Lab Manager | Run Your Lab Like a Business

Article

Businesspeople go over a business case in a meeting
iStock, utah778

Setting Up Your CapEx Business Case for Success

Formulating an persuasive business is vital to getting CapEx investments approved

by
Marwan Alsarraj

Marwan Alsarraj is the biopharma segment manager, Digital Biology Group, at Bio-Rad. He has been at the forefront of developing, marketing, and commercializing technologies in the past 15 years in...

ViewFull Profile.
Learn about ourEditorial Policies.
Register for free to listen to this article
Listen with Speechify
0:00
5:00

Capital equipment can be defined as a high-cost fixed asset (i.e., a confocal microscope) that enables a laboratory to continue or expand its current research or business capabilities. Whilst the purchase of consumable reagents and relatively low-cost equipment (i.e., a pH meter) can come from an operational budget, the purchase of capital equipment relies on a capital expenditure (CapEx) budget.

All business cases for capital equipment purchase follow the same format—an executive summary, a situational analysis, and financial justification—and there are several key factors that must be considered to increase your chances of success.

Building your business case

The executive summary provides an overview of the case study and is the first item that anyone will read, therefore making or breaking a business case. Using financial data as its backbone, it must convincingly outline the problem, propose a solution, and state the outcome of the purchase in terms of real value to the laboratory—all in a concise and direct manner. If different research teams within the same organization require the use of the same instrument, highlighting this multifunctionality in the executive summary will further bolster the business case.

Expanding on the concerns outlined in the executive summary, the situational analysis should demonstrate that the proposed equipment is the right solution, providing a more detailed breakdown of the decision-making process. It is within this section that you must acknowledge the potential alternatives (for example, outsourcing or purchasing a less expensive instrument) and ultimately present the pitfalls of these compared to the proposed solution. Every investment, especially a capital equipment purchase, has some element of risk. By demonstrating foresight of risk factors in the situational analysis, and why this risk is minimal when compared to the benefits, you will improve your chance of approval.

Determining if a capital equipment purchase is needed for day-to-day business operations often relies on obsolescence and capacity.

And finally, the financial justification should consider all costs, from purchasing to installation and maintenance, and the predicted financial benefits associated with the new instrument.

When is a capital equipment purchase needed?

Determining if a capital equipment purchase is needed for day-to-day business operations often relies on obsolescence and capacity. Will the equipment help meet new objectives or the team’s current needs? Does old equipment or software need replacing or updating? Is the business expanding or changing, and does the available equipment satisfy project needs according to the team’s capacity?

The available equipment should be able to satisfy current project needs and capacity. However, if a laboratory is expanding or relocating into a larger space, workflow capacity will also increase, creating a demand for capital equipment purchases to ensure existing operations continue running and scale up smoothly.

In addition to capacity, all equipment involved in a single workflow must be compatible with each other and the relevant software. Any change to the workflow, or if the software is no longer supported by the IT infrastructure or the manufacturer, may render an instrument obsolete. Similarly, the research or business objectives may change (i.e., to offer a new service, expand into a new market, or switch research fields) and existing equipment is therefore unlikely to meet the needs of the team. 

Continued technological innovation creates new instruments and software with improved speed, reliability, and accuracy. The decision whether to implement the latest technology hinges on the needs of the lab—for example, labs working in regulated environments require up-to-date software to ensure secure data management. Older systems may leave laboratories vulnerable to cyber-attacks.

Another key factor to determine if a capital equipment purchase is needed, which will also feed into the situational analysis, is if there are alternative solutions. For example, if the equipment is used infrequently, workflows could be outsourced, or equipment could be rented/leased. If an instrument is obsolete, there may be an option for repair. However, it is worth noting that if the instrument has been discontinued by the supplier, it will be unserviceable moving forward and parts for repair will be limited, making a replacement the most feasible option.

Laboratories must also consider the age and performance of the instrument. All instruments will inevitably breakdown with age, and although laboratories running with a tight budget may wait for a system to completely fail before considering a replacement, it is important to assess the purchasing costs against the potential costs and impact of system downtime, as well as the ongoing service and maintenance fees for older instruments. 

Justifying the capital equipment purchase

The justification documentation of a business case must acknowledge the views, limitations, and priorities of all individuals involved in the CapEx management, as well as the laboratory employees who will be using the new instrument day-to-day. A decision matrix presenting these can be a useful tool to balance viewpoints, stay on budget, and ultimately, identify the best-suited supplier. Whilst direct users of the equipment are best placed to confirm the technical specifications, where the instrument is needed, and research any potential solutions, the department and procurement leaders will be focused on the financial side of the business case, reviewing the overall CapEx and operational budgets. 

Providing an accurate breakdown of the total costs associated with the new equipment, from procurement to operational and maintenance costs throughout its lifecycle, is essential when justifying a business case for capital equipment purchase.

Another consideration is if the new instrument is compatible with the existing software; otherwise, the whole system may require updating or replacing.

Purchasing includes not only the cost of buying a new instrument but also costs associated with shipping, which can be affected by timelines, site location, and access for couriers. Once delivered, the instrument may need to be installed or built into a laboratory and will need to be integrated into existing systems and software. The business case must consider if successful installation and set-up can be achieved by in-house facility management teams or if it relies on a specialist engineer from the manufacturer. 

Another consideration is if the new instrument is compatible with the existing software; otherwise, the whole system may require updating or replacing. It is also vital to ensure that current consumables and reagents can be used, otherwise there may be additional costs incurred by switching to different products or suppliers.

Although most equipment comes with some form of warranty, the business case should outline if an insurance plan is needed. Similarly, suppliers often offer a maintenance plan with regular check-ups and ongoing support, but this comes with a cost, dependent on the level of cover and support—lower-cost plans may simply provide a call-out service in case of emergencies. Maintenance costs come from the operational budget for most teams, but if this is not increasing it may not be feasible to maintain the new instrument.

In addition to a cost breakdown, for laboratories operating under strict Food Drug Administration or European Medicines Agency regulatory and audit requirements, a bridging or comparability study for instrument changeover is critical, demonstrating that the workflow would achieve comparable data from its samples using the new instrument.

Innovation in life sciences and human health relies on efficient laboratory instruments. The process of scaling up laboratory capacity, replacing old equipment, or purchasing new technology that would help accelerate your team’s objectives, needs to be accompanied by a convincing business case. Several factors must be considered to determine whether a capital equipment purchase is the best option for your team and to ensure your business case gives you the highest chance of success for approval, including a careful evaluation of the overall costs involved.