TCO Defined Part 2 (2/4) – Breaking Down Service Cost
Over the past months, we’ve been talking about the importance of understanding the many different costs that comprise total cost of ownership (TCO), and how to use TCO as a way of finding savings hidden in purchase costs.
In our last blog post, we drilled down into the costs related to purchasing equipment that are part of TCO, and how “purchase cost” is far more than just the unit price, and includes other costs for receiving, installing, configuring equipment and training staff.
In this post, we will be discussing the second phase of the medical equipment lifecycle that accounts for 68% of the annual costs to maintain, repair, and upgrade medical equipment… service.
While most hospitals can quickly recite the various steps they have taken to reduce purchase costs (or at least purchase “price”), the total costs for servicing medical equipment can be more than double the amount spent on purchasing equipment depending on how long your hospital keeps its equipment in service. The biggest cost with the greatest opportunity for immediate, and recurring savings for hospitals, lies within the “black hole” of equipment service agreements, most of which are multiple year commitments and thus represent a huge missed savings opportunity. The best way to avoid missing out on savings is to get your arms around the idea that TCO can help identify costs within your hospital’s medical equipment service costs where you can better align coverage and rates to save more overall, and only pay for the service that your hospital needs.
As we dig deeper into the elements of equipment service costs, we want to continue answering your questions and incorporate comments we’ve received to provide clarity into the many costs that should be considered as part of medical equipment TCO. This is the best way of understanding how much you are really spending every year on service, and more importantly, how much you may be able to save.
Q.) Isn’t service cost simply everything that’s included in equipment service agreement?
No – it’s much, much more. Many hospitals think of service as simply annual maintenance (or preventative maintenance) costs, plus annual repair costs. But, it actually includes every cost from the time a new piece of equipment is installed, including support, maintenance, repairs or other costs that may arise in order to make equipment usable after the warranty has expired.
While many of the costs associated with equipment service are included in the equipment service contract, many hospitals don’t budget for, or anticipate, the various unplanned, additional costs for equipment service that may be outside of the scope or coverage period of a service contract. This also includes older equipment that may not be eligible for a service contract. The one guarantee for hospitals that don’t have a complete, or realistic picture of their total cost of equipment ownership, is that they will nearly always end up paying more than they need to for many costs related to service listed below:
- Annual Preventative Maintenance
- Unplanned Repair
- Planned Hardware Upgrades
- Unplanned Hardware Upgrades
- Part Replacement
- System Relocation
- Operating Software Upgrades
- Application Software Upgrades
- Technical Training
- User Training
Together, these costs on average represent 68% of total annual equipment service costs, and is both the biggest cost within the medical equipment lifecycle, as well as the biggest opportunity for savings.
In our next blog we’ll break down the costs related to the final phase of the equipment lifecycle – disposition. We’ll explain how disposition and recovering value from equipment at end of life fit into the TCO picture, and how you can use a better understanding of your hospitals TCO of medical and IT equipment to uncover substantial, and recurring, savings.
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