How to persuade bosses to fund automation

Let’s say your hospital has a problem: medication errors. Arguing that automation could decrease the incidence of errors could be the strongest way to bargain with hospital administrators for such a system. But don’t count on it.

"Fortunate or unfortunate, the CFO [chief financial officer] is going to be looking at dollars. That’s what they’re trained to do," says John S. Jahera Jr., PhD, professor in the department of finance at Auburn (AL) University. So while a reduction in errors is important for any institution, Jahera says it’s not the most potent argument you can make for an automated system.

Instead, focus on cost benefits. "Automation requires green cash dollars, not some accounting numbers," Jahera says. Using software such as Lotus or Excel, present a spreadsheet on out-year cash flows, showing how automation will reduce such things as pharmacy, nursing, and medical records full-time equivalents.

"But be careful not to take a shift in work effort as a change in cash flow," Jahera says. "If it doesn’t change any cash flows, it’s probably going to be irrelevant to the CFO."

Don’t fall into traps

In other words, you shouldn’t argue that once the machine is on-line, your pharmacists will have more time to spend on the floors. The real question is, how will their presence on the floors reduce costs? Jahera says this has to be a solid argument — not just that "patient care will improve." It may, but how many dollars will be saved as a result?

Show the CFO how the machine will reduce inventory and purchasing, and by all means, include information on capturing lost charges. But don’t peg too much of your proposal on lost charges — it’s sometimes irrelevant. Recapturing lost charges "doesn’t always translate into cash flows for the organization," he says.

Confine your actual analysis to a page or two, Jahera says, but use as many financial techniques as possible. Calculate the net present value (NPV) of the system — that is, how it will benefit the institution financially over five years. Jahera says this calculation can be especially effective in showing why a cheap automation system isn’t always the best choice because it takes into account the "time value" of money. An expensive system might cost more at the outset, but at year five could turn out to be a real bargain compared to a cheap machine that breaks down during out years.

Payback is very important

Once you have the NPV, you can calculate several other financial variables. Divide the NPV by the number of years in your forecast, and you get the equal annual benefit. The profitability index provides a convenient measure of cost vs. benefit.

The payback period describes the time it will take for your institution to recover its investment — a number that varies from institution to institution. (Some can be as short as two years — an unreasonably tight period, Jahera says, that may reflect a CFO’s misunderstanding of pharmacy as a labor-driven department with minimum technological needs.) The internal rate of return describes the proposal in investment terms. How much of a "return" can the institution expect from year to year on the money it spends on an automated system?

Don’t avoid bad news in your proposal, either, Jahera says. CFOs expect to see anticipated problems in your forecast. "I would absolutely want to see alternative scenarios," Jahera says. So provide an analysis of a best-, worst-, and realistic-case scenarios.

Keep the actual financial section short and readable, Jahera says, confining details of your calculations to the appendix. And above all else, don’t try to put a proposal together by yourself. "The best way to get the administration to buy into this is to find your allies out there," Jahera says.

Look to the experts to crunch the numbers you need. Every hospital has a CFO or a controller on staff, and it’s best to get his or her advice on the proper numbers and formulas to use. Remember, interest rates sometimes figure heavily in these projections of cost savings in outlying years, so you need current data to make your proposal accurate.