October 18, 1999

Unusual Partnership Benefits Medical Center, Outsourcer

By Andrew Binstock

he Detroit Medical Center entered into the largest outsourcing deal in the health-care industry earlier this year when it hired CareTech Solutions Inc., the health-care subsidiary of outsourcer Compuware Corp., to take over all its IT operations, including application development. The 10-year, $1 billion deal was unusual for the type of partnership struck between the two parties.

With net operating revenue of $1.7 billion, the medical center sought not only a company that could perform all IT functions, but one that would become a plenary partner in its successes and failures. As a result, the deal has numerous provisions that tie payment levels to CareTech with the general performance of the medical center, even if this performance is not directly the function of the outsourced operations.

For example, if the average age of accounts receivable drops--that is, bills are being paid more quickly--CareTech receives extra payments; but if it rises--even for reasons other than IT functions--payments decrease. On a larger scale, part of the payment formula is based on the medical center's operating margins. Clearly, these margins--whether thin or fat--are only partially attributable to IT operations. Why would an outsourcing company have its own payments be predicated on activities over which it could exert no control? "Most vendors thought we were crazy at first. But eventually, they came around," says Don Ragan, the medical center's CIO. "They could see that if we were turning over the whole IT operation of a major health-care provider--and IT is a mission-critical system in the health-care business--to one vendor, that vendor was going to have to be married to us for better or for worse."

In matters relating directly to IT, the partnership is even tighter. For example, most hardware acquired since the contract was signed is owned by CareTech. As for software development, a bonus is specified for on-time delivery. In addition, user satisfaction with new software--indeed with all IT operations--is constantly monitored. If satisfaction falls below certain agreed-upon levels, penalties apply. And, as Ragan points out, the penalties can easily climb into the millions of dollars. In fact, if all penalties were applied and all fees reduced as far as they could be, according to the contract, CareTech could lose money on the deal. This means that everyone is at risk. And to make sure both sides share directly in the risk, the medical center purchased a 30% stake in CareTech and sits on its board of directors.

A key part of the medical center's own decision making was figuring out how to manage CareTech. CareTech hired the entire IT staff, including about 100 programmers. Who then would manage the process at the medical center? Originally, it was suggested the project leader should report to the medical center's CEO. But on a practical basis, this approach required the CEO to be involved in much too low a level of IT decision making. So the medical center decided to retain a single IT employee: CIO Ragan. A small staff was proposed, one to oversee hardware, another software, and so forth, Ragan says. "But every structure we set out required more and more bodies, until we had created a small staff to replace the staff we just outsourced. It made no sense, so we went with the approach of having just a CIO."

To help establish priorities for IT projects and resolve any conflicts between CareTech and the medical center, a six-person technical committee made up of three members from each party exists. While the even number of members could lead to a tie, both parties are eager not to have a tie or a stalemate as this makes issues difficult to resolve. And the equal representation of the committee is in keeping with the equal status of the partners--which is at the core of this unusual, and so far workable, model for large-scale outsourcing.

Return to main story, "Outside Development Partners."

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