Cost-Benefit ROI Analysis - Can Your Organization Afford Not To Do It?

Prepared by Cheryl Waggener

---

Proving value is a key management competency. Attaining value is a necessary business requirement. Through some recent industry experiences, we have observed that healthcare entities are no longer blindly investing in information technology for their organizations. Rather, they are demanding accountability and requiring that a set of investment criteria be met before allocating valuable resources to new systems.

Historically, health care organizations have not conducted rigid Cost-Benefit ROI analyses on their information technology (IT) investments. By neglecting to calculate and measure anticipated benefits from the implementation of information technologies, health care organizations are not establishing expectations and, in many cases, are adding overhead expenditures to their organizations. Looming financial constraints coupled with the vast availability of advanced application opportunities have prompted an industry-wide shift in focus to cost-benefit return-on-investment analysis.

A recent client engagement at a integrated delivery system afforded me the opportunity to develop a comprehensive Cost-Benefit ROI model for IT investments. This model was subsequently applied to several of the client's existing investments on both a prospective and retrospective basis. This process uncovered some important lessons, allowing me to discover the following:

Many words are used for Cost-Benefit ROI analysis - "Value Based Decisions", "Proving Value", "Maximizing Return", etc…..

Most of these descriptors have a similar purpose and generally include the following components:

• Cash Benefits: Cost reduction resulting in direct decrease in cash outlays such as workforce reduction, maintenance fee elimination, transportation cost reduction, and reduction in inventory.

• Efficiency Benefits: Decrease in time to complete a specific task or function thereby creating increased productivity, volume tolerance, or ability to allocate resources to another area

• New Revenue: New or additional income for organization via new cases/patients or seeking out revenue relationships (e.g., partnerships, co-branding, advertising opportunities)

• Strategic/Quality Improvement: Positioning or infrastructure advantages, often difficult to tie directly to a quantifiable gain including: physician retention/loyalty, cost of attaining a new patient/member, improved service quality/customer satisfaction, prominence in specific "Centers of Excellence," health & wellness promotion, and enhanced corporate image.

A true Cost-Benefit ROI analysis forces some hard - but critical - decisions at the organizational and departmental levels.

Justifying an investment in information technology involves close scrutinization of a variety of metrics, from staffing levels to envelope usage. Some of the more difficult decisions that must be made involve staff reduction and/or consolidation, determining the feasibility of workflow or process re-engineering, and determining accountability for estimated quantitative benefits.

The opportunity cost of funds can significantly impact Cost-Benefit ROI potential.

Healthcare organizations with substantial cash reserves may find that leasing information systems or application service provider (ASP) alternatives are a more profitable alternative to purchasing, especially during a "bull market." Capital dollars slated for acquiring information technology may otherwise be invested to generate sizable interest income for the organization, or expand services and target markets.

Strategic benefits of IT investment frequently outweigh quantifiable financial benefits.

In some cases, health care organizations will knowingly proceed with an IT investment that generates a negative cash Cost-Benefit ROI in order to gain the strategic benefits that accompany the investment. While difficult to quantify, these benefits are often more important than near-term cash flow. For example, building a physician extranet is an expensive undertaking with small cash benefit value, but the resulting physician satisfaction and improved patient care can be measured and are important objectives for healthcare organizations.

In order to achieve full Cost-Benefit ROI potential, identified efficiencies must be harvested into cash via decreased costs or increased revenue through volume tolerance.

One of the most significant arguments for acquiring advanced information technologies is the efficiency to be gained once the application is implemented. Converting extensive efficiency gains into cash benefits, in most cases, requires a careful examination of existing processes and documentation of a future state design for optimal alignment with the technology. Depending upon the applications being implemented, this process can take anywhere from 6 to 12 months, and requires full commitment from the health care organization, its vendor(s), and other strategic partners in order to succeed. Re-engineering or process redesign can create cash benefits by either reducing overhead or increasing production.

Full implementation of a Cost-Benefit ROI analysis process must include establishment of a process and a screening threshold to be effective.

A Cost-Benefit ROI analysis will not create "value" if an organization does not develop decision criteria to apply it against. An example of such decision criteria/structure might look like the following:

Though sometimes a tedious or cumbersome process, a Cost-Benefit ROI analysis is essential for maximizing value from IT investments. For more information on how to maximize the strategic benefits of health care information technology, refer to Joseph DeLuca and Rebecca Enmark's book, Investing for Business Value available through www.healthforum.com.

Cheryl Waggener is a Client Service Executive for Information Technology Optimizers, a business unit of Health Care Investment Visions LLC. Email info@itoptimizers.com.

 

^ top of page