated delivery networks and the nation s largest payors. Greg McGovern Principal gmcgovern@chartis.com Greg McGovern is a Principal in the Informatics and Technology practice within The Chartis Group. For more than 20 years, Mr. McGovern has led and advised leading integrated delivery networks and hospitals in finance, general operations and IT. He has spent the last several years advising executive and IT leadership on the development and execution of IT strategy and performance to support organizational strategy and growth. Mr. McGovern s areas of expertise include IT operations and innovation, population health infrastructure and exchange, digital health planning and IT strategies. His clients have included leading national and regional health systems and clinically integrated networks. Page 8

10 About The Chartis Group The Chartis Group (Chartis) provides comprehensive advisory services and analytics to the healthcare industry. With an unparalleled depth of expertise in strategic planning, performance excellence, informatics and technology, and health analytics, Chartis helps leading academic medical centers, integrated delivery networks, children s hospitals and healthcare service organizations achieve transformative results. Chartis has offices in Boston, Chicago, New York, Minneapolis and San Francisco. For more information, visit Boston Chicago Minneapolis New York San Francisco 2017 The Chartis Group, LLC. All rights reserved. This content draws on the research and experience of Chartis consultants and other sources. It is for general information purposes only and should not be used as a substitute for consultation with professional advisors.