Is your health care organization undergoing a strategic transaction? Are you wondering how to best focus your current legal and operational resources during the information-gathering phase (i.e., diligence) to understand the target hospital or health system’s current purchased services vendor relationships?
Most strategic transactions are made with the goal of identifying synergies that can lead to cost savings. As you are conducting your due diligence, you should begin evaluating where consolidation of purchased services could lead to post-closing cost savings. Prioritizing review of your soon-to-be partner’s vendor relationships and identifying key operational and performance issues during diligence can ease the burden of integrating or renegotiating those arrangements with current or new vendors after the transaction closes.
Leaders of supply chain operations should consider tasking legal resources or vendor management consultants with assessing and summarizing aggregate or annual costs, the services in question, and the vendors’ overall performances.1
During your next strategic transaction, use the diligence phase to do the following prior to closing:
- Bring your internal business leaders and legal counsel up to speed on your organization’s current purchased services vendor relationships. Develop a list comparing what is outsourced in your organization against what is outsourced by the target hospital. Identify any overlapping service areas.
- Ask for aggregated information that demonstrates the performance of the target hospital’s vendors under its current agreements. Consider including the following in your diligence request:
- Ask for data regarding annual expenses. Assess what the target spends on categories of products and whether there are aggregate discounts. Where applicable, assess labor staffing and aggregate labor expenses. Compare that data against data related to your current vendors or in-house team to identify savings opportunities.
- How is communication with the vendor team? Accessibility? Responsiveness? Does the vendor monitor the relationship and anticipate and address issues? Is the target hospital’s vendor performing at a higher level than your in-house team or vendor?
- Does the vendor contribute particular expertise and/or benefits, such as advanced technology, that are not currently available to you? Conversely, is your vendor offering expertise or technology that the target hospital’s vendor does not offer?
- Ask for aggregated performance reports. What are the key performance indicators? How are they benchmarked? Are they being met? Are there automated reports related to performance and quality? How do they compare to your in-house team or vendor?
- Be proactive, not reactive, when it comes to contract expiration dates. Ask for a chart summarizing key terms within the purchased services arrangements related to termination and renewal. This will aid in understanding potential expiration dates and windows of opportunity for renegotiation, or consolidation into a single RFP post-closing. Do the dates align with windows for expiration at your current organization? What are the conditions for breach of the agreement? If you want to consolidate vendors but the contracts and circumstances do not permit termination of the vendor contracts, can you convince the vendors to mutually agree to a termination date in order to offer both vendors the opportunity to become the sole vendor of all of your post-closing facilities?
- Request information regarding existing vendor capital commitments. Identify the penalties and losses applicable if the target pursues early termination of any existing agreements. If you are considering service consolidation between vendors, determine whether your preferred vendor is willing and capable of assuming any capital commitment obligations that may result from termination of the other vendor’s contract.
- Many contracts prohibit a hospital from hiring a member of a contractor’s management team after termination. You need to determine what impact termination of an existing vendor contract will have on management staffing subsequent to the termination.
Consolidating purchased services vendor relationships in a health care transaction can be challenging. Your organization’s efforts in the diligence phase to gain insight into current relationships will support your ability to efficiently evaluate potential savings opportunities, evaluate potential impediments to consolidation, and be better prepared to address those relationships post-closing.
For further information, contact the author below or any member of our Outsourcing and Cost Management Team.
1 The pre-closing exchange of cost information can raise antitrust considerations and should be done in consultation with legal counsel.