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Measuring Outsourcing's Effectiveness
July 2006
Four years ago, Indianapolis-based M*Plan outsourced the hosting and operations of its core payer information system, which includes processing claims and related transactions. The HMO, serving 183,000 members throughout Indiana, also outsourced the scanning and processing of paper claims to the same vendor, The TriZetto Group Inc. of Newport Beach, Calif.
M*Plan spends $10 million a year outsourcing services to TriZetto, which processes transactions according to the payer's rules. Alex Slabosky, president and CEO at M*Plan, is sold on outsourcing, believing that Trizetto provides service and functionality beyond what the small insurer could deliver on its own.
"We would not go back from outsourcing, no way," he contends. "I'm not sure we could do it in-house as cheaply, but I'm sure we could not do it as well."
Still, M*Plan executives want to ensure they are getting their money's worth. So their outsourcing deal, like most such contracts, lays out specific expectations of performance called service level agreements, or SLAs.
Common SLAs cover such issues as the speed of resolving help desk requests and the accuracy and timeliness of processed transactions. Contracts also typically include numerous compliance clauses setting timetables for application deployments, upgrades or changes; and requiring the vendor to comply with the client's specific policies and government regulations.
The SLAs-such as having critical systems available 99.9% of the time or the help desk answering the telephone within five rings and resolving 95% of requests within a certain time period-set benchmarks for formally measuring vendor performance.
But how formal the measuring process is, and how strictly organizations stick to their process, varies. The most important measurement, some organizations believe, is satisfaction with the vendor's overall performance.
Organizations that have previously outsourced I.T. functions tend to set their performance benchmarks higher than rookies, says Lewis Redd, managing partner for the North American provider practice at Accenture, a N.Y.-based consulting firm.
Market dictates performance
But in general, the market dictates what are reasonable benchmarks for outsourcing contracts, Redd says. "If a client has too high an expectation, no one will bid on that contract, so these things tend to self-adjust."
For M*Plan, TriZetto collects data to measure numerous performance and compliance criteria set by the client in at least 33 broad categories.
Each month, the vendor issues a report showing in what areas it met performance benchmarks and what areas it didn't. If TriZetto doesn't meet certain targets, it may pay penalties of up to $20,000 per month. In some cases, M*Plan may be satisfied with the vendor's effort and waive penalties. "Some months they pay penalties, some months they pay nothing," Slabosky says.
That's not an indictment of the vendor's services, he emphasizes. There are some targets, such as paying all clean claims within 14 days, that are not always met, but would be "exceedingly hard" for M*Plan to meet on its own, he adds.
When outsourcing for the first time and negotiating service level agreements and compliance language, vendors initially may have the advantage, says Lynn Orfgen, president and CEO at 290-bed Crittenton Hospital Medical Center in Rochester, Mich.
"When you first get into outsourcing, you don't know what you don't know," he notes. The hospital in 2003 signed a full I.T. outsourcing contract with Troy, Mich.-based CareTech Solutions Inc. that included its I.T. staff transferring to the vendor.
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