PITTSBURGH -- When CIO Nick Valadja and David Zimba, vice president of corporate contracting, started working together...
at the West Penn Allegheny Health System in 1999, the organization might best have been described as a sick giant.
A third-tier health care provider in the competitive Pittsburgh market, West Penn -- known then as the Western Pennsylvania Healthcare System -- entered into a massive merger and acquisition when it took over four near-bankrupt hospitals from a competitor twice its size. The acquired hospitals were losing $95 million a year, and industry experts were not optimistic the newly merged organization would survive.
In an impressive turnaround, West Penn Allegheny healed itself, posting $38 million in profits last year on revenue of $1.5 billion. The company is now the city's fourth-largest employer with some 2,500 physicians and 13,000 employees.
Valdja and Zimba's ability to coordinate efforts and negotiate contracts was central to West Penn's turnaround. Using a strategy of "competitive friction", Zimba cut $42.5 million out of supply chain costs in his first 18 months on the job and Valadja pushed the healthcare provider to adopt new technologies. To date, more than $75 million in costs have been taken out of the supply chain.
So what is competitive friction?
"Competitive friction for us is, one , creating the greatest number of viable competitors for a product or service," Zimba said. "When you have more participants it creates more competition. I never want a participant to feel comfortable. I want them to feel as if they are at risk of not being chosen."
The IT industry often lacks competitive friction, Valadja said. "When we took over this organization, it was an IBM organization. They bought old IBM. They leased IBM. Actually, I wish I was the salesman for IBM for this account. At one time they were paying $12 million a year in leases to IBM," he said. "I kind of blew that model apart because what I'm looking for is the best price/performance that meets the needs of our business. I employ a variety of vendors."
Reverse online auctions cut costs
One way Zimba and Valadja have continued to solicit competitive bids is through a "reverse auction" process that invites vendors to bid online against each other for contracts. Zimba got turned on to reverse auctions in 2001 by software provider FreeMarkets Inc., which was acquired by the Sunnyvale, Calif.-based Ariba in 2004.
After seeing customer presentations from Ariba customers, such as Alcoa and Heinz, Zimba was persuaded that the online process could work for West Penn.
Not everyone in the organization was receptive. Some suggested Zimba try out reverse auction on something innocuous, like toilet paper. But Zimba decided that if the process was to have "any long-term staying power, it needed to be used for clinical items."
The first auction was for arthroscopy equipment for an orthopedics group that was six months into a contract negotiation. "We put the brakes on it -- and in three weeks changed the way we were working with vendors," he said. The reverse auction bidding sliced 35% off the cost of the contract.
Today West Penn runs auctions with software installed on their laptops and accessed through the Web. "We run the bidding ourselves, so we are not only content experts but now sourcing experts," Zimba said. Ariba continues to provide vendor training and monitors the connectivity of the companies participating in the online bidding.
About a year ago, Valadja and Zimba used the reverse auction process to acquire a Kodak PACS (Picture Archiving and Communications System), for three facilities in the West Penn system. "We had a long process of defining the requirements that we wanted," Valadja said. One of the big objectives was to pay per procedure, as opposed to writing a big check to acquire the PACS. Once the request for proposal was put together, Zimba and Valadja identified vendors, ending up with about eight who agreed to participate in an online bidding process that took about five hours.
"We may be one of the few organizations in the country to ever acquire a PACS through a free market auction," Valadja said, adding that IT occasionally runs up against vendors who refuse to participate in the bidding but "acknowledge their own companies use reverse auction to bid contracts." When that happens, Zimba's sourcing group will either proceed without them or use a manual process.
Ariba subscription model for midmarket
The challenge for smaller companies until now has been paying for expensive spend management applications, many of which lack the IT infrastructure to host the applications, said Lou Unkeless, chief marketing officer for Ariba. As Ariba has offered subscription-based pricing, allowing companies to pay per sourcing need, its roster of clients has grown. "In the past few months, we've had 32 companies adopt our on-demand solutions, and all of them were the size of West Penn Allegheny or smaller," Unkeless said.
Zimba estimated that West Penn has used Ariba's reverse auction process for procuring roughly $100 million in equipment and services, saving an average 21% per contract and reducing the time spent for procurements to three to 12 weeks, compared to the three to six months it took through conventional contracting.
He said the health system's return on investment (ROI) for Ariba exceeds 1,400%. "Of the $75 million we've taken out of the supply chain since taking over, I'd say $25 million is probably related to the sourcing strategy that Ariba taught us," Zimba said.
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