Insourcing versus Outsourcing in Health System IT Strategies
The growth rate in hospital IT spend has outpaced growth rates in overall healthcare costs by as much as five times between 2007 and 2015, according to our analysis. Much of the IT spend during that time was dedicated to massive investments in electronic health record (EHR) implementations. Now, in the post-EHR era, hospitals are left to decide on their own which technology investments to undertake, and whether to slow their spend. To move forward, hospital leaders must first determine how their technology investment strategy aligns with their business strategy.
Our recent report The Next Generation of Health IT Spend outlines three approaches to future IT spend, and differ based on the extent innovation is necessary to fulfilling a health system’s mission. Each approach comes with a different guide on spend as a percentage of revenue, how to design a technology team, and the types of technology in which to invest.
Different investment strategies call for different ways of approaching technology talent. Do you employ every technology resource? Do you outsource certain skills or functions?
There are many different types of technologists. Some are “operators” who are best at running the IT operations in a highly cost-effective manner. Others tend to be “innovators” who find intrigue in developing new and innovative solutions. Once the mix of team members is determined, the mix of insourced versus outsourced services should be decided. Lastly, heath system leadership can define the technology CapEx and OpEx expenditures. When deciding on these three elements, each blend implies a variability in the cash outflow.
The Traditional player tends to insource as much of the IT personnel as possible to keep costs low in supporting basic operations. Some roles may be outsourced around certain areas like security services. For example, instead of hiring a Chief Security Officer, a traditional player may use a virtual Chief Information Security Officer (CISO). The personnel hired are meant to simply run the operations in a steady manner and are not required to be innovative. When it comes to OpEx spend, it is lowest among these systems while CapEx will likely be higher due to high number of insourced functions. The spend variability tends to be higher for a traditional player since there will be assets that have a multi-year lifecycle needing upgrades every few years, causing spend to spike some years while being lower other years.
An Experimenter is a Traditional player who also seeks to support some targeted areas of investment. There are two types of experimenters:
- HOME-GROWN: This experimenter wishes to keep innovation and talent in-house. Typically, Home-Grown Experimenters tend to be academic medical centers or health systems that reside in metropolitan areas where innovative technology talent is abundant. The tendency is to keep as many of the innovative/transformational types of personnel in house. The OpEx spend is larger than that of Traditional Players due to higher-skilled insourced personnel and even some outsourcing. CapEx tends to be similar to Traditional players, perhaps slightly higher. Spend variability also tends to be volatile like Traditional players.
- LEVERAGED: A Leveraged Experimenter wishes to keep a smaller internal staff to keep costs low and outsource via partners to conduct innovative/transformative technology work. A health system would tend toward this composition when innovative/transformational talent is difficult to find and retain. Such health systems must form strong partnerships in the vendor ecosystem to find leveraged innovators. CapEx/OpEx composition tends to be similar to Home-Grown and spend variability is also similar with strong strategy and budgeting processes in place, so that year-over-year “experiment” budgets with partners are anticipated.
An Innovator is an experimenter who considers innovation a part of doing business and experimentation becomes a key part of both long-term strategy and day-to-day operations. Similar to the Experimenter, Innovators can be home-grown or leveraged and face similar compositional qualities with a few differentiators: The level of CapEx/OpEx investments are higher than that of an Experimenter; the innovation pipeline is much larger and diversified – across patient engagement, analytics, technology driven patient care, revenue models etc. – as a result variability is lower than that of an Experimenter; and budgeting and governance is a much more mature process.
Learn how your organization can map your strategy to one of our five investment profiles with our Signature Research: The Next Generation of Health IT Spend.