10 Mar How to measure ROI of new products in the operating room
We have all heard it talked about, but it is unfortunately a vague concept if you are not a seasoned investor or best friends with the CFO.
Return on Investment, or ROI.
Not a new performance measure, ROI has been used in various forms by investors and organizations since investing began. It is not however, an entirely straightforward metric.
ROI essentially breaks down to how much money you made compared to the money you spent. For a more in-depth look, Investopedia has a great overview where you can learn all about ROI. So, while seemingly straightforward, how do you apply ROI to new products you are purchasing for your operating room. Is ROI even helpful in this context?
Let’s start with the case for why you should use ROI. First, you are likely spending a good amount of money on whatever product you are bringing into your operating room. A new Bovie® may cost you a few thousand dollars. And there are other pieces of equipment that cost much more. Even if something seems small, forceps or clamps for example, how many are currently in use at your hospital? A lot of little things may add up to one big ticket. And shouldn’t you know if that investment was worth it?
Second, you may need new products or new services. You may need training for your operating room nurses. If you decide your team needs training, the next obvious question is going to be, “how much does training cost and what kind of return will we see on the training?”
In an article from Journal for Nurses in Professional Development, authors Garrison and Beverage (2018) looked at the return on investing in professional development. They found that there were returns on one of their programs close to 500%. That means they made, or in this case saved almost five times the amount spent.
To relate to new products specifically, it may be the case that you or your staff would like a new product, but it is marginally, or even significantly more expensive then what you are currently using. And top brass will likely tell you that what you have been using for the last several years, works just fine. But that may not necessarily be true and being able to put together a case with ROI may just get you the products you are looking for.
In an environment, where savings are critical and every penny is scrutinized, knowing and understanding ROI for any product, service, or program can be invaluable.
So how do we go about calculating ROI of products in the operating room?
There are a couple of likely scenarios where you may want to use an ROI calculation. The first is replacing a product. The second is bringing in a new product. Let’s take each one in turn.
Scenario #1: Replacing a product
One of the great things about ROI is that it is simple once you have a handle on it. The basic formula is:
(Current Value-Cost)/Cost ×100 =ROI%
For the purposes of calculating ROI for new products in the operating room we need to define “Current Value.” This is the critical piece in both Scenarios.
If you have a net savings on the product you are replacing that’s great. If the product does the same things and works just as well, there is not a tremendous need for an ROI calculation, unless people start talking about switching costs. In that case you could use an ROI calculation, but it just depends.
As an example, let’s say you are purchasing new scopes and are going to save $10,000. The savings are the Current Value in this example. Switching costs, including downtime to train and in-service are the Costs. Switching would cost you $5,000. In this case, you are going to have an ROI of 100%. Not bad for a cost savings that requires a little effort to get up and running.
Now let’s consider something a little trickier. You would like to bring in new scopes and are going to spend $20,000 more. Well, there is likely going to be some amount of push back on the necessity of these new products at a higher cost. That’s where knowing your ROI can be a very powerful tool.
First let’s define in this example what the Current Value is going to be. It is not $20,000, that’s your cost. The current value is everything positive about bringing in the new scopes. If they are easier to clean you may save costs on reprocessing. You can potentially turn them around faster and have more operating rooms in use because you are not waiting for instruments. These new scopes may provide better visualization and work better, allowing for better outcomes. Better outcomes always lead to savings.
For the sake of example, after you quantify all the above saving, let’s say the total savings come out to $50,000. That’s great news because by spending $20,000 you are getting a return of 150%. In this case it would be worth switching scopes.
While these are simplified examples and simple numbers, the principles remain. Knowing the return on investment into new products can be tremendously helpful in informing your decisions of whether you should replace products.
Scenario 2: Bringing in a new product
Bringing in a new product is not unlike paying more for an existing product. In fact, it is the same. The only difference is that your cost is not just the increase in costs from the old product to the new product, it is the full cost of the new product.
Regardless let’s make up another example. Your hospital may not be buying something, call it product Y. Product Y is going to cost you $80,000 a year. A big expense, but there may be tremendous benefit, or Current Value to the product. The difficult part is defining what that benefit is.
Are you going to save on other costs? Are you going to have a higher throughput? Are you going to have less downtime? Are you going to be able have higher utilization? Are you going to reduce overhead, increase administrative efficiencies, or improve rankings and therefore brand equity?
All these benefits should be taken into consideration when calculating and evaluating ROI.
In the case of Product Y, if the benefit of savings in other areas and upside through improved quality are $100,000, then you are ROI positive at 25% return. If on the other hand, the benefit would only save you $70,000, that would lead to a negative return. A negative return would indicate that you should not bring in the new product.
Despite this seeming straight forward, the critical component and the most valuable aspect of an ROI calculation on new products is in defining what the Current Value is. Once you have a handle on Current Value, it becomes much easier to make the case for or against new products.
Knowing the return on new product investment is no substitute for the initial evaluation that should be done to see if a product is worth considering. There are great resources from the AORN, Infection Control Today, and many others on the evaluation of products.
Understanding Current Value (the value in savings or earnings upside) is the critical component to determining product ROI. While you and your cross functional team discuss the need for a new product evaluation, make sure to translate upsides and downsides into quantified costs. Identifying and quantifying the benefits or costs of a new product is the key component to calculating ROI and determining if you should upgrade, bring in something totally new, or stay the course.