Recently we chaired a panel session at a conference run by the Medical Technology Association of Australia. The title of the session was Sustainable Healthcare, a panel discussion exploring the differing business needs of suppliers and hospitals. While it was about health, the problems with KPI’s apply to many businesses.
Are your KPI’s only short-term?
Imagine you are a buyer choosing between two medical devices. Both will do a similar job. There are just two differences one costs $18,000 and lasts 8 years, the other costs $20,000 and lasts 10 years. Which will you choose?
Let me help you by telling you that when you replace the item after 8 or 10 years, the patient needs major surgery costing say $20,000. So your decision is do I spend $2,000 now to postpone spending $20,000 from year 8 until year 10. Still not sure? Well how about if you use 100 of these devices a year? So do you spend $2,000 more a device to delay 100 operations at $20,000 each or $2Million from year 8 to year 10.
My advice would be spend the extra $2,000 per device to save spending the $20,000 for two years. Yet, I guarantee that most buyers would buy the cheaper one that lasts 8 years.
Why? Well first the buyer has KPI’s that only look at this year. Typically, a target cost reduction in dollars or %. So, if they buy the $18,000 device they have a saving of 10% or $2,000 a device which gives savings of $200,000.
If they buy the $20,000 device then some people might argue for 100 devices they paid a premium of $200,000 a year. So, the buyer has a disincentive to make the right decision for the long term. And what are the consequences for the buyer of committing the organisation to spending $2Million two years earlier than necessary? None.
What if we had a courageous buyer who understood the benefit of delaying the $20,000 operation by two years: delaying 100 operations costing $2Million by 2 years? They would not meet their KPI’s this year. And what recognition would they get for delaying spending $2Million by two years? None!
So, if there are no consequences for making a bad decision long-term and no rewards for making a good decision long-term then guess what happens? The buyer makes a decision that is good for KPI's in the short-term and bad in the long-term.
What about Total Cost?
How do we prevent some of these bad decisions? Stop looking at only price, start looking at Total Cost. In health this is the cost of the operation and the cost of other health specialists: until the patient is well. Don’t stop there, add in the annual costs for visits and check-ups for the next 10 years.
If the price is more expensive and the Total Cost is much less, then buy the more expensive one. And as for your KPI’s, measure savings in Total Cost because this will give you better decisions and a more sustainable business.
So, as you can see your KPI’s are costing money. A $2,000 saving can cost you $2Million. As a rule of thumb, look hard at Total Cost for items that will last 5 years or longer. For a more sustainable business, on items lasting more than 5 years ensure you set KPI’s for your buyers using savings in Total Cost.