Monday, November 10, 2008

The Impact of the Economy on Healthcare IT Spending

I was recently asked to comment on the impact of the struggling economy on my IT spending.

In all my organizations, I have two kinds of budgets - capital and operating.

Capital is used to purchase durable equipment and to fund project implementations. We often capitalize the labor, consulting, and license costs incurred when acquiring and installing a product.

Capital in my organizations is based on the following equation:

Available capital spending = Operating Margin + Investment Performance + Donations + Depreciation - Debt Service

In today's economy, spending on elective surgical procedures is going down, energy costs are rising, and reimbursement is falling - all putting pressure on operating margin.

Investment performance for many organizations, especially those which invested in mortgage backed securities, is causing loss of principal. Luckily my organizations had invested conservatively.

Donations are more challenging when consumer confidence is low.

The end result is that 2009 will be a challenging capital year because of lower operating margins and investment performance. We will have enough to keep the trains running on time, to ensure our disaster recovery efforts continue, and to remain compliant with all our regulatory requirements. However, we will extend the timelines of some projects to conserve capital.

Operating budgets are used to fund salaries, maintenance contracts and supplies.

For now, operating budgets are stable, but the outlook is conservative. Adding new positions is challenging and we are managing all our contracts carefully. We're negotiating hard and thinking creatively about how to trim operating expenses by reducing the complexity of our hardware and software environment.

All projects are function of Scope, Time and Resources, so tight operating budgets mean fewer resources which means narrower scope and longer time for our projects.

All this being said, I believe that economic challenges are good for IT organizations because it forces customers to prioritize their projects, matching their demand to limited IT resource supplies.

In summary, we are limiting major capital purchases, extending timelines, and focusing on the highest priority projects. We are not expecting major new enterprise purchases, instead we will refine and improve what we have.

One last thought. In the spirit of buy low, sell high - the best time to purchase is when demand and prices are at a low point. We will keep looking for bargains that will reduce our capital and operating costs over the long term. Eventually, the economy will improve and we want to be in the best position when that occurs.
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