This article was originally published on LinkedIn.

Fifteen years ago, I described the healthcare purchased services/indirect spend arena as the “wild, wild west.” It was lawless, raw, and largely out of control. While we’ve made some progress since then, the reality is that traditional methods haven’t delivered sustained results.

Why? Because the primary villain isn’t the spend itself, it’s the chronic lack of governance.

Collectively, purchased services and indirect spend are the largest expenditure category—often totaling more than medical-surgical and medical devices combined. Ignoring this category means overlooking the biggest opportunity for financial impact at a health system in many cases.

Gaining the trust of the C-suite and collaborating with key, non-supply chain stakeholders is what truly separates good health system supply chains from the great ones. This is one of my True North areas of focus, and it demands an improved industry-wide approach.

The Four Factors Compounding the Governance Problem

Governance over this spend is challenging because it is compounded by four key, interlocking factors that prevent systemic progress:

1. Depth and Definition: We Don’t Know What We Don’t Know

Indirect spend is notoriously complex, spanning upwards of eight hundred categories.
  • The “Other” Problem: Health system income statement holds hundreds of millions of dollars in “other” expenses, and general ledgers often lack categorization standards. Most health systems look at 25% of their total third-party spend and have an identification problem; they don’t even realize the spend is actionable.
  • No Contract: Nearly 50% of indirect spend is not governed by a contract at all, or when contracts are in place, they are of low maturity levels, not providing sufficient insight into pricing and/or not providing much flexibility in contract terms. New entrants are impacting categories; health systems have historically never considered the supply chain’s domain. We have a fundamental identification and control issue.

2. Dispersed Stakeholders and Ownership

Governance is consistently impeded by end-user stakeholders who have long felt they solely “own” their decision-making.
 
Stakeholders in Finance, Marketing, Construction, and Human Resources have historically prioritized service and relationships over a professional sourcing process. They may feel they are supply chain experts in their own right, but the truth is that a professional, standardized process yields benefits every single time.
 
In too many cases, the supply chain is simply not involved because these categories of indirect spend are intentionally or unintentionally obfuscated from the main view.
 

3. Supply Chain’s Start-and-Stop Progress

“Insanity is doing the same thing repeatedly and expecting a different result.”
 
While some health systems have made progress tackling standard categories like laundry, linen, or EVS—this progress often slips. It’s not the norm. Why?
 
  • Retention Challenges: Indirect spend requires deep knowledge of complex service areas and strong stakeholder relationships. It’s incredibly difficult to keep team members consistently engaged and knowledgeable in this important work.  Many times,  successful leaders of indirect spend do well and are promoted, effectively moving on to other things and leaving indirect spend less attended.
  • Platform Dependency: Even the best spend management platforms are only as good as the people who maintain and enforce the policies and the governance. When people leave, processes fail.
 

4. Comparing Apples to Apples (Outside of Healthcare)

For too long, we have compared healthcare to healthcare (peer benchmarking) without looking outside our own bubble.
 
Other industries don’t buy medical devices and pharmaceuticals, but they do buy technology, construction, food services, waste management, and financial services, the core components of indirect spend.
 
Generally, in healthcare, we are in the early stages of leveraging external, cross-industry data. And guess what? Healthcare, as many have suspected, often pays more for the exact same services…and in many cases with the exact same suppliers. This data, data that historical group aggregation methods don’t touch, is one of the secrets to uncovering better financial deals hiding in plain sight.
 

Where Do You Start?

Cost pressure is accelerating again for health system supply chains. Figuring out how to address the largest, most under-governed area of spend at a health system aggressively is no longer optional.
 
Governance is the cornerstone of success in indirect spend. Outside industry comparisons may be the key to better financial results.
 
To start building your governance structure, ask these questions:
  • Clarity: Can you accurately identify and categorize 100% of your indirect spend, including those “other” line items?
  • Control: What percentage of your high-dollar purchased services are under a standardized, measurable contract?
  • Culture: Are non-supply chain stakeholders accountable for following a professional sourcing process, and how are you tracking compliance and performance?
 
If your current internal processes are sputtering, or if you want to explore new approaches leveraging outside industry expertise, now is the time to act.

About the Author

Eric O’Daffer

Eric O’Daffer

Strategic Advisor, Healthcare and Life Sciences

Eric O’Daffer brings more than 20 years of industry experience. He previously spent 15 years at Gartner as Vice President of Healthcare Supply Chain, where he served as a trusted advisor and helped launch the Gartner Healthcare Supply Chain Top 25, a leading benchmark for supply chain excellence.