Most Flexible: Group Health Cooperative and CB Richard Ellis
Awards Criteria: Both parties consistently demonstrate flexibility in addressing challenges that arise and remain flexible to ensure their interests remain aligned.
Group Health Cooperative, a non-profit healthcare system that coordinates care and coverage from Seattle, Washington, signed a facilities management contract with the Trammell Crow Company in July 1998. (CB Richard Ellis Group, Inc. acquired the Trammell Crow Company in 2007.) “The ability to drive savings” was the sole reason for outsourcing, according to William Biggs, Executive Director, Administrative Services.
When the first renewal approached in 2008, the two decided to pen a new and different contract that included new partnership priorities, including the desire to move toward an incentive bonus and fee-at-risk contract. The old 140-page contract didn’t reflect external market conditions either.
“We understood the old contract did not incent either of us to do the work we needed to do. We had an ‘a- ha’ moment when we realized we needed to fundamentally restructure this relationship for the next phase so we could move forward,” says Biggs.
Group Health asked CB Richard Ellis (CBRE) to come up with a proposal to realign the relationship “that worked well for both of us,” according to Biggs. They did, and the two partners quickly signed their second contract. This contract has KPIs (key performance indicators), which “keep us focused on what is most important.”
CBRE provides a full complement of integrated commercial real estate services to Group Health ranging from transaction and facilities management to human resources and finance and accounting services. It manages 3.3 million square feet of hospital and medical office space. It administers 58 leases. It has a $250 million five-year capital budget and manages over $97 million in operational expenditures.
Concerns at the beginning
Lance Wilken, Alliance Director, CBRE, says it is “uncommon to find an outsourcer offering the depth of facilities management” present in this relationship. He says the in-patient arrangement with Trammell Crow Company was “groundbreaking at the time and is still the case today.” Flexibility in all areas, from contracts to service delivery, is important to create successful, long-term relationships. “It’s especially important when the outsourcing scope is new and untried,” he adds.
Wilken says initially there were “natural concerns about how outsourcing would impact the in-patient experience and level-of-care expectations.”
Biggs says the healthcare system was “nervous about outsourcing” that would replace the staff model it had for 50 years. “There was no similar operating model for us to reference. In addition, we had little experience with outsourced relationships. We agonized over the decision,” he recalls.
But the executives realized their staff model “had its limitations.” The healthcare system couldn’t hire the best staff or keep them once they signed on. “We didn’t have leverage with our suppliers to improve the services we used.” And the buyer wanted to move facilities management from a tactical operation to a strategic one “so we could pull off change management efforts we historically had not been able to do.”
Moreover, Biggs cared about the facilities team with whom he had worked for years. “I was convinced they would be better served as employees of a real estate company than a healthcare company,” he says.
The fact that the service provider “put its fee and reputation at risk” helped mitigate some of the perceived risk, adds the Group Health executive.
Biggs explains this relationship has created “a flexible facilities management model that responds to the resourcing requirements of Group Health as it flexed over time.”
At the outset, CB Richard Ellis had no experience in healthcare, so Group Health specifically stated in the contract it would not take on hazardous waste disposal. But “it became apparent pretty quickly” that that decision worked for neither partner. “They had a contractual agreement to stay away, and yet we needed them to be involved. They saw the problem and rose to the occasion,” recalls Biggs.
He says “CBRE has always been flexible to add on to meet our needs. That is only one example.”
Another example is business continuity planning. “This was another area where we didn’t perceive a need when we did the initial contract,” says Biggs. Three years ago it worked with CBRE to put a program in place including “figuring out how to resource the program management with existing resources.” Price, he adds, “never came up” in these discussions.
When Group Health had the opportunity to move people to Tukwila, a Seattle suburb, it didn’t have room for 1,000 people to park their cars. Together, the two partners came up with an innovative plan to shuttle people to and from work while the new parking garage was under construction.
“A lot of people thought we were crazy. But the CBRE team took on this project. Their goal: to make people miss the shuttle when it went away. And that happened,” says Biggs.
Flexibility actually started early on. Biggs says the original contract reflected inaccurate operational data that did not “truly reflect the nature of the operation.” Once the two groups corrected the information, CBRE targeted areas for savings, which it did by eliminating or redeploying properties that were under utilized.
Why this relationship works
Rick Woods, Executive Vice President and General Counsel of Group Health, says one of the chief factors for success is Biggs’s championship of the relationship from the beginning. “We wouldn’t have had the success we enjoy without his energy and commitment,” continues Woods.
The two partners have developed trust. When the relationship began, Group Health asked the service provider’s employees to sign confidentiality agreements before they shared sensitive news. Today, “we’ve gotten comfortable sharing some pretty detailed information. We just tell them what the sensitivities are. We don’t agonize over that issue,” Biggs says.
This trust allowed Group Health to proceed with new initiatives without setting up service level agreements (SLA) first. “Ten years ago we would have done SLAs and formal agreements before undertaking anything new. But once you trust people to deliver, you just figure out how to get it done rather than wasting effort trying to put an agreement together,” Biggs explains.
There have been occasions when CBRE represented a client in a real estate transaction that could be perceived as a conflict with Group Health’s interests. “When there’s perception of a conflict, somebody raises their hand. Then we just have an honest conversation. We’ve been able to get to an agreement pretty easily,” says Biggs. The two put Chinese walls in place to ensure CBRE concludes its transaction “in a manner we all could feel good about.”
The leaders of both organizations have forged both personal and professional relationships. But so have the people at lower levels. Biggs says CBRE employees help raise funds for hospital foundations. “Their leadership endorses this,” he points out.
Whenever a challenge occurs, Biggs says the Group Health-CBRE team “listens to the feedback and finds opportunities to improve. They take the steps needed to optimize alignment and create the business outcomes desired.” Wilken adds, “There are no villains, just process misalignments.”
The original contract focused on savings. To date Group Health has saved $87 million cumulatively. Biggs says these savings allowed the cooperative to cut fees for members, making it more competitive in today’s price-conscious healthcare environment. Woods says U.S. Senators discussed this operating model as a solution during this year’s healthcare reform debate. Group Health serves more than 600,000 residents of Washington State and Idaho.
One of the sources of the savings was administrative space consolidation. CBRE analyzed how much money Group Health could save if it could move people “out of choice office space in downtown Seattle overlooking Puget Sound and move to an industrial zone in Tukwila. “The numbers were compelling, but the change management was difficult,” Biggs says.
CBRE introduced workforce planning to Group Health; this was a novel idea for the 60-year old healthcare group. “Their plan is very different” from Group Health’s historical operating procedures. They had us look at what we do, where we do it, and how we do it. Are we working in the most effective way? Could we outsource that work?” he explains.
Biggs says CBRE helped his team understand “why this is important. We see the world a lot differently now.” Group Health is currently working on “supporting this effort so we can enhance the quality of our real estate plans.”
This outsourcing relationship has made Group Health more competitive in its market, in Biggs’s view. Before outsourcing he says there were “huge variations” in its buildings. Now, the 50 locations are taking on similar characteristics. “We’re enhancing our brand,” he explains.
Biggs reports customer service has improved. “Before, we would accept excuses from services departments. Now we don’t have to. And they don’t make any excuses. Our users feel like valued customers whose needs are heard and met,” he says.
“We are exposed to some really sharp real estate minds,” he adds. “CBRE opened our eyes to opportunities we didn’t know existed and we were able to take advantage of them.”
One of the reasons for outsourcing was consolidation of services. Both the hospital and corporate had their own facilities departments. In addition, the 50 local clinics also did their own work. “We used outsourcing to bring it all together,” explains Biggs. The only bump in the transition “was some people who had their authority taken away got pretty excited. That was an interesting wave to ride for a while,” he recalls.
The biggest challenge going forward was doing something differently; the average tenure of this group was 12 years. Biggs says his staff and the CB Richard Ellis team leaders sat within 30 feet of each other to “exchange information on what someone wanted help with. Working together, we helped the staff through this.”
Summing up, Wilken says “No one else has this type of outsourcing contract with a healthcare provider. This relationship has the potential to benefit other healthcare organizations at a time when healthcare is under increased pressure to control costs and deliver true reform.”
Lessons from the Outsourcing Journal:
- Flexibility in all areas, from contracts to service delivery, is important to create successful, long-term relationships. It’s especially important when the outsourcing scope is new and untried.
- Flexibility and trust allow partners to make changes to the relationship without having to look at the contract. In some cases, flexibility means the service provider will take on work specifically included in the contract once it’s clear that is not the best tactic for the relationship.