4 common mistakes in leading cost reduction initiatives

$40 million, $100 million, $220 million, $300 million. These figures do not represent recent Powerball jackpots or the contracts of star athletes. They are the annual cost reduction targets that CFOs of major health systems have recently shared with me.  

Unfortunately, all too often internal cost reduction initiatives fail to produce the level of savings required. For many organizations that fall short, the next step is to call a consultant – a costly approach as the expertise and often the ownership is outsourced. While many factors may limit the effectiveness of an internal or external approach, the lack of an effective leadership structure to drive the cost reduction initiative is usually the most toxic.

To generate high levels of cost savings, providers must drill deep into operations, challenge convention, design new care models, build new organizational structures and define new roles that will continue to produce high-quality care, but at much lower cost. Clearly, driving this level of change is not for the faint of heart and strong leadership is essential – but all too often absent.

In order to get to the right leadership structure to drive cost reduction in your organization it is critical to know what doesn’t work. The common mistakes in leadership structure that can limit the effectiveness of driving a major cost reduction fall into the following four areas:

1. Led by the CFO and finance – Since the need for cost savings is a financial problem, finance should lead it, right? Wrong. Typically, most finance teams are not positioned in the organization nor experienced in working side by side with clinical and operational departments to identify and implement opportunities for cost reduction.
2. Led by the COO and operational leaders – Since the need for cost savings originates in the clinical and operational departments, the leaders of these departments should lead the charge. Finance will help with calculating the savings and tracking the ongoing benefit. Sound good? Not so fast. Teams of operational and clinical leaders often focus on improving efficiency, which does not necessarily equate to cost savings. Take for example, working to reduce turnaround time between OR cases. Unless another case is added or worked hours are reduced, there really is no financial impact.
3. Led by everybody (essentially led by nobody) – This usually comes in the form of across the board cuts for which individual divisions or vice presidents are accountable for stepping up and hitting. The typical outcome of this approach is that so-called improvements to reduce costs ultimately sub-optimize how patients flow through the system, resulting in unexpected bottlenecks, angry patients, or worse. This leadership approach often also attempts to engage employees in the effort by asking them for ideas on where to reduce cost. While this can produce thousands of ideas, the ability of a health system to vet, validate, coordinate and implement all of these ideas is virtually impossible and the ROI is often minimal.
4. Led by performance improvement (PI) teams – Hospitals that have PI teams are a fortunate bunch. However, all too often, these change agents are assigned to projects that have a relatively limited scope and only address a piece of a much larger problem. When the PI team is not coordinated to drive toward a single key metric – in this case, cost – their work often doesn’t deliver the level of savings required.

Now, you may be thinking that there is no effective model for leading major cost reduction initiatives, since I just dismissed what everyone in the industry is doing right now. And this is exactly the message here – doing more of the same will only get us more of the same, which isn’t working.

Here is my take on the best leadership approach for a successful cost reduction initiative:

• A partnership between the CFO and COO with a commitment to hit the savings targets while maintaining or improving quality and patient satisfaction.
• Engaged and accountable senior leaders who will push cross-functional teams to think deeply about the status quo and to develop innovative approaches to doing more with less.
• Support teams, such as HR, IT and clinical leaders, who are poised to act on the recommendations of the teams and make those cost savings happen.
• One or more dedicated, influential “cost leaders” who establish targets and timelines, organize teams, partner with finance and operations to identify and implement measurable improvements, and are accountable to senior leadership.

No matter where you may be on your cost reduction journey, now is the time to stop and think. Are you set up to achieve goals and meet targets? Are you set up to fall short like the others that came before you? Will you be making an expensive phone call to a consultant?

Many have reached the conclusion that this time cost reduction is not an initiative, but rather something that will need to be a core competency for every healthcare delivery system. Putting the right leadership structure in place will lead to you more effectively bending the cost curve, both right now and further down the road.