In this white paper, Audrey Cushing, Chief of Staff, discusses outsourcing as a strategy to enhance profitability and improve financial performance margins. Using Game Theory principles, she explains how healthcare organizations and vendors can achieve better outcomes through a collaborative approach to outsourcing.
Click on the video to the right to learn more about the author, hear her insights on this white paper, and learn what motivated her to write about this topic.
To discuss this white paper, please contact Audrey using the information provided at the end of the page.
During recent years, outsourcing by health system administrators has evolved as a practical strategy to enhance profitability and enrich financial performance margins. Offshore sourcing engagements also play a critical role in easing the strain these same executives face due to the shortage of skilled workers here in the U.S.
Yet, the desired outcomes of outsourcing engagements often fall short of reaching their full potential due to what Kate Vitasek, a well-known outsourcing researcher and educator, views as one of the most common ailments afflicting outsourcing arrangements, the “Zero Sum” game where each party strategizes to achieve gains at the loss of the other party.
Outsourcing service providers and clients engage in Zero Sum games when they mistakenly believe that if something benefits the other party, then it must be bad for them. Wouldn’t it be better to engage in a Non-Zero Sum game where both the service provider and the client benefit from the relationship? Stated differently, the parties work together to ensure the engagement creates value for each organization so both win!
Everyone loves to win, it feels great, right?! But how can that sensation be achieved in outsourcing engagements? The answer lies in the concept of Game Theory. Game Theory is the study of strategic decision-making and uses mathematical models to understand the behavior and motivation of individuals when in competitive situations. At least twelve leading economists have been awarded the Noble Prize for their contributions to Game Theory principles. These principles are present in fields where logic in decision-making is a governing factor: business, finance, economics, politics, sociology, psychology, and undeniably outsourcing!
According to Albert Rutherford, author of Learn Game Theory, everyday decisions that we make align with the notion of game theory. For example, in social situations, we observe others’ behavior and adapt our actions accordingly. Or, how neighbors tend to be respectful of each other, but people may behave rudely or selfishly while on vacation, knowing they won’t likely encounter that person again. Rutherford argues that most of our daily decisions incorporate some aspect of Game Theory.
Noble Prize winner John Nash’s concept of equilibrium, known as the Nash Equilibrium, focuses on situations where no player in a non-cooperative game has anything to gain by changing their own strategy. Remember, as a child playing rock-paper-scissors? Your strategy was based on what you thought the other player’s next move was going to be. Nash is known for making this well-known quote: “The best result comes from everyone in the group doing what is not only good for oneself but also for the group. It is the only way for all to win.”
It is simpler than it sounds… The Nash Equilibrium is not about each person choosing the most optimal strategy; instead, it is about the benefit of mutual decision-making. One of the more widely known Non-Zero Sum game theory research projects is the Prisoner’s Dilemma. The experiment involves two members of a criminal gang who have been arrested and imprisoned. Each prisoner has been placed in solitary confinement and cannot communicate with the other prisoner. The police do not have enough evidence to convict the pair on the principal charge and can only sentence the prisoners to one year or less of prison time. The police believe they should receive more time for their crimes. Frustrated, the police decided to offer each prisoner the option to testify against the other prisoner and, in turn, have the charges dropped against them. There are two catches related to testifying. The first is that the other criminal will receive three years in prison. The second is that if both prisoners testify against each other, both will be sentenced to two years in jail (see the chart below). The prisoners individually are given time to consider the offer, but they will not learn what the other has decided until each has shared their independent decision. Each is informed that the other prisoner has been offered the exact offer. As you would suspect, each prisoner is only concerned with what is best for them.
The police’s offer leads to four different possible outcomes.
As you can see, the experiment was carefully designed so that each prisoner was incentivized to betray the other (by “defecting”). The prisoners, time and time again, in each study, would choose option 4 (above) to testify against the other, resulting in each receiving two years of jail time. In this scenario, the Nash equilibrium is present because both prisoners made the decision to confess, even though individually, they would have been better off collectively to remain silent. Imagine how different the outcome of the prisoner experiment would have been if the two criminals had been allowed to communicate with each other. And think about how often in outsourcing engagements, the client and the service provider have the option to communicate but do not.
Game Theory research demonstrates that each party will make decisions that collectively make both parties worse off versus making decisions that mutually benefit both parties.
Perhaps the reason why Nash received such extreme recognition for his equilibrium concept theory is that its significance can be incorporated into a wide range of disciples from economics to social sciences. And yes, this includes business relationships when the parties have not yet realized the benefits of collaboration versus “defecting.”
A well-known case of two parties defecting are ridesharing companies Uber and Lyft. These businesses have had their share of publicized disputes over the years, especially around poaching each other’s drivers. Uber’s Project “Hell” was an initiative that created fake accounts to order Lyft rides undercover. Uber representatives, once in the car, would provide Lyft drivers with a sign-up kit and enticing incentives for them to leave Lyft and become an Uber driver. The feud between Uber and Lyft is a business example of the prisoner’s dilemma.
The companies focused on competing and stealing each other’s drivers instead of concentrating on what would be best for both companies. Remember, this was at a time when ride-sharing was a new concept and an exceptionally disruptive force to the taxi industry. If Uber and Lyft had worked collectively to dominate over traditional taxis, they would have grown faster, had less negative publicity, and spent less on lawsuits and regulatory fines. Cooperation would have led to much better outcomes for both companies.
Rutherford, referenced earlier, uses a large 14-inch pizza to illustrate Nash’s equilibrium concept. Depending on the care used to slice a pizza, some slices may be oddly small, while others may be huge. But no matter the size of the individual slices, the total diameter of the pizza remains 14 inches big. Kate Vitasek focuses her research at the University of Tennessee on how service providers and clients can figuratively make a pizza bigger (creating more value) versus fighting over which parties’ slice of the pizza should be larger. She advocates that combining each parties’ talents and resources and having a win-win mindset will ultimately make the overall engagement more successful.
In the Uber/ Lyft example, the pie would be the ridesharing market and the pizza slice represents each organization’s individual revenue. Vitasek finds that in many sourcing engagements, the parties are short-sited and do not understand that the sum of the parts is larger when both parties shift away from the win-lose mindset.
McDonald’s understood from its inception that its suppliers could empower them to be successful and embraced a philosophy that “None of us is as good as all of us.” McDonald’s supply chain director has been quoted saying, “It is our goal to have both McDonald’s and the supplier sitting shoulder to shoulder on the same side of the table working to make the best possible decisions for its supply chain system. This approach allows McDonald’s to see the bigger picture with much more clarity and make better decisions.” The McDonald’s supply chain philosophy has been studied for years.
When suppliers have been interviewed by researchers it is not uncommon to hear them say, “We feel like we are part of the McDonald’s team, not just a supplier who sells them stuff until the next competitive bid cycle comes around.” The McDonald’s supplier approach paid off for both parties. Suppliers grew their own businesses in ways they did not think possible, and of course, we know the rest of the story. McDonald’s evolved into the most successful restaurant chain worth almost 200 billion dollars!
Clients and service providers often get caught up in “getting” the winning edge over the other party, no matter how strategic each organization views the engagement (the “deal”). The parties focus on who is getting the better deal versus focusing on combined interests. In contrast, reaching the Nash Equilibrium means both parties are satisfied and benefit from the engagement. Vitasek calls this “finding the pony”. The Pony is the difference between the value of the self-optimized solution and the potential of an optimized collaborative solution.
Professors Mary Laicity and Leslie Wilcox, both outsourcing experts, found that, when something goes wrong in an outsourcing engagement, there is a tendency to blame the other party, but rarely looks at their own contribution. Just like outsourcing, games often throw unexpected challenges at players. Collaboration, clear communication, and commitment to shared goals are crucial for overcoming obstacles and adjusting strategies during the engagement’s life. Analogies often liken an outsourcing relationship to a marriage. And, as we know, it takes two to have an enjoyable marriage. Although contractual documents are necessary, they don’t drive the spirit of the relationship. Laicity and Wilcox remind us that it is the actions of both parties in operationalizing contracts that determine if the outsourcing arrangement triumphs or fails. Only a colloborative-style relationshp can handle the ups and down experienced by any business over time and not treat the engagement as a Zero Sum game where there is a winner and a loser.
Behaviors (“moves”) that contribute to a succesful outsourcing relatioship include:
Healthcare service providers and administrators, isn’t it time to make the pizza bigger by focusing on creating shared value rather than playing a Zero Sum game with your outsourcing counterpart where one side “wins” and the other “loses?” By working together, the parties share ideas, build off each other’s suggestions, and collaborate to create novel and innovative solutions to solve each other’s challenges.
Each party shares its strategy versus making decisions in isolation like the prisoners in the research study. When outsourcing partners work together to solve a problem, the results are always better than if they worked separately to secure their own win. Healthcare leaders engage your service providers strategically to enhance your organization’s bottom line.
The Vee Healthtek team would love the opportunity to share the moves we take to collaborate with our clients and create big wins!
