When Outsourcing Goes Awry

Grant Newman, chief executive officer of Regional Medical Center (RMC), expected the worst from the meeting that was scheduled to begin in less than an hour. The anesthesiologists were at the end of their rope, and the hospital’s surgeons and obstetricians were pretty riled up, too. Eighteen months earlier, Newman had decided to outsource RMC’s anesthesia services, and he had signed a contract with Physicians Development Services (PDS), a contract management company. At the time, PDS had seemed a good fit. It had a reputation for providing high-quality physicians for both permanent and temporary assignments. Furthermore, Dr. Barry Doane, cofounder of PDS five years earlier, had been on RMC’s staff for many years. While at the medical center, Doane had developed a reputation as a top-notch clinician. Newman knew that his colleague’s reputation had helped attract hospital clients to the newly formed PDS. Unfortunately, Doane and his physician partners had extremely limited business skills, and PDS was undercapitalized and chronically mismanaged. It was not clear to Newman how PDS had managed to survive for five years. But he did know that the company held contracts to supply 15 medical facilities with anesthesia services—a fact that alleviated some of his concerns. When Doane had approached Newman two years earlier, the sales pitch had been attractive. “Look,” Doane had said, “everyone in town knows that the anesthesia group is a revolving door at RMC. The surgeons and obstetricians are generally happy here, but they don’t like constantly seeing anesthesiologists they don’t know in the operating room. The obstetricians never know who is going to be standing next to them to resuscitate a newborn in a crisis.” Newman had nodded in agreement. It was common knowledge that lifetime-care malpractice lawsuits were the most costly of all malpractice cases, and Doane did not have to elaborate on the myriad lawsuits that the obstetricians and surgeons could be drawn into as a result of someone else’s negligence. Doane continued, “If you contract with my company, we will handle all of the management, recruiting, staffing, credentialing, and scheduling for the anesthesia group. We will handle all of our own financial management, and we will allow the hospital administration and department chiefs to approve any physician that we decide to place here. If he or she is not acceptable, we will recruit another physician at our own expense. That will guarantee that RMC has the highest level of physician service available.” Newman was sold on the idea and signed an agreement granting PDS exclusive management of the anesthesia group according to the terms they had discussed. As is typical in such arrangements, the anesthesiologists would be independent contractors with PDS, and PDS would be under contract with RMC. Legally, there would be no agreement of any sort between the anesthesiologists and the medical center. PDS then recruited and signed contracts with five anesthesiologists, including George Jacques as chief of anesthesia services. For the first year, things went smoothly. But, at the beginning of the second year, PDS’s paychecks to Jacques’s group began arriving late and then bounced several times over a three-month period. Rumors were rampant about PDS losing several big accounts and teetering on the brink of bankruptcy. In addition, although the hospital had recently extended its contract with PDS for another 12 months, relations between Jacques’s group and PDS had become extremely strained. As a result, although the contract between Jacques’s group and PDS had expired three months earlier, a new one had not been negotiated. Even so, the anesthesiologists were providing services without a contract. Jacques’s primary point of contention was that the anesthesiologists had achieved certain agreed-upon financial goals for the previous year and were owed a $300,000 bonus. PDS had never contested that amount but simply did not have the funds to pay them. More seriously, the anesthesiologists felt that PDS was falsifying the current year’s financial statements and was in the process of cheating it out of another $150,000 bonus for the current year. Jacques had confronted PDS, but the company’s response was that because the anesthesiologists were working without a contract, PDS was under no obligation to supply them with any financial statements or even to pay their salaries until a new contract was negotiated. This morning, the already strained relations between the anesthesia group and PDS had reached the breaking point. The most recent physicians’ paychecks had arrived several days late and then had bounced. Jacques was furious and, demanding a meeting with Doane, had been heard shouting at him over the telephone, “If you can’t make our payroll in cash today, bring the keys to your Mercedes 560SL, and be ready to give me your gold Rolex watch, because I want them both!” Then he stormed into Newman’s office. “PDS owes us $300,000 for last year’s statements,” he said, barely controlling his temper. “We want you to break the hospital’s contract with PDS, and either let us handle our own finances and management, or put us on a hospital salary. If you do not resolve this, my group and I are leaving next week. The surgeons support us. RMC will be left with no surgical services, and I don’t care who sues me!” Newman asked Jacques why the anesthesiologists had stayed on for so long without a contract, and Jacques exploded. “Are you trying to say that this is our fault? We stayed on to provide medical services to the community, hoping that this situation would resolve itself. Because it will not resolve itself without your support, we are doing what we should have done months ago: We are leaving!” After a pause, Jacques calmed down, but he refused to change his position. Before he left Newman’s office, he said, “I don’t want to have to put you in the middle of this, but my physicians will be unable to feed their families if this continues. I want to have a meeting with you and the rest of my group later today, and I want to know how you’re going to resolve this.” Newman was in an extremely serious predicament. He knew that he had no legal right to interfere with the contract between PDS and the anesthesia group unless PDS breached its contract with RMC—something that Doane had managed to avoid thus far. RMC was relying more and more on contract management arrangements, such as the one with PDS, and taking sides with a physicians’ group could hinder future negotiations with companies like PDS. Furthermore, the contract between PDS and RMC specified a $120,000 recruiting fee if the hospital ever converted PDS physicians to hospital employees. And Doane’s attorney had made it clear that he would sue the hospital if RMC interfered with what Doane felt was a resolvable dispute between labor and management. Moreover, it would be a public relations disaster if the anesthesia group walked out—even if no other group left with them. The absence of Jacques’s group alone would shut down the operating rooms and the obstetrics unit. RMC was already experiencing reduced in-patient days due to the loss of a large managed-care contract and increased competition in the marketplace. Newman felt that the future viability of the hospital would be seriously compromised if he allowed such an exodus to occur even for a single day. In addition, Newman knew Jacques was capable of playing hardball and had been in contact with the local news media. The anesthesia group, two surgeons, and three obstetricians were due in his office in 45 minutes. Newman didn’t have much time to figure out what to do. What can Newman do to resolve this conflict? Ken Alvares is vice president of human resources at Sun Microsystems in Mountain View, California. First things first: Grant Newman should cancel that meeting. By negotiating with the anesthesia group, the surgeons, and the obstetricians, he would place himself squarely between PDS and its subcontractors. There is no way to win in that situation, and it must be avoided. Next, Newman needs to take decisive action to remove a contractor that is clearly not living up to expectations. He can then meet with the anesthesiologists alone to negotiate a short-term arrangement directly with them. Such an arrangement will protect the quality of care for patients and give Newman the time he needs to put an effective long-term contract in place, either with the current anesthesiology group or with another provider. Newman’s actions cannot be dictated by concern over the legal issues of severing the relationship with PDS. It’s not clear that the company has fulfilled its obligations under the contract. And he’s got a hospital to run: RMC simply cannot afford to lose its public trust or to jeopardize the health of its patients. Of course, Newman’s problems really began 18 months ago when he decided to outsource anesthesia services. Right now, he is experiencing outsourcing’s worst-case scenario, but the crisis shouldn’t have come as a surprise to him. How, then, could he have avoided this mess? Moving work out of an organization should always be undertaken with a great deal of deliberation. Most companies choose to outsource carefully selected noncore activities that can be accomplished quicker, cheaper, and better by outside resources. The intent of outsourcing is to focus management on core competencies and to expose certain activities to the competitive pressures of their own marketplace, ensuring that they are performed by the highest quality and most efficient means possible. For example, the service-business unit at Sun Microsystems uses local third-party vendors to warehouse spare parts, repair hardware, and train users. Outsourcing these activities gives the unit the ability to focus on an expertise in business-process engineering and consultancy while guaranteeing that other important areas of customer service are provided efficiently and cost-effectively. Outsourcing may also be appropriate when demand for a particular service is extremely variable or when skills or technologies associated with the delivery of a service are about to change or become obsolete. Those circumstances, however, don’t appear to be present in Newman’s situation. When services critical to an organization are performed by an external source, the organization must protect itself by forming a deeper, more careful, and more far-reaching relationship with the supplier—essentially, by forming an alliance or partnership. Sun outsources computer-chip fabrication, a critical business function for us. We made the decision to use our resources and expertise to develop the design, or “recipe,” for our chips but not to invest in the construction of advanced silicon-manufacturing operations. Instead, we manage a partnership that begins with our own chip design and ends with a chip manufactured by leading-edge fabricators. This relationship differs from commodity procurement in that our supplier-alliance agreements contain measures for dealing with problems long before they would necessitate ending the relationship. The agreements state exactly what constitutes acceptable performance and detail procedures to deal with subpar performance. The emphasis is on helping both parties forge a long-term relationship rather than simply delivering services. It appears that Newman chose to outsource a critical component of his business with little awareness of the real issues involved. He seems to have selected PDS based on Doane’s previous relationship with the hospital and on PDS’s claim to be able to deliver quality service. Newman failed to evaluate PDS’s ability to run its own business. He negotiated a contract that was unfavorable to the hospital and failed to establish clear performance standards for his contractor. He also failed to take into account the critical nature of this service to the short-term and long-term success of his organization. In addition, he seems unaware that managing external resources requires an entirely different set of skills than managing the same services internally. Managing external resources requires an entirely different set of skills than managing the same services internally. All of this suggests that Newman himself may be sorely lacking in outsourcing skills. He might well use the time slot scheduled for the meeting to update his résumé and to start looking for his next job. Anthony R. Koviner is a professor of health management and policy at the Wagner School of Public Service at New York University in New York City. He was formerly CEO of Newcomb Hospital in Vineland, New Jersey, and is a hospital board member and management consultant to health care organizations. Grant Newman did not make a mistake in outsourcing anesthesia services. But he would be in much better shape now had he forged a stronger contract with PDS to begin with. Newman should have insisted on specified performance criteria and related contingency sanctions with monitoring provisions. Newman would be in much better shape now if he had forged a stronger contract with PDS to begin with. That said, the CEO does have a few things going for him in his present predicament: Jacques and his anesthesia group appear to want to continue working at RMC; the anesthesiologists are respected by the hospital’s surgeons and obstetricians; Doane wants to retain Jacques’s group at RMC as well as the hospital contract; and a work stoppage by the anesthesiologists would hurt all the stakeholders. At the meeting, Newman should tell the physicians that there is a short-term crisis and a long-term threat to all parties involved. He should say that he is there to listen to what the physicians have to say and that if they have a proposal he will get back to them within 48 hours. He should stress that it is important to continue to provide high-quality patient care at the hospital and that he appreciates the anesthesiologists’ efforts to do so under such stressful circumstances. Newman must be patient and conciliatory with all parties, emphasizing that they can work things out and that walkouts and lawsuits will benefit no one. But Newman must also let the anesthesiologists know that if they do walk out, RMC will contract with another anesthesia company or group and that the anesthesiologists, the surgeons, the hospital, their patients, and the community will all suffer. After the meeting, Newman should speak with his board, explain the situation, review several possible solutions, and gain its support. Then he should meet with Doane. One possible outcome would be reaching an agreement with Doane in which RMC would stand behind PDS financially so that PDS could forward to the anesthesiology group a sufficient amount of money to meet its legitimate demands. In return for the hospital’s financial help, Doane would agree to be audited and to have PDS’s management practices monitored. In addition, he would agree to forfeit the $120,000 recruiting fee penalty if PDS does not comply with the auditor’s recommendations so that any hospital loan or guarantee is adequately protected. If PDS is already beyond salvaging and is unable to provide acceptable replacement coverage should the anesthesiologists walk out, RMC should threaten to sue for breach of contract. Then, if Jacques and his group do walk, RMC should hire them directly and be prepared to deal with PDS in court. If PDS can be saved, Newman can probably expect Doane to comply with RMC’s proposal. He really has no other choice if he wants to keep its business. What’s more, PDS is unlikely to secure contracts elsewhere if Doane doesn’t comply. Joellin Comerford is the managing partner of the business-process management practice of Andersen Consulting in Chicago, Illinois. Rudy Puryear is the managing partner of Andersen Consulting’s information and technology strategy practice for the Americas. You don’t have to be a physician to know that Grant Newman is facing a medical emergency caused by a poorly designed and executed outsourcing contract. The backlash could cost the Regional Medical Center the interruption of critical services, a shortfall in qualified anesthesiologists, and possibly even the loss of human life. You don’t have to be a physician to know Newman faces a medical emergency caused by a poorly designed outsourcing contract. Although the medical nature of this case dramatizes the ramifications of a badly handled outsourcing arrangement, the problems that RMC faces are common to all types of outsourcing deals in which either the wrong provider has been contracted or the goals, the provision of service, the guarantees, and the relationships have been ill defined. It’s clear that Gordon did not select an outsourcing provider with a demonstrated ability to deliver services as promised. Newman and RMC should have read the early signs that PDS might not be able to sustain a consistent level of service. PDS was known to be undercapitalized and mismanaged, and the market was growing; Newman should have found another company. Given that PDS was the choice, we doubt that Newman, Doane, and Jacques had a clear understanding of the desired outcomes of the outsourcing arrangement before they agreed on contract terms. Outsourcing is more than contracting for people or assets; it is contracting for results. An understanding regarding expected outcomes shared by the purchaser and provider should determine the nature, terms, and conditions of the contract. RMC needs continuous, reliable, and uninterrupted service; but, as far as we know, the contract between RMC and PDS stated only that PDS would guarantee the “highest level of physician service available.” Access to skilled personnel is a far cry from continuous, reliable, and uninterrupted service. The arrangement should have included guarantees for service delivery, renegotiation conditions, and exit clauses. With such guarantees, RMC would have been protected from unforeseen business changes, the financial instability of the outsourcing provider, and the failure to deliver services as specified. In addition, because the continuous delivery of services is inextricably linked to Jacques’s group, Newman should have made sure that the contract included a provision that allowed RMC to participate at some level in PDS’s contract with the anesthesiologists. A successful outsourcing arrangement means building strong relationships—among all parties. Even though the relationship between RMC and PDS has been relatively positive up to this point, the friction between PDS and the anesthesiologists threatens the delivery of continuous service to RMC. At a minimum, RMC should have known when the contract between the anesthesiologists and PDS had expired and been able to persuade PDS to move quickly to renegotiate mutually agreeable terms. Finally, RMC should have insisted on a provision that allowed it to break its own contract if PDS reneged on commitments to the physicians, thereby jeopardizing the continuous delivery of service. Such a provision is a safety net: In a best-case scenario, it would never need to be used. It does not imply a lack of trust, but it does ensure protection. Even given the poor choice of and arrangement with the provider, Newman still could have prevented the current crisis by carefully reviewing the situation when the first contract between RMC and PDS ran out. When RMC renewed the contract with PDS for another year, news of the loss of business and bankruptcy was already surfacing. Newman should have taken a closer look at PDS’s financial situation and thought through the possible ramifications. He could have renegotiated the contract terms to protect RMC from instability. Or he could have taken the opportunity to pursue an entirely different route. Right now, Newman has to get through this meeting. He should tell the parties present that there is no legal contract between RMC and the anesthesiologists and no provisions in the PDS contract with RMC to address the situation. Newman should inform Jacques that he has to work out his own contract problems with PDS. However, he should let Jacques know that the services of his group are valued and appreciated and leave the door open for directly hiring or contracting with the anesthesiologists once they settle the disputes with PDS. Then Newman should review his current contract to see if he has any legal ground to break it and start anew by contracting directly with Jacques’s group. If he can’t break the contract, he still might be able to renegotiate it. If none of the above is possible, Newman has to sit down with PDS and make the case that the possible interruption of service caused by the exit of Jacques’s group constitutes a breach of contract. The two organizations should be able to come to terms with the business problem and agree on a solution. Otherwise, RMC should explore legal action against PDS. Vaughn Hovey is manager of IT supplier and alliance management at Eastman Kodak Company in Rochester, New York. There are several things Grant Newman should have done that not only would have helped him see the potential problems between PDS and RMC before they developed but also might have helped him avoid those problems altogether. First, Newman should have investigated the marketplace more thoroughly to see which other companies were capable of providing the services that RMC needed. Such an approach would have given him a more effective benchmark for evaluating the capabilities of Doane’s organization. His choice of provider would have been based on real business knowledge, not just on familiarity with a former colleague. Newman’s choice of provider should have been based on real business knowledge, not just on familiarity with a former colleague. Second, Newman should have prepared a list of the requirements he was trying to satisfy through the outsourcing arrangement, along with a detailed list of expectations. The lists would have enabled him both to gauge the performance potential of his contract company and to measure the company’s success in meeting the objectives. Third, Newman should have held regular formal meetings with Doane and Jacques. Those meetings would have provided a forum for RMC to review performance against expectations, discuss issues, clarify roles, present new services, and so on. In this context, Jacques might have alerted Newman that PDS was not meeting the anesthesiologists’ requirements. Fourth, rather than leaving the perception of performance to conjecture, the surgeons and obstetricians under Newman’s direction should have conducted a semi-annual assessment—a customer satisfaction review—of PDS’s performance. This review would have effectively ensured that the performance objectives were accurately set and that the customer, RMC, was truly satisfied. If there were shortcomings in the relationship, they could have been identified; and Newman, Doane, and Jacques could have developed plans to resolve them. Right now, all the parties involved will only continue to threaten and blame one another for the current crisis. They may even end up in court. But Newman, Doane, and Jacques all know that if that happens, no one is going to be completely happy. A court resolution will meet some, but likely not all, of the individual interests involved. A court resolution will meet some, but likely not all, of the individual interests involved. A more creative and effective option would be to try to approach the problem in a way that is acceptable to all parties. Each party should step back and define the interests they feel must be satisfied in order to resolve the conflict. Then among themselves or with the guidance of a fourth objective party, such as an outside mediator, they can begin thoughtfully to develop ways to meet those interests. While these kinds of situations can seem like major challenges at the peak of a disagreement, a measured approach will get them through it. For example, Newman’s interests might be to continue to have qualified anesthesiology services provided for his staff, to keep the operating rooms open, and to maintain a good public image. Doane’s interests might be to keep a good customer reference with RMC and to maintain his reputation in the field. The interests of Jacques’s group might be to get paid for services already provided, to get paid for services currently being provided, and to maintain their current position at RMC. This kind of clarification is useful in any outsourcing endeavor in which there is significant downside risk or exposure if service objectives are not met or opinions differ. Clearly, it’s critical in a hospital setting, where the risk is the health and welfare of patients. At Kodak, in the most successful outsourcing arrangements, we schedule a series of meetings to share and discuss openly the various parties’ short-term and long-term objectives. We’ve learned that trying to satisfy those interests that are mutually beneficial is the most effective solution—and one that all parties can live with. The approach is quite successful at getting all parties to focus on ways to solve their problems rather than on just getting even. Newman, Jacques, and Doane might try taking the following steps to help them get back on track once the objectives are all on the table: RMC could pay Jacques’s group directly for a specified period; RMC and PDS could petition all 15 of PDS’s customers to support the company and provide a financial base until it was stable—again, for a specified period; PDS could hire an effective business manager as part of the agreement with its customers; Newman could set up a customer oversight or advisory council to guide PDS on a short-term and a more long-term basis. Of course, the central assumption is that all parties want to get their relationship back on track. It is possible that the principals have moved past that point. Even so, Newman should lead the process to an amicable resolution as soon as possible. Tom Chapman is the CEO of University Hospital at George Washington University in Washington, D.C. Nowhere in the case does Grant Newman examine or discuss why the anesthesia service at RMC was so bad in the first place. Was it a lack of hospital support, impossible surgeons, or weak operating room leadership and control? If Newman did not clearly understand the problem, how did he think he could solve it with an outsourcing arrangement? But that’s a separate issue. Assuming that outsourcing was indeed the best solution for the anesthesia service, Newman made several key errors. First, in contracting with PDS, he relied too heavily on Doane’s past association with the hospital and his reputation as a good clinician. He was too comfortable with the reputation of an individual. Unfortunately, that is not what RMC was buying in this deal. RMC was contracting for the total expertise of a professional service company to provide reliable, high-quality anesthesiology coverage for the hospital. The health care field is small, and it is easy to check out reputations of providers and get the scoop on contractors. Calling a few other administrators for references is always a good idea and using lawyers and consultants for performance of due diligence is critical. There are also many sources that provide financial data. The bottom line is, Newman didn’t thoroughly research the company. That is not sound business practice. The key to selecting good contract companies is evaluating their overall stability and success over time. The professionals a company employs may come and go, but can it deliver a consistent standard of performance? Obviously, the financial foundation of a given company determines its stability, attractiveness, and reliability. If Newman had questions about PDS’s ability to survive for five years, a warning light should have gone on. If the company failed, how would he explain his decision to his board? The key to selecting good contract companies is evaluating their overall stability and success over time. As far as the actual contract between RMC and PDS goes, Newman should have made sure that it contained a performance clause dealing with disruption of professional services from the point of view of patient safety and the hospital’s financial needs. After all, the surgical services supported by the anesthesia group were a lucrative line of business that could easily be destroyed. Newman made another mistake when he elected to extend the contract even though he knew the company was having trouble. When the contract came up for renewal, Newman should have pressured Doane for more information and amendments. If he thought things were going sour with PDS, he should have had another company lined up to step in. The rumors should have been thoroughly examined and the financial records of the company meticulously reviewed as a condition of extending the contract. Once the anesthesiologists’ contract with PDS expired, Newman should have taken action. At that point, the disruption to service was real—even though the anesthesiologists were still coming to work. The anesthesiologists were threatening to sue Doane and walk out of the hospital. PDS was simply not meeting its obligations and responsibilities. The hospital should have acted on its duty to protect the patients, the public, and the medical staff—as well as its own business. Newman should have broken RMC’s contract with PDS. The logic is straightforward: The hospital needs a stable anesthesia service to maintain service to patients and operating revenue. That basic responsibility to the community is paramount; anything less would be bad business strategy. Jacques’s group was right to provide responsible service without payment. It took the ethical high ground; PDS was the poor performer. Regional Medical Center’s basic responsibility to the community is paramount; anything less would be bad business strategy. Regarding Newman’s concern that other companies might view the hospital as a company buster if he breaks the contract, I doubt it. They will probably view the hospital with respect. And shaky companies will be forewarned: Don’t deal with RMC if you have financial or performance problems. If, however, Newman caves in, other companies will not respect the hospital. No hospital can deal from a position of strength if its reputation is to roll over. My advice to Newman? Don’t sweat the lawsuit, bring one yourself, and maintain the service. Gary P. Pisano is an associate professor in technology and operations management at the Harvard Business School located in Boston, Massachusetts. Rule number one in outsourcing is to know exactly what you are buying and why. When Newman decided to contract anesthesia services to PDS, he thought he was contracting for access to anesthesiologists. He also was looking for protection from malpractice suits. And he wanted the arrangement to provide administrative services. Two of his three assumptions were off the mark. To be sure, access to anesthesiologists is critical. However, Newman already had such access. He could have hired a group of anesthesiologists directly. PDS, after all, doesn’t have some magical exclusive rights to leading anesthesiologists in the area. In fact, the contract between RMC and PDS removed Newman’s access to anesthesiologists by putting PDS in the middle. What’s more, PDS probably didn’t give the hospital any additional protection from malpractice suits. If something were to go wrong in an RMC operating room, RMC would probably be sued regardless of whether the anesthesiologists were under direct contract to the hospital. In any case, if Newman was worried about malpractice suits, he should have purchased extra malpractice insurance. (Because RMC probably gets a better insurance rate than an independent contractor like PDS, its total malpractice-insurance costs would most likely have been lower had it taken that route). RMC should have been outsourcing only administrative services. And herein lies the problem: PDS appears to be a lousy provider of administrative services. Newman has bought himself the hospital-service equivalent of oceanfront property on the Nevada coast! PDS may have seemed like a great deal; but, had Newman checked out its administrative capability, he might have been alerted to potential problems. It’s unlikely that RMC is the only client having problems with PDS. The references would have been revealing, and Newman might have stopped right there and avoided this mess. Even if Newman had proceeded despite poor reports, he might have structured the contract more carefully. For example, he might have built in a few termination clauses and established some sort of direct contractual link with the anesthesiologists. In contracting with PDS, Newman has bought the hospital-service equivalent of oceanfront property on the Nevada coast. But all that doesn’t solve his current dilemma. In the short term, Newman has three options: Let Jacques walk, and leave it to PDS to solve the problem; try to mediate the dispute between the physicians and PDS in order to keep the physicians on the job; play hardball with PDS, and side with Jacques. Any hospital’s number-one competitive priority is reliable service. It is one thing to find out your local supermarket is out of avocados this week; it is quite another thing entirely to find out that your heart surgery has been postponed because there are no anesthesiologists available. Thus keeping Jacques and his staff on the job is critical, ruling out the first option. The choice between the second and third options depends partly on the contract and the hospital’s ability to get out of it. If there is a legal way to get out of the contract (perhaps PDS has already breached it in some way), then Newman should get out of it. Right now, however, he is probably better off trying to mediate the dispute between PDS and the physicians. That approach gives him a chance to keep the physicians on the job and avoids a potential lawsuit. If the dispute cannot be settled in one week and the physicians walk out, then Newman probably has sufficient grounds to terminate the relationship with PDS. Newman should postpone the meeting with the anesthesiologists, surgeons, and obstetricians until later in the day. Before he faces them, he must arrange a meeting with Doane and Jacques. He needs to make clear to Doane that if the physicians walk out, the contract with PDS will be terminated. He also must make clear to Jacques that a walkout would seriously damage any potential future relationship between the hospital and the anesthesiologists. The hospital might be able to ameliorate the situation by offering to hold in escrow some fraction of the money allegedly owed to the physicians by PDS, pending further investigation. In addition, RMC might agree to pay the physicians’ latest paycheck. However, it clearly needs to get something in return for doing this, such as a promise from the anesthesiologists that they will stay on the job for at least 30 days, as well as a reduction in service fees from PDS. When Newman meets with the anesthesia group, the surgeons, and the obstetricians, he has to make clear that he is on their side. He must let them know that his immediate goal is to work out the dispute but that in the long term he wants to pursue a very different approach—one that would protect the physicians from such situations in the future. The reason for siding with the physicians is simple: Newman needs the anesthesiologists, the surgeons, and the obstetricians more than he needs PDS. If RMC develops a reputation as a hospital where doctors are not happy, it will not be able to attract the first-rate professional staff that is critical to its competitive advantage. In the long term, there is no reason why Newman shouldn’t continue to outsource, but it’s clear that the relationship with PDS is not sustainable. One approach that Newman might explore is setting up joint ventures with physicians’ groups. The ventures could then contract out administrative services, such as billing. With those kinds of arrangements, the hospital would maintain direct access to the physicians and direct control over its relationship with them. The administrative contractor would be a third party providing billing, accounting, and other “plumbing” services, but it would not interfere with or confuse the key relationships. RMC needs good administrative services. But, more important, it needs to establish and maintain direct contractual relationships with its physicians. The relationship between a hospital and its doctors should be a core competence. Regardless of the kind of arrangement Newman pursues, he must focus on keeping control of such key assets. The relationship between a hospital and its doctors should be a core competence.

When Outsourcing Goes Awry

Partner Center