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T E A C H I N G C A S E

An IT outsourcing dilemma at Sick Kids Hospital

Ron Babin1 • Mohamed Shazadh Khan1 • Kyle Stewart1

Published online: 16 November 2017

� Association for Information Technology Trust 2017

Abstract This teaching case is based on a true situation at

the Hospital for Sick Children, in Toronto Canada. The

case asks students to either assume the role of the CIO or to

advise the CIO in making a decision to outsource IT at Sick

Kids Hospital. The case requires students to understand

three important issues: First, while health care costs con-

tinue to increase, automation of information is an important

opportunity to streamline patient care and reduce costs in a

hospital environment. Second, IT outsourcing, relying on

external service providers to deliver complex technology

services, is a fundamental business strategy across all

industries and has great potential in the health care indus-

try. Third, hospitals and health care have unique require-

ments for IT outsourcing, particularly the critical

importance of patient data security and privacy.

Keywords IT outsourcing � Hospital information systems � Information systems security � Data privacy

Introduction

The Hospital for Sick Children (known as Sick Kids) is a

premier children’s hospital with a global reputation. It is a

tertiary institution, offering a large variety of specialist care

to children afflicted and affected by many serious medical

conditions. Founded in 1875, Sick Kids has grown from a

rented 11-room house to a 370-bed facility that carries out

leading edge pediatric medical research. Currently at Sick

Kids, the projected number of admissions per year is

16,500, treating over 100,000 patients per year and with an

annual budget of over $500 million.

Sarah began her term as CIO at Sick Kids in the

summer of 2015. After an initial review of the IT assets

including software applications, hardware, networks and

IT management, and professionals, she realized that a

number of critical IT services needed to be upgraded. Her

concerns were reinforced by a number of consulting

studies that had been commissioned prior to her arrival,

which recommended improvements in IT governance and

allocation of IT resources to support the existing systems.

One IT assessment report suggested that due to lack of

processes, multiple platforms, and aging information

technologies, ‘‘a much-needed overhaul is required in IT.’’

Another consulting study evaluated IT risk and concluded

that five out of seven areas were either medium or high

risk in terms of IT governance. Executive management at

Sick Kids were concerned that IT needed to be improved

and made more secure, to avoid outages and system

failures. 1

The executive management team were interested

in the benefits and costs of outsourcing, and had recently

held a discussion with an external advisor on this topic.

Selected slides from the discussion document are provided

in Exhibit A.

Sarah launched two important IT initiatives late in 2015.

Firstly, requirements were defined in order to issue a

request for proposal (RFP) to replace the core Hospital

information systems (HIS). The RFP was released in

& Ron Babin [email protected]

1 Ryerson University, 350 Victoria Street, Toronto, Canada

1 In May 2017, computer systems in most UK hospitals under the

National Health Services (NHS) were shut down by a malicious

software attack. The attack gained access through outdated software

running in most of the NHS hospitals. For more information see

https://www.theguardian.com/society/2017/may/12/hospitals-across-

england-hit-by-large-scale-cyber-attack.

J Info Technol Teach Cases (2018) 8:81–89

DOI 10.1057/s41266-017-0027-1

December 2015. By May 2016, the executive team had

selected an external HIS vendor.

Secondly, a key component of the RFP was a request to

operate or host the HIS outside of Sick Kids, in other

words, to outsource the operation of the HIS to an external

service provider. Members of the executive team were

developing an appreciation for outsourcing. The Peo-

pleSoft Financial and HR system had been installed by a

global consulting firm who had then proposed an out-

sourced application management service (see Exhibit B for

details). The HIS represents a healthcare-specific applica-

tion, while the PeopleSoft application is a more general

purpose system that supports organizations in many

industries. Table 1 below provides an overview of the two

systems.

Patient information within the HIS is governed by the

Ontario Personal Health Information Protection Act, which

defines the rules for collection, use, and disclosure of

personal health information. Most jurisdictions have simi-

lar laws in place, such as the Health Information Portability

and Accountability Act in the US and the Data Protection

Act in the UK. Personal information within the HR system

is also protected under government legislation such as

Canada’s Personal Information Protection and Electronics

Document Act.

The executives at Sick Kids expected that outsourcing

would reduce IT costs and improve the overall IT services;

the consulting firm had certainly given the impression to

the executives that IT costs could be significantly reduced.

For these reasons, Sarah realized that she and her IT

management team required a better understanding of the

risks and benefits of outsourcing as well as outsourcing

trends in the hospital and health services industry. She

needed to improve IT’s capability in order to continue

supporting core services and to help the hospital continue

its growth while maintaining its excellent global reputation

as a pediatric hospital. At a time when other hospitals and

large organizations were discussing Digital Transforma-

tion, Sarah needed to improve Sick Kids capability to

simply provide reliable IT services and keep the lights on,

and to support Sick Kids core services as it continues to

grow.

Healthcare spending growth

With the rising costs and budget restrictions to healthcare,

managers and CIOs of hospitals are always searching for

ways to reduce their costs and find a way to make their

organizations work more efficiently (Roberts 2001).

According to the Canadian Institutes for Health Informa-

tion (CIHI), the ratio of Health expenditures to GDP has

declined from 11.6% to an estimated 10.9% in the period of

2011–2015 (CIHI 2015). Hospital spending growth rate is

at 0.9% as of 2015 which is the lowest it has been since the

1990s (Canadian Institute for Health Information 2015).

Hospital expenditure per capita in Canada has increased by

3.5% throughout the period of 2014–2015 which is putting

a strain on managers and CIOs and forcing them to find

new ways to reduce costs.

According to the Canadian Institute for Health Infor-

mation (CIHI), total health expenditure was expected to

reach over $219 billion in 2015. This represents over

10.9% of Canada’s gross domestic product (GDP). 2

Despite this share reducing since 2009, there are still rising

costs within the healthcare sector. Hospitals account for

29.5% of total health spending which is continuing to grow

each year although the pace has slowed down over the past

few years. In fact, hospitals account for the highest portion

of Canadian healthcare expenditures with Physicians and

Prescription Drugs following behind at 15.5 and 13.3%,

respectively. Healthcare spending is expected to account

for $1804 per person in 2015. It is believed by the Cana-

dian government that ‘‘The possibility of technological

change could create cost savings due to process efficiency

or could generate cost increases due to new or expanded

diagnostic services and treatments’’ (Canadian Institute for

Health Information 2015).

The information systems support category increased

from 1.8% in 1999 to 2.4% in 2008 of hospital expendi-

tures. 3

A higher share for systems support may reflect the

increasing complexity and widespread adoption of elec-

tronic systems for clinical records, monitoring, and man-

agement of hospital functions.

The above literature shows that there is a slow increase

in healthcare spending and even in hospital spending itself.

With information support systems rising to 2.4% in 2008 of

hospital expenditures and 60% of the hospital spending

being used to compensate the hospital workforce, there lies

potential savings there are potential savings from labor cost

reductions for hospital IS support services. One suggestion

for cost savings and access to skilled information systems

support is the phenomenon of outsourcing.

Why outsourcing?

Executives typically expect outsourcing of IT services to

reduce costs and improve service through five enablers,

described below.

2 See Canadian Institute for Health Information (2015) National

Health Expenditure Trends, 1975 to 2015. 3

See Canadian Institute for Health Information (2012) Hospital Cost

Drivers Technical Report.

82 R. Babin et al.

1. Economies of scale External service providers are

expected to have sufficient size that allows them to reap

the benefits of the economies of scale, for example in

running telecommunication networks or data centers or

software development centers. The economies of scale

allow a vendor to deliver the IT service at a lower cost

than an in-house IT organization.

2. Economies of skill Outsourcing vendors focus on a very

narrow range of services and concentrate their human

skill acquisition and development in those areas which

are their core competencies. Their core competencies, a

concept defined in 1990 by Pralahad and Hamel, will be

different than those required in a hospital, or any other

organization (Prahalad and Hamel 1990).

3. Technology exploitation Many outsourcing vendors are

also technology developers and manufacturers, and are

experts at exploiting ongoing technology innovation.

Moore’s Law typifies this innovation, which predicts

that the cost of computer processing continues to

decline by approximately 50% every 18 months.

4. Labor arbitrage Outsource providers are able to move

digital activities to global locations where labor costs

are lower. Thomas Friedman describes the IT labor

arbitrage model in his 2005 book ‘‘The World Is Flat.’’

(Friedman 2005)

5. Transaction cost economics Ronald Coase defined the

concept of transaction costs in his 1937 paper on ‘‘The

Nature of the Firm’’ where he proposed that when

market transaction costs for providing services are

lower than internal transaction costs, organizations will

choose to buy from external firms for those services.

Researchers have applied transaction cost economics

(TCE) to the field of outsourcing, notably Bahli and

Rivard (2003), Dibbern et al. (2004), and Ngwenyama

and Bryson (1999).

Outsourcing in health care

For years, healthcare organizations have outsourced non-

core departments such as food service and housekeeping.

Now, managers and health professionals are attempting to

reduce healthcare costs and they are turning to outsourcing

in new ways to obtain high standards of care while keeping

costs low (Moschuris and Kondylis 2006).

Outsourcing can provide hospitals with the ability to

focus on the core competencies and customers. If the

hospitals partner with industry IT leaders, they can achieve

greater efficiencies (Roberts 2001). As outsourcing by

healthcare organizations increases, the potential market of

vendors that can provide these services will also increase

(Burmahl 2001). According to Lorence and Spink (2004), it

is believed that the less the healthcare organizations use

outsourcing, the slower will be the development of indus-

try-wide standards and practices across vendors (p. 132).

Outsourcing can provide lower costs and risks, while

greatly expanding flexibility, innovative capabilities, and

opportunities for creating value-added shareholder returns

(Roberts 2001). Thouin et al. (2009) found under the

transaction cost perspective that IT activities that have

become commodities should be outsourced to improve a

firm’s financial performance. Kern and Willcocks (2000)

slightly agreed that outsourcing is driven by economic

action but that it is embedded within social relations and

organizational strategy. While in Menachemti et al.’s

(2007) findings, IT outsourcing was not a cost-lowering

strategy but instead a cost-neutral way hospitals would use

to implement an organizational strategy, Lorence and

Spink (2004) examined over 16,000 healthcare information

managers’ viewpoints on outsourcing and found that the

top two reasons why they purchase external information

resources were to improve patient care and to save money.

Table 1 An overview of HIS and Financial/HR systems

Hospital information system (HIS) Financial and HR system

Purpose Single secure source of information for a patient’s medical

care history

Administration of financial and human information

Processes &

information sets

Patient information system

Prescription history

Operation history

Laboratory information

Radiology information

General ledger

Accounts receivable/payable

Expense reimbursement

Capital projects

Payroll

Benefits management

Pension management

Principle users Physicians

Nursing staff

Clinical staff (radiology, laboratory, pharmacy, etc.)

Corporate managers and supervisors in Finance,

Accounting, HR

Departmental managers and supervisors throughout

the hospital

An IT outsourcing dilemma at Sick Kids Hospital 83

Another advantage is the cost efficiency associated with

outsourcing due to economies of scale and of experience.

Because the outsource provider specializes in IT manage-

ment, it can provide good service levels at lower cost than

the internal IT department (Thouin et al. 2009).

A simplified view of different outsourcing layers or

levels is provided below in Table 2.

The experience of other hospital CIOs

Sarah had the results of an environmental scan which was

conducted in mid-2016 by a team of external consultants,

to understand current IT outsourcing trends in health care.

Semi-structured interviews were conducted with CIOs at

seven local hospitals. There was mixed reaction regarding

outsourcing of applications such as the HIS, which is the

core application at every hospital. Some hospitals maintain

and operate the HIS in-house and had retained staff who

were skilled at maintaining and operating the systems.

Others had outsourced the HIS and were convinced that

retaining current knowledge of the complex technology,

applications, and interfaces was beyond the ability of the

in-house staff.

CIO experiences: motivation for outsourcing

Across all seven interviews, the CIOs commented that

reduced operating cost was not the primary motivation for

outsourcing. The CIOS consistently identified three bene-

fits of outsourcing: (1) quality and speed of service, (2)

access to skilled resources, and (3) focus human resources

on strategic activities. Each benefit is described in more

detail below.

1. Quality of service and speed of delivery were the

reasons most cited for outsourcing. One CIO men-

tioned that IT infrastructure, which was the most often

outsourced, is a commodity service that vendors have

focused on delivering with a high degree of reliability:

‘‘we plug-in and expect it to light up,’’ ‘‘we don’t

worry about it, it’s a generic resource.’’

2. Access to skilled resources. One CIO commented

regarding software outsourcing that it would be

‘‘impossible for my staff to support an immensely

complex software application of six million lines of

code.’’

3. By outsourcing generic services, the CIOs are able to

focus their resources on strategic activities within the

hospital: ‘‘we didn’t want to be in that [IT] business… We focus on strategy and architecture, and how to

improve the customer experience’’; ‘‘focus on devel-

oping relationships with the clinicians’’ and ‘‘new and

innovative use of technologies that are relevant to the

business’’; infrastructure ‘‘is not my role, my role is to

help the business transform and change.’’

CIO experiences: challenges of outsourcing

However, managing an outsourced service does have some

challenges: (1) outsourcing may cost more than in-house

services, (2) external service providers may not be strate-

gic, and (3) additional time is required to manage and

govern the external relationship. These challenges are

described below.

1. Although a few CIOs mentioned that outsourcing will

avoid future costs, for new staff or additional IT

infrastructure, every CIO mentioned that outsourcing

typically costs more than delivering the same service

with in-house resources. One CIO cited a 30% cost

increase for outsourcing. A few CIOs have chosen

selective outsourcing for highly specialized services,

where the financial case can be demonstrated to the

hospital board or when in-house skills cannot be

readily hired.

Table 2 Simplified view of outsourcing levels

Level Description Examples

3 Business processes Finance and accounting

Payroll

2 Application software and data General—office software such as email, word processing, spreadsheets

Industry related—Finance, accounting, payroll

Location specific—Hospital information system

1 Infrastructure Servers

Network

Help desk

Device deployment and management (PCs, laptops, phones, tablets)

84 R. Babin et al.

2. Outsource providers may not be innovative or strate-

gic, although they are very good at delivering a well-

defined service such as IT infrastructure. ‘‘I have to tell

them what I want’’ said one CIO, suggesting that the

external service providers are unable to anticipate

future innovation in the hospital sector.

3. Approximately 30% of management time was identi-

fied for ongoing management and governance of the

external providers. One CIO mentioned an outsourcing

contract where the vendor has 16% of total revenue at

risk if it fails to perform. To manage this contract, the

CIO stated: ‘‘You have to hold the vendor’s feet to the

fire.’’

CIO experiences: lessons learned from outsourcing

In terms of lessons learned, three stand out. First, managing

outsourcing, both internally and externally, takes time and

improves after several generations of contract experience.

Second, the governance of outsourcing is important, and it

requires involvement of the hospital senior executives and

potentially board members. Third, IT Infrastructure is the

most common service to outsource because the services are

more industry generic (e.g. help desk, PC support, network

monitoring) and less specific to a hospital.

What to do?

Sick Kids Hospital is at a turning point. It has recently

decided to acquire and install a sophisticated Health

Information System. It is seriously considering opportuni-

ties to rely on external vendors and outsource some or

major portions of the IT infrastructure operations. The

senior executives are searching for opportunities to reduce

cost and improve IT services, which may be realized

through outsourcing.

Sarah considered her options. Although she knew the

HIS vendor would install and start up the new system, she

had concerns about the long-term support costs, for

example the costs of servers and network within the hos-

pital as well as the costs of the failsafe mechanisms for

uninterrupted power supply and data redundancy that are

required in the hospital IT environment. She was concerned

about the ability of her staff to become knowledgeable and

capable of supporting and enhancing the software into the

future. This would become increasingly important as doc-

tors relied more heavily on the HIS for patient information,

and as the HIS became the central repository for all elec-

tronic patient data. As well, patient health data were

extremely sensitive, and many laws and regulations were in

place to protect the privacy and security of that data. Sarah

was a doctor herself and understood completely the

importance of the accurate and available electronic patient

information. Her decisions as CIO would have a significant

impact on the ability of her colleagues to deliver the best

care to patients at Sick Kids, as well as protecting Sick

Kids Hospital from significant risk and legal liability.

Apart from HIS, Sarah needed to address software

maintenance requirements for the PeopleSoft Finance and

HR systems: should the IT organization continue to support

these applications or should they outsource to an external

services firm? (Exhibit B provides more details) Finally,

Sarah needed to address the issues identified in the con-

sulting reports particularly about the multiple hardware

platforms, aging technology, data privacy concerns

regarding patient information, and security concerns

regarding reliable availability of the HIS. Could this be

outsourced to a single vendor and then consolidated to a

more manageable technology infrastructure? She also had

to consider the perspectives of her internal IT Managers;

see Exhibit C for an overview of their concerns regarding

outsourcing.

The CEO had planned an executive retreat later in the

year. One of the agenda items would be the strategy and

direction for the IT department, and the potential to engage

external service providers for more IT work. Sarah began

to prepare a discussion document to answer key questions

for the CEO at the executive retreat. Her presentation had

to set a clear direction for IT outsourcing at Sick Kids

hospital and had to address three topics:

A. Why would outsourcing of IT services within a

hospital be treated differently than similar IT services

in other organizations, such as a bank, a retail

enterprise, or a government organization? What effect

does this have on the decision to outsource IT services

or retain in-house at Sick Kids Hospital?

B. Assuming all data regulatory requirements can be met,

what are the issues that should be examined by Sarah

and the executive team when deciding to outsource IT

services or retain in-house?

C. What are the risks and opportunities for application

maintenance outsourcing regarding both the HIS and

the PeopleSoft finance and HR systems?

An IT outsourcing dilemma at Sick Kids Hospital 85

Appendices

Exhibit A: selected slides from executive discussion

on IT outsourcing

86 R. Babin et al.

Exhibit B

A recent internal analysis that examined options for Peo-

pleSoft Application Management Services (AMS) had

found the following. An AMS proposal had identified costs

of about $1.8 million per year, which would be approxi-

mately three times the current spending on in-house sup-

port for PeopleSoft. The proposal identified staffing levels

from a high of 14.4 FTEs to a steady-state level of 11.5

FTEs, approximately double the current Sick Kids support

staff of 6.8. The proposed AMS would be delivered by a

mix of onshore and offshore personnel based in India.

Table 3 below provides a comparison between the

external benchmark and internal costs. As the table shows,

the external per-FTE costs may range from 1.6 to 1.8 times

the cost of internal AMS.

An IT outsourcing dilemma at Sick Kids Hospital 87

Exhibit C: a workshop with IT staff at Sick Kids

A workshop was conducted with 12 senior managers of the

Sick Kids (SK) IT organization. The workshop was a

facilitated discussion to capture the perceived risks, chal-

lenges, and obstacles of outsourcing as well as the oppor-

tunities and benefits. Table 4 below presents the summary

comments from the workshop.

A few other interesting points surfaced during the

workshop. Sick Kids IT managers would not like to be at

the ‘bleeding edge’ of technology, but would like to be

abreast of current working technology. Consequently, they

were interested in refresh cycles, how often should

equipment and software be replaced and upgraded. For

Sick Kids, HIS may not yet be a commodity, and the area

of pediatric research, which is ever changing as new

developments and discoveries are made, may not be

suitable for a one-size-fits-all kind of software

commodity.

Table 3 Comparison of internal costs to market costs for

PeopleSoft AMS

Sick Kids internal Proposal—high Proposal—low

Staff (FTE) 6.8 14.4 11.5

Total staff cost $636,000 $2,433,000 $1,717,000

Cost per FTE $93,500 $169,000 $149,300

Market cost above Sick Kids 1.8 1.6

Table 4 Outsourcing challenges and opportunities from the Sick Kids management workshop

Risks, challenges, obstacles Opportunities, benefits

Quality will be compromised as there is no supervisory oversight of

resources applied to tasks

Relationship with client (Clinicians) will not be there in an outsourced

environment

Loss of control

SK is very early in the OS learning curve, consequently capacity is not

there to properly manage outsourced contracts

RFP for any outsourced item may be deficient as there is not the capacity

in-house to ensure that all considerations are taken into account: may

result in many changes and hence cost increases

Outsourcing would necessarily mean a change in the financial structure

Change management—managing user expectations of what the

outsourced environment will eventually become

The biggest risk is the culture change that would be needed as culture of

silos changes to standardized

OS company may not be fully aware of infrastructure at time of proposal

and even during implementation

Fear of not being able to design a successful governance structure that is

appropriate

Speed of delivery of services

Would help to proactively make underlying infrastructure better and

closer to leading edge as opposed to having outdated technology

Easier to scale and expand

Development of dynamic capacity

Economies of savings

Short-term increase in capacity

Allows in-house resources to focus on value added

Allows in-house resources to interface more with clinicians/front-end

interaction with clients

Allows for resources to engage in requirements gathering/education

Standardization

More availability of resources

Better equipped for disaster recovery

Less stress—would be able to sleep at night

Would be able to stay abreast of technology and data security

88 R. Babin et al.

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An IT outsourcing dilemma at Sick Kids Hospital 89