The outsiders

Two years ago, Henryk Konon, the director of a public hospital in Biała Podlaska, decided the health center's 12 year-old laundry needed more than just a face-lift to keep it operating. He needed zł. 150,000 to make the most urgent repairs and twice as much to overhaul the facility.

He didn't bother trying to find the necessary funds from the local authorities that owned the hospital, which like most public bodies has little cash for such investments. So instead he calculated that it would be cheaper - by as much as 30% - to outsource the hospital's laundry services to a private company. He put the job out to tender and signed a three-year lease in 1999 with Lublin-based Medi Sept, Poland's largest distributor of Henkel-Ecolab sanitary products. It was the first time anyone had outsourced hospital services in eastern Poland, and for Medi Sept it was the start of a thriving business.

The company invested zł. 250,000 and also took a bank credit to partly renovate and buy new washing equipment for the hospital's laundry. As part of the deal, the equipment was to stay with the hospital in Biała Podlaska after the contract expired. The hospital gained professional equipment without spending any money and Medi Sept had its first facility to expand into the outsourcing market.

Driving down costs

When healthcare reforms were launched in the late 1990s, the hospital in Biała Podlaska, as a pioneer in its region, was one of many centers in Poland to outsource non-medical services such as cleaning and catering. Managers of the country's 715 public hospitals, at least half of which were in debt, realized outsourcing was often the only way to drive down costs while gaining access to modern technology.

Krystyna Zaleska, director of the Mikołaj Kopernik hospital in Lublin, decided to outsource non-medical services for the first time four years ago. "We started with outsourcing washing services because our laundry was in an awful condition," she said. "First we chose a central laundry in Toruń, but it turned out that the one in Bydgoszcz (some 50 kilometers from Toruń) was 50% cheaper. For 15 tons of laundry a month we pay zł. 42,000 (including transport)."

But she said some services such as catering were more expensive when using an external supplier. For daily meals she pays zł. 14.3 per patient compared to zł. 8.9. "But if you calculate in the costs of renovation and investments (zł. 1.2 million) the outside company had to make, the price can't be lower," she said. The hospital's kitchen was renovated by Wrocław-based Impel, which now provides daily meals. "And last but not least, I don't need to concern myself with often unprofessional and unpredictable non-medical personnel any more."

Tomasz Poleszak, vice president of Medi Sept, said hospital managers across the country are eager to cut overheads - and outsourcing is one way to do it. "Take Jan Boży hospital in Lublin with 640 beds and 1,000 employees," Poleszak said. "Most of its non-medical services are outsourced and it has no debts. Compare this to the new hospital in Lublin with 680 beds and 1,600 employees, with directors changing every six months. They have no time to introduce reforms and the hospital is in debt. The figures speak for themselves."

Poleszak also said a lot of money invested into public healthcare is wasted. "Some directors prefer to spend money on new laundries that will never be fully used, like the one in Przemyśl," he said. "It has capacity for 200 tons, but it actually washes only 15 tons."

Poleszak said Medi Sept uses one laundry for as many hospitals as possible. In the first one it leased in Biała Podlaska, it does laundry for eight nearby hospitals. Today, Medi Sept leases five laundries in eastern Poland, handling 26 hospitals and washing more than 200 tons of linen and clothing a month.

But Poleszak said getting the business started was tough. Every time Medi Sept took over a new laundry, it also inherited a lot of inefficient staff. "There were lots of details we had to teach them," Poleszak said. "We often started by teaching people to wash their hands, or telling them to organize breaks in small groups so they wouldn't stop all the machines for 20 minutes like they used to."

When leasing a laundry, Medi Sept first tries to renovate the existing machines, as new ones cost zł. 3 million ($714,000) for an average 600-bed hospital. "No company would start by buying completely new equipment," Poleszak said. "We replace it gradually, but thanks to regular contacts with Electrolux, we can count on discounts and credits so we spend only 30% of our own resources on new purchases."

Since 1999, Medi Sept's laundry-service revenue has doubled every year and some are already generating a profit. "We try to lease new laundries at such a pace that the old ones already generating profits can fund the new ones," Poleszak said. "One thing that bothers me is that this year's prices dropped by 20% compared to 1999 while energy costs went up by 18%. What saves us are the economies of scale and that's why we're planning further expansion."

Medi Sept is now looking for work in central Poland, but the company's plans will have to be postponed until next year as the market in central Poland turned out to be tougher than expected. "They (Varsovians) don't let outsiders do business in the capital and on top of it Warsaw is still behind when it comes to reforming healthcare," Poleszak said. "But we hope that in January we'll be able to get our first laundry near Warsaw," Poleszak said. "It's worth the effort. According to our estimates, the potential of the Warsaw market is as big as the entire country's eastern region and it's still nearly intact as there are practically no big outsourcing suppliers down there." Meanwhile, Medi Sept is also launching a catering service and plans to start its first hospital kitchen in the first quarter of 2002.

Come and get it

Poland's general catering market generates zł.7 million ($1.6 million) revenue every day, according to estimates by Impel. Impel Group (IG), one of Impel's subsidiaries, has 25% of the hospital catering market. It started in 1999 and now serves 28 hospitals and feeds 6,000 patients per day. "Catering for hospitals is the most attractive segment of the catering business because it's an always necessary and thus stable business," said Sławomir Bogdański, vice president of IG's management board. "Patients have to eat regularly while pupils at schools, for instance, can have a sandwich or a cake outside school." Bogdański said there are 10 companies on the market that handle more than one hospital. Outsourcing suppliers are usually forerunners of changes in most Polish hospitals as they provide modern, professional services. But it's only when outside caterers arrive that many patients first see the difference between state-run catering and that offered by private companies. "We use professional equipment to transport and distribute food to hospitals," Bogdański said. "Immediately after leasing a kitchen we change cutlery and dishes. Our personnel also wear uniforms."

Like Medi Sept, IG also upgrades obsolete equipment in hospital kitchens. On average, the company invests zł. 2,000 per patient in renovation costs, which comes to zł. 1 million ($238,000) in a 500-bed hospital. "We try not to renovate buildings, leaving that to the owner; we concentrate on modernizing the equipment," Bogdański said. "If we sign a 10-year contract, the equipment will stay with the hospital once the deal expires. In the case of shorter contracts, we can take the machinery with us once we move to another hospital."

For IG, the length of the contract also affects prices offered by the company. Under a 10-year lease, a hospital can negotiate a price 12% lower than in a three-to-five year contract. Prices range from zł. 9 to zł. 20 daily per patient. "On average, food for meals costs zł. 4.8 per person," Bogdański said. "We serve all three daily meals emphasizing vegetables and fruit."

The efficiency of an outsourcing supplier lies in its ability to make the greatest use of its facilities. IG sets up central kitchens that handle more than one hospital and sometimes also cover pensioners' houses or spas. "Such a kitchen has to service 800-1,500 patients," Bogdański said. But 60% of IG's revenue comes from catering for hospitals, reaching zł. 2.6 million ($619,000) a month.

The company's total revenue has significantly grown since it started two years ago. In 1999 revenue reached zł. 1.8 million ($428,000), by last year the company exceeded zł. 8.9 million ($2.1 million) and this year Bogdański said IG should generate more than zł. 29 million ($6.9 million). "Next year we would like to double this year's figure, that's why we're talking to investment funds," Bogdański said. "If you want to enter this business there is one barrier, access to capital. Catering for hospitals requires not only resources to renovate old kitchens, but you also need funds to keep going on a daily basis when you have to buy food and pay your suppliers. From January 2000 until 2001 we spent zł. 5.17 million ($1.2 million) on catering facilities."

Capital ideas

To expand their operations, IG and Medi Sept are always on the hunt for capital. Fortunately, it's an industry that venture capital funds are already looking to invest in. "(Outsourcing suppliers) developed their companies without funds like ours and they made visible progress, but a capital injection may speed up their expansion," said Michał Rusiecki, partner at Enterprise Investors (EI), responsible for investments in the healthcare and energy sectors.

Rusiecki said EI could invest about $10 million in new outsourcing projects. "We are talking to several outsourcing suppliers, especially those dealing with catering and laundry services," he said. Advent International, a venture capital firm looking to invest $20 million by the end of this year, is also talking to several outsourcing suppliers. "We are very interested in these companies," said Marcin Duszyński, general director of Advent International. He said the company sees outsourcing firms as able to withstand possible economic downturns and even recession. "It's a business of the future," Duszyński said. "Especially now when directors try to squeeze costs in every way and start to realize they can benefit from outsourcing services, which have nothing to do with medical treatment."

By international standards, outsourcing is a stable business with good prospects, but catering or cleaning services suppliers still face barriers that their Western counterparts aren't required to overcome - namely the poor financial state of public healthcare in Poland.

Medi Sept's Poleszak said hospitals are always late with payments. "We try to watch the execution of payments and we leave hospitals that don't pay for 270 or even 360 days," he said. "Ideally, payments should be made within three months, but this deadline is never met."

As a result, many catering companies will not work with public medical institutions. Silesia-based Catering Group Polska handles only two public hospitals and mainly targets private clinics. "Until public healthcare recovers from its financial crisis, we don't plan to expand into the sector," said Robert Siedlecki, consultant at Catering Group Polska. "Public hospitals mean nothing but problems."

Half of Poland's hospitals are in debt. Most public institutions started taking a closer look at costs only a couple of years ago. So, to meet monthly payments they sell debt, which is more expensive than taking credit. "But banks prefer to grant credits to companies, which buy debts from us offering interest rates 8-10% higher than bank rates," said Zaleska, director of Mikołaj Kopernik hospital in Toruń. Zaleska applied for a five-year bank credit to pay off her hospital's debts. "We are working on a restructuring program under which we'll further cut costs and try to increase our revenues," she said.

But despite problems with making payments on time, many directors who have outsourced non-medical services said they would make the same decision if they had a chance to do it again. "I don't regret the decision to outsource - cleaning, washing, security services and catering," Zaleska said. "We buy professional services and I can concentrate on medical services. That's what we are here for. So, it's a change for the better."

Anna Kocinska