Healthcare providers face a good news-bad news situation when it comes to major capital investments. The good news is that, through 2010, three-quarters of U.S. hospitals expect to increase capital spending by an average of 14 percent annually to increase bed capacity, upgrade technology and maintain and renew fixed assets such as plant, property and medical equipment.
The bad news is that this surge in investment comes after a decade of neglect for many organizations, during which hospital spending for fixed assets increased an average of only 1 percent per year.
In an increasingly competitive market, it's not surprising to find healthcare providers looking more strategically at the role their facilities play in both patient and staff satisfaction, and in their competitive differentiation. However, with increased investment in facilities and major equipment comes more scrutiny of spending and greater focus on how that spending is tied to specific goals and results.
Many healthcare providers have moved to more tightly integrate their capital planning process with overall strategic planning to ensure capital programs are prioritized according to long-term business objectives. After those programs are approved and annual budgets are allocated, continuing to tie day-to-day spending back to those priorities is critical to ensure that capital dollars are spent effectively.
However, organizations often stumble in managing ongoing capital spending. Providers face a variety of challenges in overseeing capital spending. Multiple departments and sometimes several lines of business are involved in capital planning, budgeting and purchasing, and each may employ slightly different processes and systems. Managers who requisition capital items frequently have limited visibility into overall spending levels within the organization, or even within their department.
Also, the lag time between when a purchase is authorized and when a cash outlay is finally made can be considerable, leaving financial managers in the dark about actual cash requirements. Unanticipated needs inevitably arise, leading to substitutions and tradeoffs along the way. With such unplanned expenses often carrying a premium of as much as 50 percent in additional cost, it's easy to see how budgets can derail, leaving strategic capital programs underfunded.
With almost half of hospital CFOs already reporting that their infrastructures are deteriorating faster than they can make capital improvements, the implications of misallocating critical capital funds are serious.
It's clear that traditional processes and systems for managing capital budgeting and spending are not providing the accurate and timely information organizations require to respond to ongoing and dynamic financial needs, and to provide visibility into capital budgeting, purchasing and spending processes. Enterprise-wide spend management systems are becoming a critical component for managing financial performance and avoiding business risk.
When every manager - from a department head to the CEO - has real-time view into financial performance, each has greater accountability for that performance. By supporting the automation of business rules and policies, spend management systems can help organizations avoid "political" spending and ensure spending decisions are based on preset priorities.
Department managers can see the same information as financial managers about the status of requisitions and their actual spending vs. that of the plan, empowering them to make better decisions. Meanwhile, purchasing has better information to lower acquisition costs and ultimately reduce the total cost of ownership for capital items.
Rather than pitting different functional groups against each other in the management of capital spending, this kind of capital spending control helps each group ensure that the investments they make in capital are applied effectively.
Ultimately, most managers want to contribute to the success of the organization as a whole, but need tools and information to do so effectively.
Chuck Hodian is vice president of healthcare at VFA Inc., a Boston-based company offering solutions for enterprise-wide capital planning and asset management.