How Smart Healthcare Facility Managers Measure Success

Walt Vernon, PE, LEED AP, EDAC, FASHE

Principal, Chief Executive Officer
7/11/14

The smartest Healthcare Facility Managers I know measure their success in buying Natural Gas.

Hospitals tend to have one major goal and measure success based on one of two methodologies. The overall goal for every healthcare facility manager is to “avoid price spikes,” “reduce volatility” or “avoid risk.” Facility managers have developed a range of strategies to do this, combining some strategy for triggering some percentage of future contracts based on projected need.

Generally, the measure of success in the procurement process is whether the strategy outperforms the budget or the utility. My small sample (about 20 people) seems to indicate that smaller, or more stand-alone hospitals, tend to measure against budget. While larger organizations measure against utility cost (which seems odd to me, but it was the trend in the responses I got). One person noted that CEOs tend to understand cost versus utility and that is therefore a better comparison. I think this is an interesting question, and it may be the CEO/CFO preference that determines how you should measure success.

One problem with trying to beat a budget, of course, is that it is a function of both buying strategy and consumption. Most people, in their answers, did not address this, and I assume they are measuring the absolute expense against the absolute budget; that is, they are measuring their success as a function of managing both demand and cost against a dollar expense budget. I think this is a good strategy, in some ways. But I am also compelled by one organization that dis-aggregated their buying strategy from their consumption by measuring both. That is, consumption is easy to measure and control independently (and should be controlled independently; less consumption is always better). And, you can measure your purchasing strategy as a weighted average cost against a range of indices. I think you should measure against both. As a CEO, I could care less if you get one right and the other wrong; I want the result, which is, that you beat budget!

Then a few organizations use, as a secondary measure, comparison against an index, though it was not usually NYMEX. Rather, it was the relevant index for the local market. Two organizations used, as a tertiary, the more interesting than relevant benchmark, NYMEX.

One nice thing about looking at Natural gas is being able to aggregate balancing your usage across a portfolio and ‘settling’ (under/over) across many meters, versus settling meter to meter (prior to deregulation). Also, doing an RFQ/P helps drive down the transportation and various utility mark-ups that are “Adders” on top of any Strip or Spot price. Even though we are all price takers with respect to these commodities. The ‘adders’ can often add 15% to 25% on top of the unit cost.

One organization noted that they also had an investment arm, and the investment arm frequently took positions in commodities, including energy. These investments tended to reinforce or counteract facility purchases. This is a very interesting idea, and one I would like to think through further. It seems to me, that organizations in this kind of arrangement could benefit from some kind of coordinated approach, rather than dis-aggregating their financial thinking about utilities. But, I am not smart enough to think about the right way to do this, and I would like to discuss further with some finance experts I know. More on this idea in the future.

My favorite observation:

Every Broker (typically a friend of a CFO or CEO) promises that their financial model for procuring gas or electricity will beat the marketplace if you pay them a fee for doing so…   I have not found this to be true and everyone looks great when prices fall while everyone says ‘ouch’ when commodities go sky high.

BOTTOM LINE, in my opinion: You are trying to avoid risk. You should measure against SEVERAL benchmarks. Not one is perfect alone. Each provides perspective. So, measure the following:

  1. Absolute expense against absolute budget. (My bet; this is the one the CEO will most care about.)
  2. Comparison to utility cost. (This will persuade most CEO/CFOs that you are doing better than they could by buying from the utility).
  3. Total Usage (MMBtu) building-to-building and year to year (regardless of price). (The most important number in my opinion; manage this downward constantly!)
  4. Weighted average cost per MMBtu (MCF) year over year (i.e., your success in keeping costs below last year; maybe more of a market indicator than a success indicator but probably pretty easy, and probably persuasive to some CEOs).
  5. Weighted average cost per MMBtu (MCF) as compared to riding the “Spot” market for your index (typically NOT NYMEX). (This tells you how good a fortuneteller you are!)
  6. Weighted average cost per MMBtu (MCF) as compared to NYMEX. (A less relevant measure of your ability as a fortuneteller.)
  7. Typically, since we are all ‘price takers’ with the commodities (unless your primary business is trading gas/power); you try to balance the full risk of ‘riding the Spot Market’ (100% reward and risk) vs 100% hedged to NYMEX (100% safe with regards to achieving a budget target).  If any of us knew when gas was headed back to $13 or down to $2.25 per MMBtu, we would not be in healthcare.

Walt Vernon, CEO of Mazzetti

Sidenote, we are looking at natural gas expenses as a PIM (Performance Improvement Measurement) for the Sustainability Roadmap. We would love to hear further insights on this topic. Please comment below or on the Mazzetti Facebook Page.

 


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