5 things CFOs need to communicate to CIOs to prevent overspending

By Michelle McNickle
10:35 AM

The current healthcare landscape is calling for more collaboration, and possibly the most important partnership is that of the CIO and CFO. With new IT becoming a pressing necessity, it's crucial both professionals understand the ins and outs of IT spending. 

"In terms of working with hospitals on their IT spend, it's a new thing," said Jeff Muscarella, EVP of IT at spend management consultancy company NPI. "When we started the company 10 years ago, many folks didn't know you could go out and look for a Kelley Blue Book of IT products and service and pricing. Nowadays, it's become more common." 

"We speak to CIOs a lot, and some of the challenges they face aren't just pricing; they're more holistic, and we help them think about it in a holistic fashion." 

To help CFOs and CIOs take a universal look at the cost of their IT, Muscarella outlines five things CFOs need to communicate to CIOs to prevent overspending. 

[See also: CIO confidence about meaningful use inches up.]

1. Gain internal alignment. The number one thing CFOs should communicate to CIOs, said Muscarella, is the importance of gaining internal alignment. "And what we mean by that is some of the blocking and tackling - having good budgeting processes in place and good relationships with their internal clients or users, like doctors and nurses who need services from IT." Healthcare organizations have become better at getting everyone on the same page, said Muscarella, but understanding departmental needs will help to create a true budget forecast cycle, "so you have some visibility into what those needs are and what they may cost," he said. Failing to maintain internal alignment, he warned, makes it easy for vendors to approach specific departments and throw off an organization's budget year. "[They approach] hospitals or physician groups and get them wanting solutions that may be overlapping with something the IT department already has on its strategic plan," he said. "It lands on their doorstep six months into their budget year, and it may only be half a million, but it begins to throw things out of whack."

2. Benchmark your spending. It's becoming much more common place to benchmark spending, said Muscarella. "I spoke with a CIO yesterday who was doing it, and they were benchmarking everything from internal salaries to how much they pay for certain things," he said. "[This helps] companies drive more savings, even more than they realize, because they're paying too much." To clarify, Muscarella said IT pricing is one of the most complicated markets out there, since there isn't a public list price available for products and services. "The technology itself changes so quickly, that you're not buying the same product [that it was] three years ago," he said. "The pricing models for them changes." Historically, Muscarella added, CIOs talk to their peers to formulate a good price for IT solutions. "They say, 'I'm thinking of buying this product and at 50 percent off, it's pretty good,' but, in reality, 80 percent may be the real spot," he said. "So reaching out to know what's common in the market place for pricing and terms and conditions - what are the key contract terms, especially as it relates to cloud offerings, since you don't own the underlying software." 

3. Don't get stuck in 'vendor lock.' Once the big-name vendors make their way into your organization, it makes sense to stick with the products they offer in their umbrella. But, Muscarella said it's important to go through a "sourcing process" and invite in other potential solution providers to keep it competitive. "Too often, people get locked into one vendor strategy, and they forget to do that," he said. "There isn't a whole lot of pressure on that incumbent vendor to keep things tight and focused." Explore your options, he said, and don't forget to "beware of the bundle." Large vendors, he said, "love to bundle…they bundle things together, and sometimes, a bundle could make sense, but unfortunately, 75 percent of the time or more, a bundle contains more than you need." A basic example Muscarella and his team uses is Microsoft Word or Excel. "How many features do you actually use?" he said. "There's hundreds of thousands, but for most of us, we only use 10 percent of them." 

4. Question your maintenance charges. Muscarella and his team have begun asking people to "push back" and question their operating costs and maintenance charges. "They tend to go up 3 or 4 percent every year and no one asks questions," he said. "But in this environment, we had success helping CIOs go in and trim their maintenance budgets." One of the more common ways to question charges is to ask yourself what you actually still need maintenance on. Sometimes, said Muscarella, a system is old and works fine, "and you don't need the platinum level support; 8 to 5 is fine because you aren't changing it." Other cases include simply going back and telling a vendor you aren't comfortable with certain charges. "If you think about it, maintenance is 18 to 20 percent of the purchase price, and then it goes up 3 or 4 percent each year," he said. "It doesn't take long, about five years, until you've rebought that entire product. That's an important thing to bring to the attention of your vendors." 

5. Stay on top of going rates for outside services. With more organizations using outside services and paying contractor rates, said Muscarella, it's important to benchmark and stay on top of going rates for outside professional services. "Or, a lot of times, they end up going with these fixed fee engagements," he said. "On the surface, that's great because you don't worry about overages, but in reality, there's a lot of language in those agreements that leaves room for overages." For example, he said, a vendor can come back and make a case by pointing out "assumptions" the organization said it was going to do, or not having data set up the way it claimed it would. "Then they say, 'Well now we have to do a change order,'" he said. "So the fixed fee engagements that aren't defined well or don't have adequate protections frequently result in change orders." And, before you know it, you're back to the pay-as-you-go model. Muscarella advised that folks go ahead and "bid it on a time of materials" basis, since this will lend insight into what the vendor is thinking about the project. "If you see what kinds of people they're assigning and their skill levels, hourly rates, and how much time, you can look at that and say, 'that makes sense," or 'they're underestimating the amount of work here,'" he said. "If you do fixed fee, you don't see that detail and you're more in the dark and hoping they got it right."


[See also: CIOs consider how to define ‘meaningful use’.]

Follow Michelle McNickle on Twitter, @Michelle_writes