Greg Moore hints to Fran Butler that he’s expecting an overall cost reduction of 10 to 15% as their lunch is served. Fran is not surprised since her company’s contract is due to expire at the end of the following quarter.

As they leave the restaurant, she is not pleased when he tells her that he is being pressured by Bob Michaux, the president, to solicit competitive bids. Fran was hoping she’d get a chance to grow her business with Greg’s organization.

As she drove back to her office, Fran thought through the implications of competing to extend her three-year service contract with the Central Hospital System. She’ll have to fight hard against tough competitors with deeper pockets. One of them might already be talking to Central. She’ll have to work closely with Greg Moore to help him educate and persuade his boss that a switch now means higher costs down the road. She’ll have to ask her team to put in extra hours.

Fran’s company, Service Medical, provides a wide range of IT services to hospital systems. These include supporting and maintaining highly specialized medical equipment as well as data centers, networks and desktop computers. Its annual sales volume of $500 million has followed a consistent growth trend since the company was founded six years ago. Currently, Service Medical has staff at each one of Central’s hospitals.

The Central Hospital System, where Greg Moore is responsible for the biomedical engineering program, manages hospitals in 45 locations. Central’s top administrator, Bob Michaux, made his name when he led Central out of bankruptcy by attacking cost aggressively. Bob didn’t understand services very well and had little interest in it. But he and Greg developed a great relationship when Greg turned service around within a year following bankruptcy.

The following day, Fran decides to take a proactive approach to the situation and calls Greg. After thanking him for joining her for lunch, she asks Greg: “I know Bob is satisfied with asset management and IT services overall. What is his motivation for putting services through a competitive bid process?” “He seems pleased,” said Greg, “but he’s asking all of us to cut cost. Just last week, Bob forced a physicians’ group to accept a new pay-for-performance compensation package that leaves them without a pay increase in three years and puts 35% of their compensation at risk. I didn’t think the physicians would accept the new terms. Most of them did.”

Fran then suggests that she and Greg work together to prepare a detailed report for Greg to present to Bob. The report would include the following sections:

1. Status quo: A look at Central’s operating service costs in a format that Bob can easily follow;

2. Benchmarks: A comparison between Central and other similar hospital systems on operating services’ performance levels and costs;

3. Change Scenarios: A projection of costs associated with managing the competitive bid process, lost productivity due to replacing Service Medical’s experienced staff with new staff and potential degradation of service level;

4. A summary of indirect benefits that Central has realized from this relationship such as uptime guarantees, productivity aids, management support, etc.

Greg’s reaction is positive. He sees value in benchmarking and in the cost/benefit analysis of taking on a competitive bid process. He reminds her that he’s been sharing various reports with Bob already. The new report would have to add a tremendous amount of value. He also said he’ll commit to working with Fran to prepare the report but that he’ll hold judgment on whether or not he’ll present it to Bob until a final draft is complete.

Greg stresses that they ought to figure out how to reduce labor cost by 10%. He doesn’t expect Bob to be flexible on that point. Fran asks Greg if Bob is aware of Mirage, a company that promised hospitals to cut their maintenance cost by as much as 25% and has recently filed for bankruptcy protection. Greg doesn’t know. Fran decides to gather examples of the impact that the Mirage bankruptcy has had on some hospitals. They spend sometime discussing the pros and cons of options such as deferring or cutting back training or reducing bonuses or both. It doesn’t take Greg long to envision the negative impact these options would have on service performance.

They then explore new functions that Central can outsource to Service Medical so that Greg might have a chance to reach his cost savings target. Fran is pleased with the outcome of the call. But that didn’t ease her concerns about the possibility of going through a competitive bid process if Central decides to follow that path.

The author acknowledges contributions to this case study by Jenifer Brown, Mary Coker, Dennis Gershowitz and anonymous.

ServicesRevenue case studies illustrate realistic service marketing or sales situations but do not portray any specific organization. All company and individual names are fictitious.

Walt Gasparovic, Ron Mathews and Ray Zambuto offered their perspective on how to deal with this challenge in ServicesRevenue Volume 1, Issue 3. Subscribers click here to download the issue. Visitors and lapsed subscribers, thank you in advance for subscribing.

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