Part 1 of this two-part article appeared in the July issue of
MedicalLab Management. Visit: medlabmag.com/article/1978
Defining the true cost and price of a given laboratory instrument is challenging at best, but the number listed on the price tag is usually just the beginning. In Part 1 of this article series, concepts including accounting versus economic views, the range of costs, and an introduction to key financial terms were focused on laboratory instrumentation. The following provides more detailed information on important laboratory business concepts, such as the time value of money, future versus present value, and switching, opportunity, and sunk costs. Applying these concepts will help gain a more complete understanding of the laboratory’s existing resources and future capabilities, as well as provide a valuable template for ongoing technology acquisition projects.
Key cost concepts detailed in TABLE 1
Click here to view a larger version of this chart.
The Time Value of Money
Invariably, acquiring a new instrument requires a financial outlay, and while rates of return can meet or ideally exceed the initial costs, among the determining factors is the instrument’s productive life or its economic life. Not to be confused with the instrument’s physical life, the instrument’s economic lifetime depends on several factors, including new technological advances, availability and costs of preventive maintenance service, replacement parts cost, etc.
An analyzer may have a physical life of 10 to 15 years, but an economic life of just 5 to 6 years. Determining an instrument’s economic life will help calculate an accurate payback period (ie, ROI) and thereby determine whether the initial investment is sound.
In addition to economic life as a factor in figuring the payback period, consider the comparison of the present value (today’s dollar value) with the future value (the value of a dollar at a point in the future). The actual value of money depends upon time; the inflation rate is currently 4%, so 1 dollar now will be worth 96 cents next year. Thus, a proper comparison requires a calculation of the discounted cash flow—present value compared with future value.
Present Value versus Future Value
With inflation, a dollar today is worth more than a dollar tomorrow; thus, the purchasing power of a dollar decreases over time as prices for goods and services rise.
Final Economic Concepts
Bringing all the aforementioned elements together, the lab will be well positioned to acquire instrumentation under favorable terms. However, there are three fundamental economic concepts to consider before signing on the dotted line.
Switching Costs
The first is the oft-overlooked issue of switching costs, which represent the costs of moving from one vendor, technology, or system to another. These costs often can appear hidden, only to come to light after the deal has been struck. Examples include the present workspace footprint is inadequate for the new analyzer, or the existing laboratory information system interface is not able to easily interface.
Opportunity Costs
Opportunity costs are perhaps the most misunderstood and mysterious costs of all, and stakeholders may be totally unaware of them, as they represent the costs of not doing something. The amount of time spent researching, vetting, implementing, and training on new instruments has an opportunity cost associated with it equal to the amount of production or profitability that could have been rendered in that same amount of time by the same staff (including leadership). The goal is that opportunity cost is eventually recouped via the benefits of the implementation.
Sunk Costs
The third and final key concept is that of sunk costs, which is so vitally important that it is best to be ignored. To wit: sunk costs represent the money, effort, and time spent on a project that cannot be recouped. These costs are gone and should not be allowed to influence future economic decisions. This can be difficult to accept if the team has spent a lengthy amount of time unsuccessfully trying to get a new instrument or a process to work properly and a breaking point has been reached. Some projects cannot be forced into success. Most good leaders are personally invested in their work and can therefore personalize such expenditures and cloud future judgement.
Conclusion
It is likely that most laboratory directors did not initially seek out the profession to explore the economic minutia of laboratory instrumentation. That said, this is an area of laboratory leadership that can reap substantial rewards for numerous process improvement projects throughout a career. The economic concepts described herein can help lay a foundation for how to view technology acquisitions through a more detailed lens, and that will only benefit the lab and the patients it serves moving forward.
Ian Wilkinson, MS, MBA, PhD, DClinChem, CSCC(Cert), recently retired as director of the Manitoba Quality Assurance Program at the College of Physicians and Surgeons of Manitoba, Canada. He is a certified clinical biochemist with advanced degrees in biochemistry, immunology, clinical chemistry, and business. Ian is a past fellow of the American Academy of Clinical Biochemists (FACB), the Canadian Academy of Clinical Biochemists (FCACB), and the International Society for Quality in Healthcare (FISQua). In addition, he is a former Chair of AACC’s Management Sciences Division and of the Laboratory Management Committee of the International Federation of Clinical Chemistry and Laboratory Medicine (IFCC).
Like what you've read? Please log in or create a free account to enjoy more of what staging.medlabmag.com has to offer.