For years, Healthcare CEOs and CFOs have been coming to the JP Morgan Healthcare conference, blaming the high cost of moving to the EHR as a primary driver for depressed results. A common refrain from them this year was more responsible investments in operations, which includes IT. For all its complexity, it turns out that healthcare is still a business, and the healthcare budget is as important as ever.
The age-old formula of Revenue – Operating Cost = Profit still holds true.
The general consensus in the industry is that the health system top line (revenue) has been under attack for some time and will remain so at an increasing rate. It used to be due to surgery centers, urgent care, and other pop-up health service centers. Now, though, it is becoming more sophisticated with a wave of digital competitors that don’t even have to procure real estate in order to practice medicine in your market.
If you buy into the premise that revenues will be under pressure, it is safe to assume that operating costs will have to come down as well. If you think revenues are only going to climb, you can ignore the rest of this post.
Let’s explore a few strategies for reducing your IT Budget.
Get Ahead of The Curve
The title was not just click bait — it really is part of the plan. Today, you are operating on the 2018 budget. If you need to make changes to this year’s budget without prior planning, you will be forced to make changes that are likely to seriously impact strategic plan activities or the operation. Even if you are asked to make reductions to next year’s budget during the normal planning cycle, it will likely have an impact on strategy or operations.
However, if you start planning today for a 10 percent reduction in your operating budget for the year 2020, you are likely able to make the change with a muted impact to strategy and operations.
- Example #1. The cost of maintaining the desktop environment is growing. The recent vulnerabilities and patching recommendations for Intel Machines with Spectre and Meltdown only highlight the cost of maintaining this environment. We utilized a normal refresh cycle and some additional capital spending to implement a VDI environment. This reduces the cost of maintaining this environment by upwards of 50 percent. By implementing this centrally-managed solution over an 18-month timeline, we were well-positioned for the 2020 budget reduction.
- Example #2. I’ve written several posts about this topic, so I will make this one brief. Shut down your hospital data centers and change the architecture in your primary data center. We reduced our footprint in each hospital to a single rack. We reduced our large data centers to ONE with a backup in the cloud. The Cloud backup was made possible by primarily shifting the architecture to a highly-automated, virtualized solution. In reducing the variation in our data center and implementing dev-ops, we saw millions in savings.
Immediately following the next year’s budget approval process, I would go to my direct reports and ask them for 5 percent in savings for the current year. They have two weeks to return with plans on how to make that a reality. I’d bake that into their semi-annual review and have them report in on it monthly.
Why would I do this? Primarily, margin; secondarily, diligent operations.
Margin is the space we have to move around. If I allocate every budget dollar to projects, I’m making the assumption that there won’t be any hiccups this year that require additional money. (Personally, I’ve never experienced that kind of year, so I’m assuming they don’t exist for any CIO of a health system.)
You could always put a contingency number in the budget, deny new requests, or ask for money when challenges arrive. Each approach has its place in IT budgeting. Contingencies in big projects are required, governance to properly vet new projects is wise, and requesting money from executives promotes transparency. I consider this an additional strategy.
The margin created can be used to prepare for next calendar year’s budget cut request, or can be used for this year’s unbudgeted operational oversights. Either way, the practice gets staff in the right frame of mind and focused on efficiency. How do we become an optimized IT organization? This creates a good culture with good outcomes.
We reduced our power spend in the data center by $160,000 and co-location costs by $400,000. We eliminated the use of tapes in the data center, reducing operational overhead, and created a more responsive recovery solution. Then, we reduced the cost or contract labor and temp-to-hire contracts with a negotiated solution with fewer vendors.
You get the picture. Small projects in each department lead to significant savings overall.
Contractors, Contracts, and Waste
There are three levers you are already looking at, but each bears repeating in any conversation about budget reductions in IT. These are contractors, contracts, and waste.
Contractors are those people you currently have onsite doing work that you pay for outside of payroll. We evaluated this list monthly. We had a simple set of questions: Is this person/role still required? Can a staff person do this work? Should we fill this role permanently? How long will this contractor be around?
Contractors can play a key role. Just make sure to use them wisely.
Contracts are always a source of budget cuts. To facilitate this, we had a calendar which showed when every contract would come up for renewal. We tried to start negotiations as far out as possible, because we found this to be the best way to get the optimum deal for both parties.
We created new models for several of our vendors by asking them to do things a little differently. Straight-up money negotiations are lazy; creative problem-solving is something that both sides can usually agree on.
Waste is rampant in healthcare. Dust off your Lean Six Sigma practices and get those huddles going. Lean is a proven practice for optimizing performance.
Hope this helps.
This piece was written by Bill Russell, a former CIO at St. Joseph Health who now serves as CEO of Health Lyrics, a management consulting firm. To view the original post, click here. To follow Russell on Twitter, click here.