web analytics

Is it a Bad Idea to Pay a Lean Consultant Based on a Percentage of Cost Savings?

Screen Shot 2014-03-26 at 7.09.38 PMThe price paid for most management consulting work is based on either a daily rate or some variation of a flat-rate fee based on what is being delivered. Enterprise software pricing is also often fixed. In both cases, the client pays this with some expectation of benefits and even an “ROI” for the customer).

When I worked as a Lean healthcare consultant for J&J, we would sign flat-rate contracts with our clients that were based on the number of weeks we would be on site (and how well the client could negotiate with our leaders) and the results we expected to get based on past projects (the value to the client).

I sometimes hear about a Lean consultant who will work for a client for no up-front fee. The consultant gets paid only a percentage of cost savings that are realized (and the travel expenses). I’m not sure that’s a very good idea and this blog post is a chance for me to share my thoughts and for you to comment. This might be a bit controversial and there might not be a “right” answer, so let’s please have some respectful debate.

Working as an independent consultant, I charge a flat rate (plus travel) for the short assignments I carry out, such as a one-day site visit or a “kaizen kickoff” event that might last a few days. This flat rate includes prep time and follow up activity (to avoid having to track and/or charge some sort of hourly rate for that). I try to keep the pricing simple. When I’m paid as a speaker, that’s based on a flat rate, as well, one that’s mutually agreed upon.

The price for a consultant (or a speaker) is ultimately set by the market. It must be a price the client can be happy with (leaving them with more value than they paid) and something I can be happy with (a good income for me and enough to pay for taxes, CPA fees, insurance, and other overhead that comes with running a business). Our professional services pricing at the technology company KaiNexus is generally handled the same way – a fair, mutually agreeable fixed price based on the services (and value) that will be delivered.

You might ask, “Wait, but don’t you guarantee your work? Doesn’t the customer determine value and worry about that, not time spent?” Well, sure. Like many consultants, I guarantee my work. My contract always says the client can cancel for any time, for any reason, and they can ask for a refund if they want. Nobody has ever asked for a refund. I rarely get pushback on my quoted price, which maybe means I’m not charging enough, but there’s more to life than absolutely maximizing the price I get for each engagement.

The value of consulting work can be subjective or it can be measurable (or both). The value can also be long-term or there can be short-term benefits (or both). This is where I think a “contingent” fee can possibly cause more problems than it’s worth.

Like many things in life, contingent or “shared savings” deals might sound good at first, on the surface, but maybe aren’t that good in practice. One parallel I’d draw is that it sounds good to offer a percentage of cost savings to employees who participate in a suggestion box system. At first glance, you’d think that people like money, so therefore paying people for suggestions would be “win/win” for the company and the employee.

But, in practice, these “pay for improvement” incentive approaches quickly get dysfunctional (as described well in the book Ideas are Free and addressed a bit in our Healthcare Kaizen series). As Daniel Pink said so well in the book Drive, incentives (such as sales quotas) work… but they have side effects and that needs to be considered. I think Dr. W. Edwards Deming would have had some strongly-worded thoughts on this too.

For example, he said on individual merit ratings…

photo-2

I think the same thing would apply when deciding “merit pay” for a consultant.

You can’t blame a client who doesn’t know better for thinking “shared savings” is a good idea. It sounds good. They might think, “There’s no risk” or “The consultant is guaranteeing results.” But I’m not sure either of those statements is true.

For one, the results a client gets (measurable or immeasurable) are not just a function of the consultant’s skill and effort. A lot of it depends on what the client does (or doesn’t do) and how much leadership they exhibit (or don’t). My advice to consultants would be to not take on these arrangements unless you’re really good at selecting clients who you know will put their all into this.

When I worked for J&J, we sometimes discussed doing a “contingent” deal if the client was balking at the price. But, we decided to not do this for multiple reasons, including the ones I bring up below (which should be viewed as my personal opinions, not J&J’s). Our leaders also decided that if we couldn’t convince somebody of the value of our work upfront, then we shouldn’t be doing it.

1) Lean is not primarily about cost savings

If you’re working solely for a percentage of cost savings, that might drive decisions that aren’t in keeping with generally accepted Lean principles.

Lean isn’t a “cost cutting” system. It’s a system that focuses on improving flow (reducing delays in a process) improving quality – these are the two pillars of the Toyota Production System and they go hand in hand (improving one improves the other, and vice versa).

From The Toyota Way Fieldbook:

photo-3

Here’s a great post by Bill Waddell on this topic.

As has been said, costs are something to be measured, not something to be managed. They are measured (as an end result) not managed (trying to directly reduce them).

It’s easier to measure costs (or increased revenue) than it is to measure other factors. Well, you can measure safety, but how does the consultant share the benefits of that? If the hospital prevents 10 patient falls, does the consultant only get shoved and knocked down once? How do you share the savings of reduced patient waiting times in the emergency room? Reduced waiting times might result in higher patient volumes, but that doesn’t always mean the hospital gets paid more… so how does the consultant share that savings?

I’d be afraid that “sharing cost savings” would drive too much focus, for the client and the consultant, on cost.  Lean is about “SQDCM” – or safety, quality, delivery (on-time delivery or reduced waiting time), cost, and morale. These are the core measures, the balanced measures, you tend to see in a Lean organization.

Shared savings contracts might be most appropriate for methodologies that are solely about cutting costs. For example, there are specialized consultants who will come into a hospital and tell management how many people to fire, based on spreadsheets and benchmarks (the type of consulting I’d never want to do). If management only cares about cost cutting, and the consultant is fine with that, then this type of deal might be just fine. But, not for Lean.

2) It’s not Lean to drive short-term costs

Lower costs (or better financial performance) should be an end result of doing all of those other things well (safety, quality, waiting times, staff morale). If a hospital improves quality and fewer patients fall and get pressure ulcers, the hospital might save money (since they generally aren’t reimbursed for preventable errors). That sort of cost savings is a good result (good for the patients, the staff, the hospital, and the payer), but it’s not “cost cutting.”

Dangerous cost cutting might be short-term cost cutting. Principle #1 (the first principle!!!) of The Toyota Way management system says to make decisions based on the long-term, even at the expense of the short-term.

Short-term cost cutting could be driven by layoffs or cutting of services. That’s not beneficial for all involved (it might be bad for staff, patients, and the community).  I want to do a good job for my clients, but I don’t want to be pressured into short-term cost savings. If I had a client who wanted to use Lean methods or Kaizen for short-term cost savings, I’d just walk away and refuse that work – that’s not really Lean.

If Lean is more like farming than hunting, is the consultant willing to wait years to get paid when the seeds that are planted finally germinate and yield crops? What if the right decision in a situation is to spend more THIS year to reduce costs over the next FIVE years? How does that get divvied up with a consultant and when?

3) You have to be careful about “soft savings”

There’s a lot of “funny money” accounting that takes place with Lean (or other types of projects and consulting engagements).  As a friend pointed out, a consultant (or an internal Lean team) might claim something like this:

The improvement saved 10 minutes, therefore it saves 10 minutes x 10 nurses x 50 times a day = 100 hours / day x $40/hour = $4000/day x 365 = $1.5 million a year.

That’s “soft savings.” Freeing up time is good, but can you give the consultant a percentage of those hours? No. A reasonably savvy CFO would, quite reasonably, be a stickler and ask if you’ve reduced overtime or other payroll costs by $1.5 million. No? Then, it’s not savings. It can’t be shared with the consultant.

Freeing up time might allow nurses to provide better patient care, which might lead to fewer errors, which is good for all, including saving the hospital money (if the payment mechanisms reward quality).

But, hospitals always have MANY initiatives going on, simultaneously, to free up nurse time and to reduce errors. What percentage of the prevented infections were due to the Lean initiative? How would you ever calculate this? Does it matter, unless you need that number to decide how much to pay the consultant?

4) Shared savings might lead to lying, arguments, and lawsuits

Good consultant/client relationships are built on trust and mutual respect. So should the relationship between employer and employee. But, that’s not always the case.

Any time you have incentives where a percentage of cost savings are shared with an employee (through the suggestion box or Kaizen program) or shared with a consultant (through their contract), then you’re bound to have arguing.

The client has a natural financial incentive to downplay or sandbag the cost savings number. The consultant has a natural incentive to exaggerate (or “fully capture”) cost savings or revenue increases. I don’t want to be in the middle of arguments like this. I’d especially like to avoid situations where there’s ill will and the possibility of lawyers being brought in.

So, what do you think? Am I a coward who is rationalizing not taking on “at risk” work (and were the J&J consulting group leaders cowards)? Or, are clients and consultants who agree to these contingent contracts all making a big mistake?

What are your thoughts and experiences? Share your thoughts and comments and please state of you’re a consultant or a client.


About LeanBlog.org: Mark Graban is a consultant, author, and speaker in the “lean healthcare” methodology. Mark is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as the new Executive Guide to Healthcare Kaizen. Mark is also the VP of Customer Success for the technology company KaiNexus.

Related Posts Plugin for WordPress, Blogger...
Please consider leaving a comment or sharing this post via social media.

47 Comments on "Is it a Bad Idea to Pay a Lean Consultant Based on a Percentage of Cost Savings?"

Trackback | Comments RSS Feed

  1. Jamie says:

    Great article

  2. Ali says:

    Great ! I liked the simple calculation of soft saving. I worked on a project where I cut down the patient time on the ventilator by 16 hrs , which can be calculated as less time in ICU, minimizing risk of getting complications such as VAP (Ventilator associated Pneumonia). Over the year it is millions of dollars.

    • Mark Graban
      Twitter:
      says:

      Ali-

      OK, that’s great that you helped with that improvement and I agree there would be patient benefits and financial benefits.

      But, to the main point of this post, let me ask — could you be more specific than “millions” if you were trying to get paid based on a percentage of the savings?

      I’d argue you probably could not. Getting paid X% of a vague number like “millions” doesn’t work for reasons I spelled out in the post.
      Mark Graban recently posted..Henry Ford & Hospitals, Nearly 100 Years AgoMy Profile

  3. Ali says:

    I agree with you Mark in regards to your main point. I can understand the percentage payment option if a certain project has a limited life time, but process improvement projects are ongoing process , so should I get a percentage of saving after 10 years ? Yes ! No ! mean while to sustain this change, should I frequently visit the site ? such questions must be clear as we write the contract.

    • Mark Graban
      Twitter:
      says:

      Yeah, I’m not sure what consultant wants to wait 10 years for payment based on a percentage of those savings? Since these ARE long-term changes, I don’t think a contract should be on a percentage of short-term savings.

  4. Dale Schattenkirk says:

    The question; I believe, is hiding the problem with our industry. As Lean practitioners we should practice what we preach and improve our industry. The best relationship between a client and consultant is to create a shared goal. Shared in both vision, reward and risk. ROI is not always dollars. We have a partner (client) that their goal is to reduce LOS and readmit rate by 50%. This will improved patient outcomes, staff engagement and dollars saved. The key to achieve that ROI is both parties need to create a solid shared plan from leadership to the bedside. Everyone knows the goals, everyone knows the expectation and it’s measurable in both milestones and deliverables. Simple model that keeps everyone happy and prevents perverse incentives. Used this for years with great success – our internal success measure is – all clients we have used this model with have either rehired us for other engagement or strongly referred us to other clients.

    • Mark Graban
      Twitter:
      says:

      Thanks for your comment, Dale.

      I absolutely agree that the goal of any Lean consultant is to 1) practice what we preach and 2) improve the clients and the industries we work in. Some large general consulting firms have latched onto Lean to add it as a “capability,” but it seems like just another way to make money for them. The best Lean consultants are deep experts in this field and part of practicing what we preach is being customer focused and delivering value. When a client is satisfied, everybody wins and the consultant gets more work (and referrals to others clients). The best consultants generally don’t do any marketing other than having a website… because they have happy clients.

      If somebody “hangs out their shingle” as a Lean consultant after having taken a one week class, they might fool somebody and get one client, but they likely won’t get many more if they aren’t helping deliver results.

      Yes, I agree that a consulting relationship needs to have shared goals. And those goals have to include more than cost and the bottom line.

      The problem I have with a “shared savings” model is the only savings that’s shareable is money. That incentive will drive all but the most disciplined consultant to chase dollars.

      As you know, measuring results in healthcare is messy. You know LOS was reduced by X… knowing how much of that was due to your Lean efforts and how much was due to the community building a new long-term care facility is pretty unknowable. And how to turn that into a precise dollar amount to be shared with the consultant. That’s too complicated to figure out definitively… hence the concern about fighting over the amount saved to figure out the amount shared.

      I’m still not convinced that a shared savings contract agreement would lead to much more than short-term cost cutting focus… and if we are to practice what we preach, we can’t call that Lean if that’s what’s happening.

      Maybe you’re more discipline and more ethical than most, Dale, but I don’t see “pay for performance” working that well generally. Or, it will work and create side effects.

      What do you do to prevent those dysfunctions or side effects, Dale?
      Mark Graban recently posted..Henry Ford & Hospitals, Nearly 100 Years AgoMy Profile

  5. Mark Graban
    Twitter:
    says:

    Comment from Michael Ballé on Twitter:

    @MarkGraban It’s a terrible idea! So easy to damage the client by cutting costs! Flat fee keeps us honest (as honest as a consultant can be)

    Mark Graban recently posted..Lean Thinking: We Don’t Blame Individuals for Systemic ErrorsMy Profile

  6. Paul says:

    Mark,
    There is no question that “shared savings” is a bad idea. This was done for years in the building energy consulting industry. It led to very onerous tracking legal structures that took complex documentation to ensure the payments were fair. It also establishes targets early in the process that nay not be relevant later on, but they continue to be the targets because they are embedded in long term contracts. Plus, any complex contract ALWAYS leads to lawsuits. That is the clear evidence of the industry. And for something simple like money saved from reduced energy consumption

    LEAN in Saskatchewan is not about saving money. It is about better health, better care, better value and better teams. Those are the clients goals. Not sure how you monetize those goals. the decisions on those goals are made by patients and clinical staff, supported by managers and Executive. Lean consultants are only showing the path to “see” the waste and show the structures for finding solutions. They do NOT make any decisions, or even suggest solutions. (We have clearly experienced this in our work on the 3P Project for a project in Kelvington SK where the project “saved” $2.6M, but that wasn’t even close to the biggest “Betters” the project achieved) How can the Lean consultant claim a portion of the savings if they don’t own any of the solution?

    Paying Lean consultants based on savings would not only cause over-processing, it would also lead consultants to own the solution. This is in direct conflict with what JBA is teaching in Saskatchewan, and contrary to the best practices that underpin the Virginia Mason success, not to mention Toyota. It even undermines what Mr. Shattenkirk said in his interview your blog post is based on.

    Shared Savings contracts are a very bad idea for Lean Healthcare. You are on the right track.

  7. Dale Schattenkirk says:

    I was told a saying once “never argue with someone who buys ink by the barrel” This simply means that this is Marks Blog. The people who follow it have a great deal of trust in Mark (with good reason) and his perspective and outsiders such as myself have little chance of changing stated opinions. That’s the joys of social media.

    I understand what Paul is saying and as with any blog / social media it takes a lot of effort to try and get to a shared understanding. My simple input is the misconception that “savings” only equals dollars. We have worked with Canadian ministries to identify the best way to measure savings based on patient / client / resident satisfaction and improved outcomes. This equals value for dollar and it’s built by partnering with the health system to identify their strategies and how to measure that they have been achieved. It has to be owned by everyone that are improving the system.

    I appreciate the opportunity to discuss this but I will not get involved in a war of words on a blog with the only true casualty being the Lean methodology.

    • Mark Graban
      Twitter:
      says:

      Dale –

      I think people are disagreeing with what you are saying. I don’t think they are disagreeing with you because you’re an outsider. The blog isn’t some insider’s club here.

      I think we are all in wild agreement that are important savings OTHER than cost. We get that.

      I don’t think disagreement is a “war of words.” Good grief. I think the most outrageous thing said here in this whole discussion is your implication (which I don’t understand) is that our disagreeing with you is leading to Lean being a “casualty.” That frankly makes zero sense to me.
      Mark Graban recently posted..Did GM Forget that the Customer Should Come First? And Who Forgot Exactly?My Profile

  8. Paul Everett says:

    I fully agree. I made that mistake, twice. Both times the client defaulted, costing me about 50k. Not worth the hassle of going after the money. I guess I’m a slow learner. I only worked for a fixed daily fee for the most part. But, I don’t have to deal with that anymore, being now 100% retired.

    Paul

  9. N.O. says:

    Maybe the genius of the “shared cost savings” contract is:

    1) Clients want to pay less if they can
    2) Lean isn’t really about cost savings
    3) This contract structure disincentivizes them to focus on cost savings. If they can make a bunch of improvements (like quality and waiting time and staff satisfaction) with zero direct cost savings, they get free consulting

    That might be just the Leanest thing I’ve ever heard. Brilliant.

  10. Dale Schattenkirk says:

    I appreciate the comments Mark but you are one of the most media savvy people I know. You know as well as I do your followers follow you because you share the same values (primarily) so I could debate till the cows come home the strength of partnering with a client and never get anywhere. Some would say that’s the point, discussion, I personally would say that’s sadly something I don’t have time for. I am completely open to back and forth verbal dialogue in person – brainstorming / 5 why’s are a critical tool to get to the root of a discussion but this media form does not allow that to efficiently and respectfully happen.

    All I can say on the titled topic is we focus our ROI (healthcare) using many variables:
    1) Reduction of hospital acquired infections (has positive patient and dollar savings)
    2) Reduction of falls (has positive patient and dollar savings)
    3) Reduction in UTI’s (has positive patient and dollar savings)
    4) Reduction of pneumonia (has positive patient and dollar savings)
    5) Appropriate LOS (has positive patient and dollar savings)
    6) Reduction of readmit rate both 7 and 28 day (has positive patient and dollar savings)
    7) Reduction of ALC days (has positive patient and dollar savings)

    The list goes on.

    These all create an ROI. We have never had a client (partner) renege on an engagement that a ROI formula was used. Maybe we are just lucky. All I know is we are fortunate to work with the great healthcare providers of Canada to help improve care for all the people it serves as we teach them the Lean Six Sigma methodology so that they can continue on without us in as short of time as possible.

    • Mark Graban
      Twitter:
      says:

      Dale, I think we are basically talking past each other right now.

      1) I have no idea how a “root cause analysis” would get to the root of a difference of opinion. Why do you hold your view? It’s your experience… that’s the end of it, right?

      2) I completely agree (as I originally wrote about) that there are multiple benefits to Lean, as you articulated (and then some)

      The difficulty (as I wrote) is putting an exact $$ figure on items 1 through 7 that you listed. If you are asking for a % of savings, that % has to be calculated from a number — an exact number.

      It would be helpful if you cared to share details about that. Do you and the client accept a lower range of a $ savings estimate from each of those as the basis for the % that goes to you?

      That time spent getting to a specific savings #, so you can get a % of that, seems like a lot of effort that doesn’t move the client forward.

      If it works for you and your clients, then great. I just wouldn’t recommend that approach to other consultants or people looking to hire a consultant. That’s great if you have a differing view.
      Mark Graban recently posted..Good Questions, But With Some Misunderstandings about Lean HealthcareMy Profile

      • Dale Schattenkirk says:

        Thanks for your questions Mark

        Question 1) – I never said RCA I stated “I am completely open to back and forth verbal dialogue in person – brainstorming / 5 why’s are a critical tool to get to the root of a discussion” If we were all in a room and asked your initial question – “Is it a Bad Idea to Pay a Lean Consultant Based on a Percentage of Cost Savings?” and you responded “yes” the next question would be “why” hence creating the open discussion and continued discussion.

        Question 2) This discussion is way more complex than a blog could ever properly unearth. We never come in to focus on specific and single metrics. Health care needs system transformation not a project by project approach, so the key metric is the one that is important to focus on. Within Healthcare OALOS is a key system driver that all parts of the system contribute to (I am speaking of Canadian Health). So if you settle on partnering with a region and share the goal of reducing OALOS by say 25% over two years that would be the “primary metric”. Recognizing there is only one sustaining measure for any system that is fed by many cascading metrics.

        To your question is it difficult to get to agreement on the value, the answer is “not really”. The organization has strategic goals, all we do is support them not change them (unless they are way out of line but that’s a whole different story).

        The calculation you are looking for is a hybrid of hourly versus holdback. Once the goal is shared by the two parties then the engagement plan is created – focusing on system transformation in leadership / infrastructure / capacity to achieve the key metric. This ensures internal capacity to create self-sustainment is achieved (removing consultant dependence)

        Once again these are my opinions and how we work. It does not surprise me that not many answering this blog post accept (thanks Paul) my view and that’s completely fine. The blog post was biased away from my views and interestingly the Sask story that this blog post was written seemed to be the only Sask story Mark never commented on?

        • Mark Graban
          Twitter:
          says:

          Yeah, I answered my blog post title question with a “yes” and I wrote 1500+ words explaining my views on “why.” Talking about this in person isn’t going to happen… so I blogged about it. That’s all we got.

          I didn’t feel the need to comment on the Sask. article you were interviewed in. I didn’t want to criticize your approach in front of your hometown folks. That might have been pretty rude.

          But, it did prompt me to write the blog post. My intent wasn’t to call you out, but to talk about this issue in general. Like I said, other consultants promise this “no risk” percentage-based approach and the group I used to work for considered it (or at least talked about it).

          Thanks for sharing your perspective. The point wasn’t to criticize you or gang up on you, Dale. If 90% of the Lean world disagreed with what I wrote, I’d hear about it via comments here. People are by no means afraid to disagree with me here, trust me.

        • Mark Graban
          Twitter:
          says:

          Dale wrote:

          To your question is it difficult to get to agreement on the value, the answer is “not really”.

          OK, if that’s your experience. You’re better at that discussion (agreeing on $$ value) than I would be, so great.

          The calculation you are looking for is a hybrid of hourly versus holdback.

          What does that mean in plain English?

  11. Paul Everett says:

    One of my great teachers separated the words accept, agree, differ and disagree as a way of talking on the same plane of communication.

    Accept: Consent to take in and consider. This does NOT imply agreement, only to think seriously about it.
    Agree: Consent to do, or act on. Thus, both parties are aligned in the effort, whatever it is.
    Differ: To come from a different point of view while retaining the relationship and wanting to understand the other and to be understood.
    Disagree: He said “This means war”. His meaning was that if you are in deep disagreement with a course of action, the other is now your enemy. So, ‘disagree’ is a very harsh, violent term.

    Unfortunately, we do not generally use the terms effectively. We use ‘disagree’ where we really mean ‘differ’. We do not even recognize acceptance as deep consideration.

    Anyway, I thought I’d just throw this into the mix. I also think, looking back, that being a consultant is a very, very tough and demanding job that often demands a high price in time away from family, of nights in hotel rooms, of restaurant food that gets ‘old’ no matter how good, and the biggest price of all—seeing good work thrown away after a while by troglodyte management, usually when the top dog changes. Nothing is forever. (Believe it or not, there is a single Japanese word for that. From memory, I think it is “mugo” and if I’m wrong, I’ll post the correct word later.)

  12. Paul Everett says:

    Here’s the correct term: Falling flowers and leaves are considered special beauty in Japan though because of the concept of “Mujo” – nothing lasts forever-

    This is from my son’s Japanese fiance’.

  13. Mark Graban
    Twitter:
    says:

    From Michel Baudin’s blog:

    Michel Baudin’s comments:
    I agree with Mark, and I am happy when clients report that they get ten times in benefits what our services cost. A daily fee for work done on site and a fixed fee for deliverables for offsite work are simple arrangements; paying a percentage of benefits, whether cost savings or revenue increases, is a complicated arrangement, conducive to misunderstandings and disagreements.

    Mark Graban recently posted..Good Questions, But With Some Misunderstandings about Lean HealthcareMy Profile

  14. Merrill Jackson says:

    I think part of the question has to do with how a business measures savings. Most of the time we rely on the accounting function to define what constitutes a savings. They will use the Sarbanes Oxley guidelines as they should – for their function. But Sarbanes Oxley is about reporting the businesses functions for the purposes of taxes etc. A friend of mine, Kumen Jones, was a professor of accounting at ASU. He helped write Sarbanes Oxley. Kumen also did consulting, in one of his classes he passionately and clearly pointed out how leading a business based on accounting metrics (e.g. savings) was akin to driving a car using only the rear view mirror – as all accounting metrics are lagging indicators.

    So, I think Mark is correct in questioning the linkage between too much reliance on a lagging indicator metric when the efforts are focused on leading a change. The amount of time, and the amount of “noise” in the metric will make the cause-and-effect relationship between the change and the “savings” very cloudy indeed. It is much better to identify measures of success that are more closely linked to the effort to improve the process, knowing that sometime later, the stronger process will produce the expected savings.

  15. James Allen says:

    Too many variables to “bet on the come”. Bartering for money, sharing savings is antipathetic to the purpose of lean transformation. As a consultant I train and teach the what, when, why and how of operational excellence and lean transformation. Actual implementation that follows the engagement is totally up to the client. My guarantee comes in the form of likely ROI metrics based on statistics, time and “proper”, monitored implementation.

    My SMITH CQ methodology describes the “portion” of savings (based on multiple regression) that may be attributed to each Lean activity but should Not be used to determine financial compensation for the consultant. Besides the great reasons given by each of you in this blog, a consultancy that exposes itself to such subjective sharing plans is crossing the “means and methods” line and will likely find themselves in court the first time an implementation fails… :)
    James Allen recently posted..Strategic Planning the First ElementMy Profile

  16. BS says:

    Shared savings is a bad idea for a Lean engagement. First off, I could go into many (most) hospitals today and rapidly improve LOS and readmits with the right sr. leader sponsorship. It would be a great bonanza for me and oh, I wouldn’t even have to use that messy lean stuff, and even if I did I wouldn’t have to worry about whether the culture could sustain anything.
    Second, my experience with more than one consultant is that they are more than willing to game the system to their benefit with the approval of senior leadership. We had a consulting firm that actually claimed LOS savings for the time period before they even showed up based on their claim that the organization wouldn’t have started to focus on LOS even they weren’t considering a contract. Worse yet, a senior leader went along with this because it actually made him look smarter for hiring this consultant firm.

  17. Stuart Singer says:

    Mark,

    I completely agree with your assessment. I would emphasize several points. In the first place, any Lean improvements that may result in demonstrable lower operating costs may take months or even years to show those savings. Next, improving operational performance isn’t just about saving money. Better customer service, higher staff productivity and job satisfaction, etc. may not show immediate and clear cut savings but does that mean that those efforts aren’t worth the cost of improving them? Not to my way of thinking. Lastly, I see Lean as a way of thinking that needs to be extended to every single employee and not just viewed as some cost cutting tool used by a handful of trained individuals. The goal of improving operational performance isn’t just about saving money. In fact, improving performance may actually increase costs but is anyone going to argue with spending money that significantly reduces infection rates and other patient injuries or reduces patient waiting times?

  18. Jens R. Woinowski
    Twitter:
    says:

    Mark,

    this post triggered a lot of good discussion already, so I’m not sure if my pinch of salt will add much. To me it boils down to a simple question: Do you want a “1990’s Western Hemisphere Cost Cutting” type of Lean (I call that the “Dark Side of Lean”), or do you want true Lean, which puts customer value in the center?

    In the end, there is a limit to cost cutting: you can bring it to 100%. That’s called end of business (or defaulting…)

    Making more and better business with more customers, happier employees, and less waste is much more positive.

    Jens

    PS: With Lean healthcare there may be another problem when it comes to cost. In all cases where an insurance or national health service pays the bill, the patients are not the direct customers. In the best case, they are indirect customers (looong value chain). In the worst case, they are a cost factor in the business case of the insurances. So much for cost cutting.

  19. Jason Alvarez says:

    I would agree that most engagements would not be good fits for a shared savings model for all of the reasons stated. I have recently been working to undo a bad decision based on an IT consulting recommendation that a function could go away with their software and service which helped prove ROI for their product. Too many bad things can happen when dollars is driving decision making and not a product of. Also this could drive some bad behavior in the consultant and their approach to building sustainable improvements.

    I guess I have a follow up question. If you had agreed upon objectives understanding of the relative value of those (based on your customers controllers valuation of those targets) and could reach an agreement ahead if a shared savings model might work while protecting the principles? Now that would require a lot of effort on your customers part but would better help them understand ROI. But if they did the work and you could reach an agreement would that work?

    Is a blended model also a possibility? Reduced rate with a shared savings kicker at the end of 12 months based on agreed upon objectives ahead of time?

    Again I agree but I wonder if there might be some gray too.

  20. Joe Scully says:

    I believe that % saved agreements don’t work for subjective clinical benefits for the reasons enumerated. In my experience a % saved agreement works best for capital equipment acquisition where you are dealing with hard costs clearly enumerated. Thanks

    Joe

  21. From Twitter says:

    Rob van Stekelenborg ‏@dumontis

    @markgraban Bad idea IMO. Disengages the client. I don’t accept pay-for-performance contracts.

  22. Dale Schattenkirk says:

    So if we completed a Measurement System Analysis (MSA) we would find that the question “Is it a Bad Idea to Pay a Lean Consultant Based on a Percentage of Cost Savings?” is biased towards “bad” due to how it is written. The initial blog by Mark also indicated his opinion that he felt it may not be the best idea (it’s his blog so that is his right).

    As Lean Six Sigma practitioners we know that the first principle of Lean is about understanding value from the customer’s point of view.

    This blog was written from a story that was questioning value for money or in our world what the consultant charges and the customer receives (value). What if we posed the question in a non-biased manner: something like?

    Question -“As a consultant how do you understand the client’s needs and share risk / reward them”
    Risk defined – the client is risking their dollars that we as consultants have the skills to deliver what was requested
    Reward define – the client received the deliverables and outcomes to achieve their stated goals
    Thoughts?

    • Mark Graban
      Twitter:
      says:

      This is a discussion and we don’t need to do “5 whys” or an “MSA” or whatnot. We can share our experiences and perspectives in a professional discussion, as we’re doing.

      I would guess if I had posed the question as “Is it a good idea…” that the responses would be “no” with the same points made. Asking the question your way is much more vague and wouldn’t have prompted the same discussion (and what we’re doing is discussion, not “problem solving”).

      Value is defined by the customer… so the “right” price and “right” contract is something the customer agrees to. End of story.

      I just wouldn’t recommend this “shared savings” approach to clients or to new consultants and I’ve made my case.

      There’s no “right” or “wrong” answer here that applies to everybody.

      There are many people disagreeing with your stance, Dale. That doesn’t prevent you from continuing to do business in a way that serves you and your clients well. That’s what really matters, right?

      Best regards,
      Mark
      Mark Graban recently posted..Good Questions, But With Some Misunderstandings about Lean HealthcareMy Profile

      • Dale Schattenkirk says:

        Hey Mark
        I did not think I was problem solving but rather discussing as you indicated. I just posed the question in a different manner. A simple analogy would be:

        If you take your car into a mechanic and tell them it’s not performing the way it should and the brakes feel soft. Your expectation when you get your car back; after paying the bill, would be that both the brakes (safety) and performance were improved – value for money.

        If those outcomes were not achieved would you get your money back? Would the mechanic keep working on the car until it reach the customers satisfaction? Does the mechanic ignore you and walk away? Does the mechanic say you did not give them a good enough description of what you (client) wanted?

        The consultancy world is more difficult to measure than your car but the principles apply. In my opinion this is a shared risk / reward model? I trusted the mechanic to reach my goals – what happens if they don’t? That’s the question I am asking because I am very curious on how others measure that value for dollar.

        • Mark Graban
          Twitter:
          says:

          Dale – you keep bring up problem solving / process improvement tools like 5 whys and MSA. That’s why I felt the need to point out this is a discussion, not a workplace improvement exercise.

          As I said in the post, I share risk in that I offer a refund if a client isn’t happy with me, my work, or my approach. That’s quite a risk, so I need to do good work and try to do the right work.

          Beyond “not asking for a refund,” I try to gauge if my clients are happy by talking to them and by seeing what repeat work I get (although the goal is to help them, not get repeat work forever), and what referrals I get to others.

          I don’t want a contract with my mechanic that has “shared savings” for the cost of future repairs that are prevented or something like that. And auto repair is less complex than consulting, you’re right.

          I think you’re making the case that it’s too hard to measure and share “savings.” You’re making my case for me.

          Measuring “value for dollar” includes many short-term and long-term measures other than cost savings, as I said in the post.

  23. N.O. says:

    Dale – you’re blaming Mark for asking a “biased” question? That’s silly.

    You’ve commented multiple times and, with all due respect, you aren’t making a very clear case for your view here, other than you say it works for you. OK. Good for you.

    • Dale Schattenkirk says:

      Hello N.O.
      By no means am I blaming Mark at all I’m just trying to reframe it in a way that would continue the discussion. All I’m asking is how do we as consultants ensure we give our clients value for dollar if we don’t identify some type of ROI for our client?

      When I bring up ROI it seems to move towards only thinking from a dollars savings, there are many ways to measure ROI. People that invest in environmental organizations do it not just for money but they place a high value on that organizations ability to sustain the environment that’s their ROI.

      As indicated my opinion in this discussion is to share the risk / reward with the client to create a true partnership (because without sharing risk and reward their is no partnership). As with the mechanic analogy it makes sense to me? I am asking how others ensure their client is happy with their outcomes? We (consultants) are service providers and as such should we not be held accountable to the service we provide in some way?

      • Mark Graban
        Twitter:
        says:

        Dale – I think you are confusing two issues:

        1) How do you and the client measure value (we’re all in agreement that it’s not just ROI)?

        2) Should you have a “shared savings” contract that shares a % of a very precisely measured and stated cost savings. That’s where we differ.

        There’s not really any controversy over point 1. I’d prefer we discuss point 2, as that’s really what the post is about.

        I’ve had very happy clients that had ZERO short-term easily-measurable financial ROI but there were other benefits (like reduced turnaround time and reduced defects). Sometimes it’s not worth taking the time to turn that all into $$. The client thinks it’s not worth it and I’m fine with that, as an example of alignment and partnership.

        I’d suggest that if you’re arguing in favor of “shared savings,” choose a business that has a “shared savings” model. An auto mechanic does not do that.

        • Dale Schattenkirk says:

          Thanks for the point of clarity Mark. I think that may be where we differ. I don’t see point 1 and 2 as mutually exclusive. As requested let’s use a healthcare example of ROI based on reduction of LOS (baseline 10 days)(ELOS baseline 5 days) with a counter measure of 7 and 28 day readmission rate. Using a value of reducing LOS by 50% formula =(ALOS-(((ALOS-ELOS)/ 2)x.25)) all while at minimum not increasing readmission rates. Example calculation =(10-(((10-5)/2)*0.5)) giving a change or future value of 8.75 LOS. Easy for both parties to agree on this goal.

          Another point of clarity is I am talking about system transformation (within a Canadian system) not project based work (which I think most of us get called in to do). So to achieve this type of change homecare, long term care, public health, primary care, extended care, acute care, mental health etc. have to be involved. This is also talking about a full scale multiyear engagement. (We will use three years for this example)

          Year one would focus on training and development – leadership training and capacity building / internal capacity building (resources) / infrastructure creation. As this is being built there would be specific supporting projects that focused on the overall goal in services. i.e. LTC may focus on eliminating hospital admissions due to pneumonia or UTI’s for example – primary care would focus on increasing capacity to ensure all of the population has a primary care provider versus using emergency departments, public health could focus on immunization rates, home care would focus on increasing capacity and outcomes for home based clients so that people could be discharged into homecare easier. Year two would move into acute care quality improvement once the community based services were well on their way to embedding quality improvement as the way they do business all while focusing collectively on the ALOS goal (this would be part of the organizations strategic plan).

          Over the subsequent two years the transition would be to move away from consultant dependency to using their own internal capacity. All while the organization focuses on their key strategy of improving patient flow through the complete system – flow is measured not only in velocity but patient outcomes and health determinates.

          The consult model would allow them to be paid say 65% – 75% of their consulting fee and 100% of expenses as they work together to achieve the shared goal. At the end of each year they would evaluate the trajectory to the goal – milestones and adjust engagement accordingly as partners. By the time they get to the end of year three it would be easy to ensure the shared goal is met. Additionally all of the cascading metrics would support improved patient outcomes (positive thoughts) and patient flow. The consultant would then be paid their holdback.

          Obviously this is very brief description and there would be patient/client/resident input along the way. The dollars (once again in a Canadian system) could be evaluated as reduction of baseline LOS 10 – new LOS 8.75 = 1.25 days per patient reduced. At an average of say $1000 per bed day and 500 patients per year that would equal 1.25 x $1000 x 500 = $625,000 or within the Canadian system 71 more patients seen within the same cost envelope (our system is designed like cost centers not revenue generation). So the consultant does not receive payment based on the $625,000 but rather the achievement of the reduction in LOS shared goal = ROI that is patient/client/resident focused.

          • Mark Graban
            Twitter:
            says:

            OK, a few questions. So, you’ve clarified that you get paid SOMETHING and it’s not purely “only pay if you get results,” right? If you’re getting paid 65-75% of fee, what happens if the client isn’t happy with the first year’s training and investment in longer-term benefits? Would you offer a refund if the client wasn’t happy?

            To what you’re calling “ROI” on LOS, it’s still not the least bit clear how shorter LOS and freed up beds turns into a dollar “savings” number that is shared with the consultant (in the Canadian model). I the US, with hospitals paid per case, more hospital throughput could mean higher revenue and a better bottom line.

            Like you said, the Canadian hospitals generally aren’t paid per case, it’s a flat budget (and the exact budget approach might vary a bit by province, yes?).

            So freeing up beds means better patient care and shorter waiting times, but the same number of beds and the same number of nurses are needed, right? I don’t see “cost savings” to share. Costs might actually be HIGHER.

            With extended (longer than necessary) LOS, there’s often not much new care being provided (just waiting for discharge, meals, the patient being checked in on.. the acuity is pretty low just before discharge). It seems that costs might go UP with more patients being seen throughout the year since more tests and more procedures are being done, etc.? Might it be true that the province’s health budget is consumed faster?

            If there’s not a cost savings or higher revenue, there’s no ROI to be shared/split. That’s why I wouldn’t sign up for this approach. It’s way more complicated than it needs to be.

            • Dale Schattenkirk says:

              Hey Mark

              1) some models are simply a retainer not a percent (kinda like a lawyer). But yes that is the exact wording in the contract around repayment.

              2) that’s the point I seem to be having a difficult time getting across – ROI does not have to be a dollar amount. The client investment in the consultant is their investment – the return is the reduced LOS.

              3) the budget distribution per province would be based on their strategic plans and needs – they would be similar but have their own differences.

              4) correct that is better care – the cost savings are more of an avoidance cost – within the same budget we can see more new patients. The caveat has to be with reduced care giver workload, This is not about pushing patients through but rather making life easier for care providers to be by the bedside.

              5) very true, costs may increase overall but not significantly because patients that have to get into the system do. What happens is the hospital occupancy rate drops on average (which is good in Canada) balancing costs. Also “appropriateness” of treatment /tests etc. is something that is worked on in parallel with reduced length of stay. There is the old adage that a “built bed is a filled bed”. So if we are not watching this you are 100% correct the budget will be consumed faster.

              6) I refer back to point 1. The ROI is the agreed upon goal- not the $ value. So if the consultant contract was $100,000 to achieve the goal of reduced sustainable LOS and it was achieved then the health system received their ROI.(once again the Canadian system). I accept the comment that it could be complicated but; in my opinion, its the right thing to do and actually isn’t that complicated once its presented.

              • Mark Graban
                Twitter:
                says:

                Thanks.

                The reason you’re having trouble getting point #2 across is that you’re not using the same definition of “ROI” or Return On Investment that everybody else uses.

                It’s a financial metric. Dollars. That’s it. Canadian dollars, U.S. dollars… ROI is by definition dollars (or euros or pounds, etc.)

                ROI = [(Financial value – Project cost) / Project cost] x 100

                Anything that’s not express in dollar terms is a “benefit.” Length of stay reduction is a benefit, unless translated into $$ terms. Better staff satisfaction is a benefit, unless translated into $$ terms.

                • Dale Schattenkirk says:

                  I accept your definition in the purest of sense and as shown that value is present (the $625,000 versus $100,000 invested in my example) which can be calculate as per your formula to achieve an ROI of 525% (and as you note) the benefit is a reduction of LOS of 1.25 days both numbers mean the same but when presented create two different stories. As you and I argue adamantly and consistently the focus needs to be on the patient/client/resident outcomes not the dollar amount.

                  • Mark Graban
                    Twitter:
                    says:

                    Right. So having a contract that’s primarily about the dollar amount seems like a bad idea then.

                    We’re going in circles.

                    But, I think we’ve gained some clarity. Some of these “shared savings” contracts are not 100% based on the financial savings, as you explained it. A contract that is part fixes and partly based on shared savings would probably reduce the risk of everybody focusing ONLY on ROI, which was one of the main points of my post.

                    • Dale Schattenkirk says:

                      We can both completely agree that focusing only on the dollar is bad.

                      I think the main problem is how I initially presented ROI. As you post it ROI is only dollars (which is fair in the purest sense of the calculation). I take a less direct route to ROI through the “benefit” as you title it to get to the very same dollar amount that would be calculated via the ROI. This allows everyone to accept the goal – from the bedside- reduced LOS to the operations – reduce financial burden and the winners are the patient/ client / resident …….

  24. Kevin Martin says:

    Interesting read and certainly thought-provoking Mark. As a consultant, I almost always charge a flat fee which allows my group to have a singular focus on completing great work for our client. An at-risk model requires more management by both the consultant and client around compensation, which can be quite detrimental if not done correctly (as stated quite thoroughly in the comments above).

    However, I am not against using an at-risk under one condition: we must have a very open and honest discussion with the client about the specific challenges it will present and make certain the at-risk approach is a win-win (much like the discussion happening here). If we cannot come to full agreement, then it would not be used – much easier said than done.

Post a Comment

CommentLuv badge