MHRM 6701 Week 10 Hospital Laundry Outsourcing Case Example

Before the Linen Service, a Hospital Laundry: Whether a Three-Hospital System Reasoned Well in Closing Its Own Laundry, and What Its Sixty Laundry Employees Gave Up When the Work Moved Twenty Miles Away

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Walden University

MHRM 6701: Strategic Positioning and Social Change

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Month Day, Year

Before the Linen Service, a Hospital Laundry: Whether a Three-Hospital System Reasoned Well in Closing Its Own Laundry, and What Its Sixty Laundry Employees Gave Up When the Work Moved Twenty Miles Away

The Case

Before Allerton Linen Services had hospital clients, many hospitals ran their own laundries. This analysis examines one such decision in a composite case: a three-hospital system in western New York that, in 2019, closed the laundry in the basement of its largest hospital and contracted the work to Allerton's Cheektowaga plant, twenty miles away. The laundry employed sixty people across three shifts. Its tunnel washer and ironers were near the end of their lives, and replacing them would have cost about $4.2 million. The system's board chose instead to put that capital into an outpatient surgery center and to buy laundry service at a per-pound price. The analysis asks two questions: did the strategic reasoning hold, and what did the sixty employees give up?

Question One: Did the Strategic Reasoning Hold?

Lepak and Snell (1999) sorted work by two questions, how much the skills add to the organization's competitive position and how specific they are to it, and argued that each combination calls for a different employment arrangement. Work that is valuable and unique to the organization should be kept inside and developed; work that is neither particularly unique nor central to how the organization competes is a candidate for contracting. Quinn and Hilmer (1994) made a similar argument from strategy: a firm should concentrate its resources on the few activities where it can be the best, and buy the rest from specialists.

Hospital laundry fits the contracting case well. Clean linen is essential to patient care, but washing it is not a skill unique to any hospital, and a specialist with two plants serving twenty-two hospitals can buy equipment, chemicals and energy at a scale no single hospital laundry can match. Surgery capacity, by contrast, is where a hospital system competes for patients and physicians. Moving $4.2 million from replacing washers to building surgery capacity puts capital where it can distinguish the system.

The reasoning held on its own terms, with two caveats. First, the system gave up control over turnaround. Its contract requires linen by 6 a.m., and Allerton's record of meeting that deadline depends on an overnight crew the hospital does not manage. Second, the per-pound price is fixed for only three years, after which the system will negotiate with a supplier it now depends on. Neither caveat undoes the decision, but both are risks the board accepted, whether or not it named them.

Question Two: What Did the Employees Give Up?

The board's analysis counted the sixty employees as a transition cost: severance, outplacement services and the offer of interviews at Allerton. What the employees gave up was larger.

Research on displaced workers suggests the losses for those who left the system were likely substantial and lasting. Couch and Placzek (2010), studying workers who lost jobs in mass layoffs, found earnings losses of roughly a third at the time of displacement, shrinking but still about 15 percent six years later. The twenty-two who moved to Allerton kept steady work but lost hourly pay, the hospital's pension accrual and an easy commute. Several had worked in the hospital laundry for more than fifteen years, and their skills, such as running a tunnel washer, had value at few other employers in the region.

Table 1

Where the Sixty Laundry Employees Went

Composite case.

Bringing the Two Answers Together

The strategic reasoning was sound, and the human cost was real. These are not contradictory findings. The board could have reduced the cost without changing the decision: by guaranteeing a hospital job, at comparable pay, to every laundry employee with ten or more years of service, by negotiating a pay floor for staff who moved to Allerton or by phasing the closure over two years so more employees could retire on their own schedule. A sound strategic decision can still be carried out at an avoidable cost to the people who bear it.

Relevance to Allerton

Allerton's Cheektowaga plant exists partly because of decisions like this one. Its overnight crew includes former hospital laundry workers who took a pay cut to keep working. That history is a reason for Allerton to think carefully about how it treats a workforce whose alternatives are limited.

References

Couch, K. A., & Placzek, D. W. (2010). Earnings losses of displaced workers revisited. American Economic Review, 100(1), 572-589. https://doi.org/10.1257/aer.100.1.572

Lepak, D. P., & Snell, S. A. (1999). The human resource architecture: Toward a theory of human capital allocation and development. Academy of Management Review, 24(1), 31-48. https://doi.org/10.2307/259035

Quinn, J. B., & Hilmer, F. G. (1994). Strategic outsourcing. Sloan Management Review, 35(4), 43-55.