About a decade ago, the primary means of profit improvement was sales growth. Margins were better and getting a new customer put more profit on the books than any other method available. Then the industry began to mature and margins began to shrink.

The first response was to beat up the manufacturers and get better prices. Then we had to turn our attention inside and look at our operations. Some used Activity Based Costing, others used Business Process Reengineering, and most used crude forms of each to take costs out of the processes that people perform.

There is still a great deal of opportunity for some providers to improve profitability using these methods. However, for those who believe there are few remaining opportunities for profit improvement, take heart. You are about to witness the beginning of a new era of business process improvements.

The next fertile field is not restricted to your company. The next fertile field for profit improvement is the intercompany transaction.

Consider your purchasing process, for example. When you order goods from one of our industry manufacturers, you pay for a bundle of goods and services. Some add value for you and some do not. The fact that the manufacturer is willing to pull the goods from its warehouse and load them on a truck that is headed your way is a value-added service that you are willing to pay for.

However, another part of the same transaction is that someone at the manufacturing company spends time supervising the billing department staff and trying to recruit a clerk to volunteer time at the company’s local Chamber of Commerce golf tournament. The cost of that time is also included in the price you paid for the goods, but it does not add value. You would rather not pay for that, but you have no choice.

Now suppose that there is a way to process your purchase in a way that does not require a clerk to prepare your invoice so the manufacturing company can stuff it in an envelope and mail it to you. If the manufacturer were allowed to remove that cost, it might have less of a need to raise the price of its goods.

Duplicating Efforts
The billing process on the manufacturer’s end is only half of the problem. In your company, someone must open the envelope with the invoice and route it to accounts payable where someone else enters it in your accounting system. At a later date you can call it up and order the check to be printed and mailed. On the other end of the transaction, the manufacturer pays for someone to deposit the check and record it in its accounting system.

The reality is that we have intercompany transactions that rely on processes that are mirror images of one another. Each of the processes has its own set of non-value-added activities. The profit from the next fertile field will be derived by removing the costs from intercompany transactions. Doing so will require the buy-in of both parties and some enabling technology to facilitate the transactions. Part of the technology already exists—it is the Internet.

Tomorrow’s Technology Is Here
Companies in other industries are breaking down the walls between customer and supplier. It is happening in chemical, plastics, semiconductor, staffing, and computer companies. It even has a start in home care. Electronic claims submission and remittance is a beginning.

So, how can we eliminate costs from intercompany transactions? At this time, the solutions will be largely based on what providers are able to negotiate, because technology companies are not offering comprehensive solutions.

There are four steps to get it started:

1) Identify the intercompany transactions that account for significant activity. Four types that are common among providers and offer the greatest opportunity are claims submission/remittance, patient referral/intake, purchasing/fulfillment, and sales/purchasing.

2) Identify the relationships you have with your business partners—manufacturers, physicians, hospitals, insurance companies, etc—that are most likely to work out a solution with you.

3) Create a draft solution.

4) Start the dialogue with your business partners with the goal being to create a solution.

Common Transaction Types
The claims submission/remittance processes have already been changed to a small extent to take out some of the inefficiencies. The changes were initiated by Medicare and seemingly for the benefit of Medicare, but not without benefit to providers. We refer to this new process as electronic claims submission and electronic remittance.

There seems to be ample opportunity for industry participants to cut more costs from these processes. First, providers can make more extensive use of the electronic system offered by Medicare. Second, providers can encourage wider adoption of an electronic system by the insurance companies. There are still a significant number of insurance companies that prefer paper claims. In this arena, I believe that it would be preferable for the industry participants to open the dialogue with draft solutions instead of waiting for the insurance companies to develop their version of a solution without input from providers. An appropriate solution may look a lot like the Medicare system since it would require less adjustment from providers.

Patient referral/intake are two more processes that are essentially a mirror image of one another. The physician’s office or discharge planner performs the patient referral process by having someone look up the telephone number of the provider, place a call (which sometimes yields only busy signals and delays from automated telephone attendants), then read information from the patient chart to the intake coordinator who writes it on a paper form or enters it in a computer (if not both) in order to perform the intake process.

Finally, purchasing/fulfillment may be the area that will be the easiest for providers to start a collaborative effort. The purchasing process is performed by the provider, and the fulfillment process is performed by the manufacturer or distributor. Again the two processes are essentially mirror images of one another. The provider should diagram the steps or activities they use, consider what could possibly be eliminated by some electronic system, and then find a champion among the manufacturers who will develop a way to mirror the more efficient process.

Whichever way you decide to start, examining profit improvement opportunities in intercompany transactions can improve your bottom line and give you an advantage over your competition.

Wallace Weeks is the founder and president of The Weeks Group Inc, a Melbourne, Fla-based Total Business Improvement consulting firm. He can be reached at (321) 752-4514 or wweeks@weeksgroup.com.