May 24

Purchased Services Contract Mistakes to Avoid


Even hospitals, systems, and IDNs without a formal Purchased Services Contract Management System deal with purchased services contracts (PSC) on a regular basis. That’s why it’s important for supply chain directors, sourcing and value analysis managers, and contract administrators to avoid these top 5 purchased services contract mistakes:

1. Treating Purchased Services Just Like Any Other Commodity Purchase. We have had a tendency in supply chain management to consider our new and renewal purchased services contracts to be just like any other commodity purchase. Yet, they are quite different! First off, (i) we should be providing the specifications (i.e., statement of work) for our purchased services as opposed to them being provided by the service provider, (ii) purchased services contracts are generally department specific vs. hospital-wide, (iii) they should include performance standards and (iv) be customized to your facilities’ exact requirements.

2. Not Benchmarking Your Purchased Services Contracts Prior To Renewal. It could be a fatal mistake not to benchmark your renewal PSCs, since they could be at a higher cost than your peers’ for the same or similar service. Or, your consumption/utilization cost could have skyrocketed since you first signed the contract. How would you know this is happening?

3. Ignoring The Value of Value Analysis In Defining Your Requirements. When contracting for any service, it is prudent to have your value analysis team develop a statement of work (e.g., defined scope, requirements, expectations, deliverables, roles and responsibilities, etc.) that you would share with your proposed contractors. Not developing a statement of work will leave you at the mercy of adopting your contract’s terms and conditions.

4. Implementing a GPO Purchased Services Contract Without Competitive Bidding. We see, too often, healthcare organizations implementing their GPOs off-the-shelf purchased services contracts without competitive bidding. By doing so, these healthcare organizations are losing 15% to 20% or more in new purchased services savings by not encouraging multiple vendors to bid on their PSCs. In addition, you are accepting your GPO’s PSCs as is vs. customized to your unique requirements.

5. Lack Of Purchased Services’ Contractor Performance Targets/Incentives. One of the benefits of customizing your purchased services contracts is that you can add performance targets and incentives for your contractors. This provides stretch goals and incentives to improve the cost, quality, and outcomes of your contracts. This won’t happen if you implement off-the-shelf GPO contracts.

One of the last bastions of non-salary cost management in healthcare is the management, monitoring, and control of purchased services contracts. That’s why we must as an industry need to become more sophisticated in how we attack these hidden costs. One of the best ways to do so is to avoid these top 5 PSC mistakes.

P.S. If you would like more information on how to rein in your purchased services costs, go to

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