Modern science is complex and challenging, and the labs that do the technical work are expensive to set up and operate. Lab managers have a fiscal responsibility to manage the lab’s cashflow and make effective decisions on what the lab spends its funds on. To plan spending, lab managers create budgets that outline key investments, set priorities, and secure approval from line management on the level of financial support.
Cost as an investment
Each dollar spent in the lab reflects a decision. It is vital for lab managers to know their numbers and what they are investing in. In essence, lab managers need to spend money to ensure that the lab is focused on the right science and executing it with accuracy. . Each expenditure is building the lab and helping it deliver on its purpose. If there is spending that can’t be directly linked to the growth and performance of the lab, it needs to be questioned and investigated.
Budget planning
Budgets are effective tools to help lab managers plan how to best spend the funds available to them to build the lab. The overall lab budget can be organized in different sections that are focused on different needs; For example, costs may be categorized as personnel, equipment, repair and maintenance, space and utilities, informatics, consumables, or travel and training. One effective approach to building and managing a lab budget is to “pay attention to the law of large numbers”, as proposed by Sherri Bassner, former VP at Intertek. She suggests that the priorities of developing and managing the budget are to focus on the biggest numbers first. They have the biggest impact on the budget, have the most visibility to line management, and contain the greatest leverage for the lab. The big numbers need to make sense before moving on to the smaller categories.
Cost stack
Developing a cost stack for the lab is a valuable graphic and tool. It is essentially a pie chart showing the different budget categories and summing to 100 percent. This simple graphic shows the relative size of each of the categories and helps lab managers explain different budget-driven decisions to staff, line managers, and stakeholders. For most labs, the personnel budget will be the biggest slice of the pie. Most labs spend more than 50 percent of their revenue on people and benefits. Other significant cost categories for most labs include space and utilities, equipment and depreciation, consumables, and repair and maintenance. The cost stack is easy to build in a spreadsheet and can be quite useful in several different situations and conversations.
Investing in staff for long-term success
People are the biggest asset of the lab and modern science requires highly trained staff to deliver its mission. To obtain a significant return on investment (ROI) in people, lab managers can make decisions to continuously increase the value of the lab’s workforce. The keys are to align the size of the staff with the lab’s needs, effectively train and develop the people, and retain them. A retention rate of less than 90 percent requires extra investment in recruiting, hiring, and training and reduces the ROI in personnel. Taking actions to increase employee engagement will significantly improve lab performance and staff retention. These actions include things like ensuring effective supervision, providing opportunities for growth and development, providing constructive feedback, and celebrating success. Nothing will harm retention more than poor supervision. Ensure you are promoting the right people into supervisory roles and training them to be effective leaders.
Optimizing fixed costs
Fixed costs tend to be long-term commitments that are independent of the lab’s workload. These are costs like rent or mortgage, capital depreciation, leases, contracts, and utilities. These are fixed because they involve negotiated contracts and can’t be reduced in the short term. The key to optimizing fixed costs is to plan ahead and ensure that the contracts are negotiated to help the lab’s finances through duration, rates, and effectiveness. It is important that the lab has a good vision of its needs over the course of the contract and that it builds a reasonable ROI calculation for these long-term investments. Better planning will tend to generate fewer emergencies, prioritize needs over wants, and decrease waste.
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Keeping variable costs in check
Variable costs are proportional to the lab’s workload. These include operating costs like consumables, chemicals, reagents, solvents, standards, and cryogens. The amount spent on these materials fluctuates with demand on the lab. These costs can be controlled relative to the workload. Hopefully, when workload is high, the lab is getting sufficient revenue to pay higher variable costs. Lab managers have several levers to optimize variable costs. Some of the more important levers include managing inventory, managing expirations, buying the right materials, negotiating with vendors, and passing some variable costs along to stakeholders.
Cost management
Effective cost management requires lab managers to make data-driven decisions with proper advanced planning to responsibly spend the lab’s funds. Lab managers are accountable for the management of the budget and need to exert discipline to keep to its structure and intention. This often requires effective communication up and down the chain of command, appropriate delegation for task-driven costs, and effective monitoring of all spending. An effective approach to monitoring performance versus the budget is to do monthly make-goods on actual versus planned spending and actual versus expected lab revenue.
Simon Sinek says, “Great leaders are willing to sacrifice the numbers to save the people. Poor leaders sacrifice the people to save the numbers.” The people are the most important assets of the lab. Sacrificing people will deplete the lab’s strength, capacity, and morale. Whenever possible, lab managers can buy less, spend less, invest less, or postpone different activities to retain their highly trained staff. There is always pain in sacrificing the numbers—sometimes it means a lab manager may miss certain annual objectives. But the loss is far greater when the people needed to achieve the lab’s goals are no longer there.
