What’s the Deal?

This is not your father’s service contract; it’s not even your older sibling’s service contract. Until recently, the maintenance offerings of imaging-equipment manufacturers and third-party service companies amounted to little more than prepaid policies insuring against the oftentimes exorbitant cost of an emergency field call. How-ever, today’s service contracts are crafted to help customers find ways to improve workflow, increase productivity, and generate more revenue.

Service providers are less eager to lock customers into traditional “break-fix” contracts and instead are becoming increasingly keen about delivering comprehensive service solutions, hints Rob Reilly, general manager of service sales for GE Healthcare (Waukesha, Wis). “Good service has become more than just keeping machines running,” he says. “Today, we come in and make sure systems are optimized in order to maximize a system’s throughput, which, in turn, helps optimize workflow. We also make sure technologists and physicians are trained on all the latest protocols for very high value-added, highly reimbursable procedures.

“We’re taking things from a world where customers worry only about how quickly the field engineer shows up to a world where they’re able to ask—and get a pleasing answer—about how much revenue they’re making with the system,” Reilly continues. “We believe that service tied to productivity improvement programs can and will increase revenues.”

Down with Downtime
According to Reilly, the digital revolution is responsible for changing the nature of how service is rendered these days.

“Two years ago, we had virtually no systems connected anywhere via broadband; it was mainly slow-speed modem connections,” he says. “Today, we have about 10,000 systems across the country connected on broadband. Consequently, we now have the capacity to remotely monitor those systems and initiate repairs online. Remote fixes today account for 30% of our service calls.”

Reilly figures that a remote fix carries the advantage of holding system downtime to an average of about 30 minutes per episode, compared to the 4 to 5 hours typical of a repair initiated in person by an on-call field engineer. That, he says, can mean 50 or more hours of increased uptime per year, or about $100,000 of incremental revenue for the customer.

But that’s not where it ends. Reilly foresees a day when remote-fix capabilities will evolve into remote prognostics and predictive service.

“By having a persistent data pipe to every system, providers will be able to monitor system performance in real time to keep systems operating within spec,” he says. “If certain faults or error codes are then observed by the monitoring center, they will be able to predict failure and take action before the system actually fails. Alternatively, we’ll have technology that allows systems to be self-healing and able to put themselves automatically back into spec.”

The possibilities are huge, Reilly believes. Imagine knowing 2 days before it happens that a detector or gradient is about to fail and then being able to schedule replacement during the third shift, outside of scanning hours, so there is no adverse impact to schedules. The result eventually will be contracts guaranteeing 100% uptime during normal working hours.

Although the abolition of downtime still might be a ways off, contemporary service providers are finding other, less technology-dependent avenues for minimizing the disruption of customer work routines. According to Jim Greaney, director of service contracting for Siemens Medical Solutions USA at the company’s Cary, NC, service campus: “Service providers are increasingly willing to offer maintenance plans featuring extended primary coverage periods. Instead of limiting the primary coverage period to the hours between 8 am and 5 pm, now we’re seeing those hours stretched to 9 pm and later so that servicing can take place at times when patients aren’t as likely to be present. One thing we’ve noticed is that customers are less tolerant than ever when it comes to service calls interfering with their normal workday.”

Another trend intended to help rather than hinder customers are managed-service or asset-management contracts. “These,” Greaney says, “are where a customer with a best-of-breed environment turns to just one company to provide service for all those different makes of equipment. Depending on the number of assets to be managed in this manner, an enterprise could save between 5% and 20% on its service contracting costs, with at least some of the reduction resulting from the elimination of having to process numerous invoices from multiple companies.”

Also gaining in popularity are shared-risk service programs. “Shared-risk is an arrangement in which the customer can pay a smaller fee up front for a service contract than would otherwise be the case,” explains Brad Kranda, VP for service at DMS Health Group (Fargo, ND), a nationwide one-stop service-solutions provider, Philips-authorized dealer, and long- and short-term equipment lessor. “Let’s say you take out a full-service agreement for, hypothetically, $10,000, in which the provider will come out as many times as necessary during the course of a year to repair the machine in question. An alternative would be a shared-risk plan. Here, the provider would ask for 40% of the price of the full-service agreement up front. If the provider then never has to make a service call during that year, the 40% paid is considered the full price of the contract; the customer owes nothing more and realizes a savings of 60%.

“However,” Kranda continues, “if the provider has to make a service call during that year, then the customer pays for service as needed with a cap of perhaps 20% over the original full contract price. So, if the customer has a good year with his equipment—no repairs—he comes out ahead. If he has a bad year, he pays slightly more than the original full contract price, but is still covered for catastrophic events.”

Anatomy of a Great Contract
The practice of bundling value-enhancing add-ons within maintenance plans as a way of differentiating service-provider offerings is becoming more common. Value-adds, as they’re called, show up most abundantly in markets brimming with service-industry competition.

“Benchmarking is one example of an attractive value-add—providing customers with information to allow them to compare various aspects of their operations against those of their peers as a way to help them implement the best practices and improve workflow,” Greaney says.

Another example of a good value-add is in-house training for a customer’s technologists and physicians, says Kranda, who cautions that value-adds aren’t necessarily freebies. “Customarily, the cost of a value-add is built into the service contract price,” he points out. “If you throw it in for free, the value isn’t there to begin with, so it wouldn’t be called a value-add. The idea is, yes, there’s a cost to delivering the value-add, but it’s an acceptable one because of the way it increases the value of the service agreement.”

Beyond contributing to the perception of a contract being a good deal, value-adds are coming to be seen as one of many elements that a service plan must contain in order to be deemed excellent. Among the most important of those elements is a provision to deal with system obsolescence.

“A high-quality contract today will include a mechanism for the periodic updating of computer hardware and software to keep it cutting edge far longer than might otherwise be the case,” Greaney says. “At Siemens, we have a program called Evolve, which we offer as either a stand-alone contract or as part of a larger service contract. Customers who sign up for it receive free software upgrades once a year and all new computer hardware every 3 years.”

Something else customers should expect to see in a great contract is a provision for strong preventive maintenance (PM) coverage—that’s the word from Christopher Cone, senior director of business development for Sonora Medical Systems (Longmont, Colo), which specializes in new and refurbished ultrasound aftermarket products, repairs, and training. “Our ultrasound service contracts, for instance, provide for a minimum of two PM visits annually,” he says. “The PM procedure itself is comprehensive, far more than a site call to blow dust out of the fans and clean the cavity. We test every probe, review all logs, run full system diagnostics, and check all the peripheral devices and connections.”

Once upon a time, customers found themselves with few choices in service plans—this is no longer the case. Now there seems to be no limit to the way provisions can be mixed and matched. However, industry players warn that with such enormous flexibility comes a greater potential for making costly errors in the selection process.

“The main cause for mistakes is a lack of understanding of what the service deliverables are or the implications of those deliverables,” Cone explains. “For example, the fine print surrounding what’s known as the abuse clause is a big area where customers are prone to

losing their way. No matter what contract from what service provider you have, there’s always an exclusion of coverage for components that fail by [factors] other than natural means—in ultrasound, for instance, transducers tend to get banged up, dropped, pierced with biopsy needles. So you’ll have customers believing they have 100% coverage on parts and labor in all situations when, in fact, they don’t, because abuse is the most common cause of some of these very expensive failures. It’s not until someone drops a transducer and gets hit with an $8,000 repair bill that the facility discovers this limitation built into the service contract.”

Customers also find themselves in shoal water when they compare service offerings of two or more providers. “You’ll want to take pains to make sure you’re evaluating apples to apples when comparing contract proposals,” Cone advises. “The only way to avoid falling into the trap of an apples-to-oranges comparison is to develop a clause-by-clause map of each contract, then lay them side by side.”

A typical bugaboo encountered in comparing contracts can center around the failure to probe beyond the raw numbers. GE Healthcare’s Reilly describes such a scenario: “Let’s say you’re comparing contracts for CT service,” he says. “The first prospective provider is the OEM [original equipment manufacturer], which will give you a year’s coverage with a same-day service guarantee for $100,000. The other prospective provider is an independent service organization [ISO], which wants only $90,000 for a year’s coverage but with a next-day service guarantee. If all you do is look at the dollar difference between prices, the answer will generally be to go with the ISO. But you also have to take into account your imaging throughput.

“For the sake of argument,” Reilly continues, “let’s say you’re doing 30 or 40 scans a day. That works out to $8,000 to $10,000 a day in revenue. If the scanner goes down and you’re under contract with the ISO, you’ll lose a day’s revenue before the system is back up. That loss of a day’s revenue also happens to be the price differential between the contracts offered by the ISO and the OEM. If the system goes down a second time during that same year and you’ve taken the less expensive contract, you’re now actually in the hole $10,000.”

Still, as Kranda notes, careful analysis of contracts often yields confusion in the form of clauses that appear indecipherable. “Don’t be afraid,” he urges, “to go back to the provider with questions like, ‘OK, this sentence under section 3, part C, back on page 5—it’s not quite clear to me; can you explain it?’ A big mistake is to assume a contract says X when it could actually mean Y. You need to know exactly what’s there. Unfortunately, if you don’t, you’re going to get stuck down the road. I’ve seen it numerous times in other companies where customers signed service agreements and were later disappointed because they thought they had coverage for A, B, C, and D only to discover they had coverage for just B and C.”

The typical service contract, Cone reports, is about 15 pages in length and constructed of frequently arcane legal language. Accordingly, it’s a good idea to have a lawyer review it and offer a second opinion, with an eye toward pointing out potential trouble spots, he contends.

“These are contracts in every sense of the word, and a lot of them are very difficult to get out of without incurring stiff financial penalties once signed,” Cone explains. “Know with complete certainty what you’re getting into beforehand.”

The Ka-Ching Thing
The cost of a contract depends on a variety of considerations, including intended utilization of the equipment, the equipment’s operating environment, and the extent to which equipment uptime is deemed critical. Once everything is taken into account, the final price can be steep. Luckily, negotiation is always possible—and encouraged. More often than not, today’s customers enjoy the flexibility of being able to contract only for the facets of service they actually want; however, choosing service components on an ? la carte basis tends to be more expensive than if the desired components come as part of a standard package.

Another way to bring down the price of a service contract is to carefully limit the number of pieces of equipment designated as mission critical. “Customers frequently think equipment is mission critical when, in fact, it might not be,” Kranda says. “To illustrate, some years ago, a healthcare facility bought a CT scanner. This facility’s main customer was a retirement home. The facility was convinced that this CT scanner was mission critical; because of that, [the decision-makers] insisted on a contract guaranteeing immediate servicing—a very expensive contract.

“Fortunately,” he continues, “the service provider recognized that the scanner wasn’t mission critical since the residents of the retirement home would not be taking their business elsewhere. If the scanner were to go down and stay out of service until the following day, its customers would not be taking their business over to hospital B down the road. By encouraging the customer to see this aspect, the facility instead took out a contract with a guarantee of next-day servicing and, in the process, reduced the cost of the contract by 27%.”

Luckily, most of today’s equipment is exceptionally dependable. “The reliability of systems today is the result of their sophistication,” Kranda says. “Although it makes them less prone to breakdown, this same sophistication means that repairs, when they are necessary, can be very expensive.

“What happens,” he continues, “is that the increased reliability tends to lull customers into a false sense of security toward service. Customers think they can run their risk and not have to provide adequate coverage after the warranty period ends. Then, the system breaks down, and the facility receives a repair bill for an amount equal to half the cost of a new machine. Customers burned in this manner are vulnerable to accepting poorly crafted service plans or to locking themselves into cost-inefficient, long-term agreements just to be able to obtain after-the-fact protection.”

However, long-term agreements are fast becoming a thing of the past. Says Cone, “It used to be that service providers offered contracts that ran 3 to 5 years, and they’d try to get you to pay for all of those years up front. You hardly ever see that required anymore because of the competitive situations that exist.”

And, no doubt about it, the service contracts arena is only growing more competitive. Ten years ago, for example, providers could get away with offering a generic, take-it-or-leave-it service contract. Now they can’t.

“Today, it’s all about being a good partner with the customer,” Reilly argues. “Service contracting has evolved into a vehicle for helping customers be more successful.”

Truly, that’s not your father’s service contract.

Rick Romano is a contributing writer for Medical Imaging.