Hedge Yourself Against the Perils of Outsourcing

An illuminative case study in the Harvard Business Review, “When Outsourcing Goes Awry,” explores the dilemma faced by a hospital after it outsourced its anesthesiology services.

The hospital selected a company, cofounded by a former doctor at the hospital, to staff and manage its anesthesiology department. But struggling financially, that company began bouncing paychecks to the doctors they contracted with to provide the anesthesiology. It also failed to pay a $300,000 performance bonus the doctors group was owed.

After a year, the hospital renewed its contract with the provider, but the provider and the doctors group could not come to terms on a contract for a second year. The anesthesiologists continued working without a contract.

Not surprisingly, this situation blew up in the hospital’s face, with the doctors group threatening to stop their services, and the provider promising to sue the hospital if it interfered in its dispute with the doctors.

Lessons for Outsourcing and Contract Management

There are several important lessons about outsourcing and contract management that can be taken from this case study.

1. Before entering into an outsourcing contract, thoroughly investigate the competitors in the market.

The hospital was approached by its former doctor, who sold them on the benefits of hiring his company. With 15 other hospitals as clients, his stellar medical reputation, and his previous relationship with the hospital, it’s easy to see why his company was alluring. However, it had serious problems — undercapitalization and financial mismanagement — at should have raised red flags.

Once the hospital decided to outsource, it should have analyzed the financial strength, performance history, and contract terms of all potential providers, starting with the company they were already considering. This process would have allowed the establishment of benchmarks against which to compare their former doctor’s company. It probably could have saved the hospital the trouble caused by a poorly run provider.

2. Be clear about objectives for outsourcing.

In this case, the attraction was to the well-respected doctor. But medical skill was not what the hospital was outsourcing. It was hiring a company to administer doctors not be doctors. Yet it failed to focus on the provider’s administrative skills, which proved to be lousy.

3. Define performance requirements in the contract.

At its essence, outsourcing isn’t about contracting for services — it’s about contracting for results. Once the objectives for outsourcing are understood, the contract should be structured in unambiguous terms so that if those performance objectives aren’t met, there will be consequences, such as financial penalties or exit clauses. In this case, no such well-defined performance metrics existed.

4. Foresee contingencies.

The hospital did not look ahead to anticipate how a failure to contract between the provider and the physicians could disrupt the hospital’s vital service. If the hospital had been more careful, it could have insisted on a contract clause that would have allowed it to break its contract with the provider if the provider and the physicians could not renew their contract.

5. Monitor and manage contract performance.

The provider’s poor financial situation was already becoming apparent when the contract was renewed. How could the hospital not know this? Even without switching to another provider, the hospital could have renegotiated contract terms to protect the hospital from exactly what ended up happening.

Perhaps the hospital’s biggest mistake was its lax contract management. The hospital would have benefited greatly from an automated contract management software that monitored contract data and kept the hospital abreast of the provider’s business situation and its relationship with its doctors.


With proper contract management software, the hospital would have identified the looming problem and been able to take steps to prevent it.