Economic Considerations of Laboratory Information Management

2 Economic Considerations of Laboratory Information Management Systems Joseph H. Golden

Downloaded by UNIV OF AUCKLAND on May 3, 2015 | http://pubs.acs.org Publication Date: June 27, 1986 | doi: 10.1021/bk-1986-0313.ch002

Laboratory Management Systems, Inc., New York, NY 10010 Laboratory Information Management Systems (LIMS) have become a widely recognized tool for increasing the productivity and quality of service of the analytical laboratory. Laboratory managers are increasingly being faced with the problem of determining the benefits that LIMS could offer their organization, and of relating those benefits to economic measures which can justify a system's purchase or development. This paper presents an overview of the economics of LIMS. It presents a rationale for identifying sources of economic value to be derived from LIMS, and for estimating their worth. It presents the various factors that contribute to the actual cost of a system and finally, i t suggests financial analysis techniques which can be employed to justify system acquisition. The Laboratory Information Management System (LIMS) has achieved wide recognition as a powerful tool for increasing the productivity and quality of service of the analytical laboratory. Commercially available systems have been presented which range from inexpensive microcomputer based systems to half-million dollar or more superminicomputer based systems. In addition many firms have already developed or acquired custom systems tailored to their specific needs. Some large scale custom systems utilizing mainframe computers have actually been i n the multimiilion dollar range. Literature describing some representative examples of LIMS technology is cited at the end of this paper to provide an overview of this technology for the reader (1-7). LIMS Functions In general, LIMS can perform a basic set of functions which greatly facilitate the operation of analytical laboratories: They can provide for work scheduling, for status checking and sample tracking, for automated entry and processing of analytical test data, for This chapter i s adapted from ACS Symposium Series No, 261, Computers in Flavor and Fragrance Research, edited by Craig B. Warren and John P. Waldradt.

0097-6156/86/0313-0006$06.00/0 © 1986 American Chemical Society

In Computer Applications in the Polymer Laboratory; Provder, T.; ACS Symposium Series; American Chemical Society: Washington, DC, 1986.

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Economic Considerations of

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automated report generation, for laboratory data quality assurance, and for data archiving. In addition, they can provide management level reporting of work backlog, turnaround time and laboratory productivity, and frequently also provide billing and other administrative information whose compilation would otherwise impose a considerable clerical burden on the laboratory staff. Table I presents numerous examples of the functions that may be encompassed by LIMS although i t is unlikely that a l l of these functions would be incorporated in any single system. As the literature cited demonstrates, the technology for implementing LIMS is now well established. One of the major problems now confronting those responsible for bringing LIMS technology into their environment is the need to economically justify the acquisition or development of a desired LIMS. This translates into a need for quantitative measures of the economic impact that LIMS will have on the organization as a whole, and includes both the cost of laboratory operations and their relationship to corporate revenue. This economic view is required to establish reasonable objectives and budgetary guidelines as well as to estimate the economic cost to value relationship of any specific LIMS proposal. LIMS in different laboratory environments First, let us consider some ways in which LIMS technology can contribute to the organization utilizing i t . To better understand how mission impacts the benefits to be accrued through LIMS, we will consider analytical labs with different missions. R & D Laboratories. The analytical lab supporting R&D is principally involved in the development of new products and processes, the improvement of existing ones, and occasionally, the analysis of competing products. Testing is more frequently done by professional analytical chemists rather than technicians. The work is often non-routine and method development may be included as part of the analytical tasks. In a corporate environment, this lab is an overhead function with significant labor costs. Data archiving may be required for a research data base, for trend analysis purposes, or for legal requirements dealing with patent applications or litigation or for regulatory agency compliance. The R&D lab, then, would benefit from LIMS technology exhibiting high flexibility, the ability to structure large empirical data bases, and the ability to support scientific and statistical investigations. QA/QC laboratories. The QA/QC lab is responsible for the testing of feedstocks and raw materials, process intermediates, and finished goods, and may, in addition, be responsible for the development of standards for materials, processes, and procedures. The QA/QC lab is usually characterized by the routine, repetitive nature of its workload. Testing is primarily to specification and, where lot acceptance or rejection is involved, is often on a grade category or pass/fail basis. Data may be archived for compliance with regulatory directives and for analyses of trends in material or process performance.


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COMPUTER APPLICATIONS IN THE POLYMER LABORATORY Table I. Functions Encompassed by LIMS Technology

I.

ANALYTICAL SUPPORT FUNCTIONS Data entry and automated instrument interface Computational support Analytical result report generation Data archiving and retrieval Method and specification storage and retrieval

II.

WORK AND RESOURCE MANAGEMENT


Sample log-in Receipt and label generation Work assignment and scheduling Worklist preparation Sample tracking and status reporting Backlog reporting Report approval and release Reagent inventory and preparation control III. LABORATORY QUALITY ASSURANCE SUPPORT Audit trail generation Multiple analysis, blind sample and round robin tracking and variance reporting Automatic tolerance verification and limit checking Instrument calibration scheduling and tracking IV.

MANAGEMENT SUPPORT Lab productivity analysis Turn around time and customer service analysis Cost per analysis computation Equipment utilization analysis

V.

BUSINESS SUPPORT Labor time charge entry and reporting Customer account charging and/or billing Inventoried product data for order entry processing QC test data for feedstock purchasing and vendor qualification Data for corporate databases for regulatory agency compliance reporting (EPA, OSHA, FDA, TOSCA, etc.)


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The QA/QC lab, then, would particularly benefit from LIMS technology which would mechanize the collection and analysis of data from routine tests, which would assure and document adherence to appropriate test methods and specifications, and which would include automatic limit checking and pass/fail determination.


Commercial Testing Labs. The Commercial Testing Lab is a service organization whose product is i t s tests. Its profitability is dependent on providing a high quality of service while minimizing i t s own cost per test. The commercial testing lab may not need the data base of the R&D lab nor the speed of the Quality assurance lab, but because of the immediate link between its operations and i t s economic success, a system would be deemed beneficial i f it reduced cost per test, enhanced responsiveness to customers, or speeded the collection of receivables through automatic invoicing. The common laboratory management problem Regardless of the laboratory's mission, however, laboratory managers are confronted with a common sot of problems: Increases in data volume from increased use of smart instruments and from increased testing and record retention requirements imposed by EPA, FDA, OSHA, and other regulatory agencies; constantly rising operating and material costs; and ever tightening constraints on staff and material expenditures. These are manifested by increasingly burdensome paper work, inefficient utilization of resources, and exasperating searches for misplaced samples and data. The Economics of LIMS While these problems seem of immediate enough import to the lab manager, the economic impact of the laboratory's operations on the organization as a whole must be examined to assess the value to the organization of a capital investment to remedy these problems. R & D. Returning to our examples, The R&D lab, contributes to the long term profitability of the firm (rather than the short term cash flow) by developing and perfecting products and processes. While controlling the costs of R&D as a whole is important, the speed at which a specific analytical test can be completed is less important than the speed and success at which a project as a whole can be completed. This relates to the effectiveness of the lab at its overall mission. The ability of a R&D lab to quickly and successfully develop products and/or processes and i f necessary to protect them through patent actions, may ultimately impact the firm's market share and its profitability. QA/QC. The QA/QC laboratory, on the other hand, is concerned with the quality of the firms products and therefore can influence product costs and revenues (the cash flow associated with those products). It determines acceptance or rejection of raw materials and feedstocks and/or assesses their market value for the purchasing department. It


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COMPUTER APPLICATIONS IN THE POLYMER LABORATORY


frequently initiates the processing of claims against vendors providing raw materials which are below grade specification but are nevertheless used. The lab also may be responsible for process monitoring to determine process parameters which minimize the production of scrap and off-grade product. The economic impact of LIMS technology in the QA/QC lab is primarily produced by its ability to speed the delivery of dependable information to those responsible for making immediate decisions regarding the purchase, production, and sale of product. Since the QA/QC lab budget may be relatively small compared with product production costs as a whole, the improvement in laboratory staff productivity which LIMS also offers, may be, i n contrast to LIMS' importance an the R&D environment, actually of secondary importance to its impact on product costs and revenues. Commercial Testing. The commercial test lab is by definition, i n the business of testing. The satisfaction of its customers is paramount. Quality service and responsiveness holds old customers and attracts new ones. Getting dependable data fast is important, but here cost is critical. In a competitive market, the ability of LIMS to bring down the effective cost per test means more profit and/or the ability to keep or increase one's market share by lowering prices. The Financial Perspective. Having looked at some general ways in which LIMS can enhance a lab's contribution to the corporate bottom line, we must next consider how this can be put into specific financial terms. In this process i t will become apparent that the establishment of reasonable expectations for LIMS' economic benefits is to a great part dependent on understanding the mission of the lab rather than on the technical merits of the system (i.e., its ability to interface with various equipment or to perform specific functions desirable at the bench level). We will see, in fact, that the economic justification for acquiring LIMS technology must be based on an understanding of how the laboratory contributes to the corporate bottom line. This holds true whether one is trying to determine the scope of a LIMS that is appropriate, or to justify the acquisition of one being considered. In other words, we must consider not just what LIMS will do, but what it's worth. Assessing the value of LIMS To make that determination, we must examine the specific ways i n which the analytical laboratory's product — information — contributes to the corporate bottom line as well as the ways LIMS can reduce the direct cost of laboratory operations. The intent here will not be to provide specific economic relationships, but to highlight the analysis approach. LIMS value in the R & D lab. Returning now to the R&D lab, the economic value of LIMS is heavily skewed to the productivity area. This productivity improvement usually amounts to at least 10%-20% of total staff resources of a laboratory complex. The reader can verify this by assessing for his/her own labs the percent of staff activity spent manually recording data that could be captured automatically,


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transcribing and checking data, performing manual computations, searching for test data, looking up test methods and specifications, locating samples, consolidating data into issuable reports, and performing other clerical functions.


In addition, other economic benefits can be discovered although they may be harder to quantify. The speed at which a product can be perfected and brought to market may be the competitive edge through which the firm secures a lead position in its marketplace. Sometimes this means getting there first; sometimes i t means fielding a product in response to a competitor - before the competitor has been able to capture the market. Thus the rationale for LIMS technology in the R&D lab is not just an improvement in productivity or in the speed at which particular analyses can be completed, but also lies in the lab's ability to complete entire task projects in shorter time. LIMS value in the QA/QC lab. In the QA/QC lab the primary area to investigate is the time-value of the information i t produces. In the case of raw materials analyses, the ability to quickly accept or reject raw material lots may reduce costs associated with having to compensate for inferior materials or of holding materials or having to return them to their vendors. Similarly, the ability to quickly assess the quality and worth of raw materials in a competitive market may insure achievement of maximum value for the firm's purchasing dollar. In in-process testing, improving lab performance may contribute to process optimization or to reducing waste and rework. Here, the speed at which test data can be used to adjust a process can be directly related to the cost of the end product. This may be seen in the reduction of total production time and/or labor or in the reduction scrap or off-grade product, or in increasing the effective capacity (salable product per unit time) of the plant itself. Increasing effective plant capacity, for example, might reduce the need for finished goods inventories to accommodate peak demands. This would reduce the cost of inventory space, management, and insurance (it would also result in customers receiving fresher products where this is a factor). Furthermore, in applications where certificates of analysis are required prior to shipping or acceptance, time saved may translate into material holding and/or labor savings (e. g. for truck driver's or tanker crew's idle time awaiting authorization to depart). t

To this must be added the 10% to 2 0 % savings in direct lab productivity to be achieved through elimination of repetitive clerical work and through computerization of inefficient and error prone manual procedures. Commercial Testing. Once again, in the commercial test lab environment, the ultimate test for LIMS is whether i t makes the lab itself more profitable without regard for how i t s product, information is being used by others.


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Cost Analysis


Having taken an overview of where benefits of LIMS may originate, and how they may differ depending on the mission of the lab using the LIMS, let us consider what these systems may actually cost. First of all we must look at the total life cycle cost, not just the price tag on a purchased system or the development cost of an "in-house" system. This includes the costs of preparing a valid specification and/or requirements analysis (8), of site preparation if required (raised floors, air conditioning, etc.), of system purchase or development, of installation (including cabling), of integration into operations (including training and redundant activities during cutover), of continuing operation and maintenance, and perhaps even of insurance costs. If the system is developed in house there is the obvious cost of the development labor, but even if the system is purchased, staff will have to be committed to requirements analysis, liaison with the system developer/vendor, integration of the system into operations, and in-house system support and maintenance functions. If the system is modest and stand-alone (perhaps based on a small minicomputer or super microcomputer), only the acquisition cost may be significant. If the system needed is a large and expensive one (such as would be based on a mainframe or super minicomputer); and i f it requires specially prepared and/or air conditioned facilities, much cable installation and/or on-going service contracts, then a l l cost factors may require consideration. Cost influencing factors. In estimating the real cost of a LIMS, however, the actual cost may be significantly less than the systems purchase price or apparent development cost. In estimating the true cost of a system one must consider many factors: First of a l l , there is an immediate Investment Tax Credit which is currently 10%. This means that a system whose price is, for example, $100,000.00, would actually cost the firm only $90,000.00. Then using an accelerated depreciation rate, the system's cost can be written off over 3 or 5 years. If the firm in our example is in a 5 0 % tax bracket, as is typical, the actual savings would be $10,000 on the ITC, plus 5 0 % of the capital value, $95,000 (cost iess one-half the ITC as per the current tax code) or a total saving of $57,500. This means that the $100,000 system would cost'only $42,500 over a three year period. Now suppose that the firm borrows the i n i t i a l cash outlay to buy the system and is paying a rate of 13% interest. The interest payments are also deductible at the firm's tax rate so the financing cost, offset by its tax deduction, raises the total system cost to roughly $70,000. The exact figures would depend on the details of the firm's fiscal policies such as whether payments are made monthly, quarterly, etc. whether purchases are financed or bought out of cash reserves, and other factors. The most salient point is that the true cash cost of a capital acquisition to the firm is usually between one-half and three quarters of its price tag.


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The need to compare costs with benefits. Having looked at the real costs of a system one must then be prepared to answer that question, "is i t worth it?"


This is where financial analysis comes into play. It is the process through which one decides whether the time to computerize the lab has come, and i f so, how much or how little cost is justified by the anticipated benefits. It is also the process by which one can access whether or not a particular system being considered is worth its price. Returning to our discussion of benefits, we note that they fell into two principal areas: the time-value of information and the improvement in laboratory productivity. As we saw, assessing the benefits from the time-value of information requires examination of the total process through which that information will be used. For example, using data such as the anticipated improvement in laboratory turn around time, the rate at which material is produced and i t s value, and the current the financial losses attributable to scrap or rework, one can estimate the savings in dollars to be accrued (each hour of faulty production avoided through faster lab turnaround time yields as a gain to the firm, the revenue that otherwise would have been lost). Similarly, knowing the average labor, overhead, and General and Administrative (G&A) costs allows one to convert productivity improvements in the lab to dollar values of equivalent labor made free for more productive uses. Thus, by understanding your lab's mission, and how i t contributes to the organization's bottom line i t is possible to develop quite reasonable and persuasive estimates for the benefits achievable through LIMS. Having developed estimates of benefits as well as costs, these values must be compared. Since costs and benefits are not necessarily experienced in the same time frames, the same financial analysis methods used by the firm to make its other capital investment decisions must be used to justify the LIMS acquisition. The LIMS which is desirable from the technical and operational viewpoint can then be shown to be a truly beneficial capital investment and not just another corporate overhead expense. Application of financial analysis methods In general, one or more of three methods are used to justify major expenditures. The first, payback, is a measure of the time i t will take for cumulative benefits to equal cumulative costs (time to break even). This, by itself, may not be sufficient to compare alternative investments and projects competing for the same limited resources so one of two other methods may be used. These methods, Net Present Value and Internal Rate of Return, consider the earning power of money in making comparisons. Because investments earn compound interest, a dollar to be gained i n the future has less present value than one gained today. The NPV i s computed by estimating the yearly


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cash flow (benefits less costs) generated by the acquisition over its life and then adjusting each years contribution to the total to its current value based on anticipated interest rates. An NPV of zero means break even, a greater NPV means that profit is returned. Similarly, IRR is an estimation of the equivalent compound interest earning rate of the investment over i t s life. Since financial managers are responsible for attaining the maximum return on their dollars, IRR is an important tool for comparing competing projects and investments. It is frequently used when available funds for major capital projects are tight. Table II demonstrates how NPV would be calculated for a hypothetical LIMS, purchased as a package with negligible site preparation and with installation costs included in the purchase. It is to be acquired for a service laboratory primarily supporting R&D activities but with some minimal process monitoring responsibilities. The IRR for this project could be found by trial and error determination of the yearly discount rate which results in a zero NPV. A succinct discussion of these financial management analysis tools can be found in two works by Weston and Brigham. The first (9) presents theoretical and detailed analytical expositions; the second (10) is a more practical, applications oriented presentation. Conclusion A l l this discussion may seem a far cry from the problems of running a laboratory or of introducing LIMS technology to i t . Indeed, i f the lab is small, and its needs modest, a l l that may be needed to justify acquisition of LIMS technology is the general knowledge of LIMS value in facilitating laboratory management and in increasing the speed, quality of service and productivity of the lab, and some realistic estimates of the system cost and payback. 1

On the other hand, i f we are speaking of a large laboratory complex whose problems would necessitate a comprehensive computerization program costing from a quarter to well over three quarters of a million dollars, or perhaps to many millions of dollars, as some systems have cost, we may be dealing with a very different decision making process. For such major system acquisitions, a more thorough analysis of the system's economics will probably be required. In such a case i t is best i f those responsible for exploring and/or securing the benefits of LIMS technology, understand the financial decision making process that goes on in the firm and can assess for themselves the value of anticipated benefits and the investment which such benefits would justify. Not only will this insure a judicious system acquisition, but i t will develop, in advance, the specific data that the financial decision makers require and which proves the value of the system not just to the labs, but to corporate organization as a whole. Having familiarity with the tools of financial analysis, those seeking the introduction of LIMS technology into their laboratory environments will be well prepared i f such financial considerations are the ultimate arbiters of budget approval decisions. A


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Economic Considerations of LIMS

Table I I . Net Present Value - Discounted Cash Flow Analysis

Assumptions:

Cost of LIMS is $250,000 both depreciated and amortized over 5 years. Cost of money interest factor (I) is 13% and the firm is i n a 50% tax bracket. Lab has staff of 60 which, with overhead, costs a total of $3,600,000 per year.


LIMS will produce productivity savings of 5% the first year, 10% the second, and 15% thereafter. LIMS will produce savings from expedited QC testing reduction of rework and scrap, improved claims processing on out of spec raw materials, and lower inventory maintenance and insurance — of $25,000 the first year $50,000 the second, and $100,000 thereafter. One senior staff member will be committed to the project full time during the first year. Operations and Maintenance (O&M) will cost $25,000 annually thereafter. Formulae:

PVCF(n) = Present Value of Cash Flow for year n = CF(n) * PVIF(n) where CF(n) is the n-th year's Revenue less Costs and PVIF(n) = Present Value Interest Factor = ( l + l / i ) where n = the period (year) and i = the discount rate n

NPV = PVCF(l) + PVCF(2) + ... - Initial Cost

CF Item Year 1 Amortization of p r i n c i p a l ( - ) 50,000 Interest (-) 32,500 Project labor(-) 60,000 Tax Credits (+> 41,250 Depreciation (+) 47,500 P r o d u c t i v i t y (+)180,000 Revenue Gain (+) 25,000 Cash Flow 151,250 PVIF 0.8850 PVCF 133,856

Year 2

Year 3

Year 4

Year 5

50,000 26,000 25,000 13,000 47,500 360.000 50,000 369,500 0.7831 289,355

50,000 19,500 25,000 9,750 47,500 540,000 100,000 602,750 0.6930 417,706

50,000 13,000 25,000 6,500 47,500 540*, 000 100,000 606,000 0.6133 371,660

50,000 6,500 25,000 3,250 47,500 540,000 100,000 609,250 0.5428 330,701

NPV = 1,543,278 - 250,000 = $1,293,278; PAYBACK i n second year


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presentation of sound economic considerations added to the presentation of qualitative and technical benefits to be derived from LIMS technology can be decisive in the decision making process. Literature Cited


1.

Dessy, Raymond E. [ed], "Laboratory Information Management Systems: Part I"; Analytical Chemistry, Vol. 55, No. 1, JAN 1983 2. Dessy, Raymond E. [ed], "Laboratory Information Management Systems: Part II"; Analytical Chemistry, Vol. 55, No. 2 FEB 1983 3. Harder, Mark E., and Koski, Peter A., "A Microprocessor-based Scientific database Management System"; American Laboratory, SEPT 1983 4. Liscouski, Joseph G., "Distributed Laboratory Data collection and Management"; American Laboratory, SEPT 1983 5. Ouchi, Glenn I., "Lotus in the Lab"; PC World, Vol. 2, No. 2 FEB 1984 6. Reber, S., "Laboratory Information Management Systems"; American Laboratory, FEB 1983 7. Stinson, Stephen C., "Lederle's Toxicology Lab is Computerized Marvel"; C&EN, JAN 24, 1983 8. Golden, Joseph H., "Computerizing the Laboratory: The importance of System Specification"; American Laboratory, NOV 1980 9. Weston, J. Fred, and Brigham, Eugene F., Managerial Finance, Seventh Edition. The Dryden Press, Hinsdale, IL, 1981 10. Weston, J. Fred, and Brigham, Eugene F., Essentials of Managerial Finance, Third Edition, The Dryden Press, Hinsdale, IL, 1974 RECEIVED February 25, 1986


Economic Considerations of Laboratory Information Management

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