How to find out how much a LIMS is worth

Want a tour of the financial jungle? Try seriously pricing out a LIMS!

A LIMS is quite an expensive item in labs. Typically, it takes around 7-12% of total costs. The line item is substantial, and keeping an eye on it is essential.

Since IT scales well, the larger the lab, the smaller the percentage that goes to IT software. On the other hand, in a small lab you do a lot of things by hand, and as you grow, more and more tasks require automation, which builds up costs.

Most small and medium-sized labs will tell you that they are paying an obscene amount for LIMS and that it’s not worth it. But deep down they probably realize that it’s not that simple. This is illustrated by the fact that there are also free systems on the market, usually ones that labs have developed for themselves and decided to share in the open. However, they are not popular. It would seem that if these vendors are so mercilessly charging you – take the free one and use it just to spite them. But in reality the operation of such free systems is more expensive than paid ones.

Laboratories suspect that the cost of the system cannot be summarized by what is written in the offer, and that suspicion is fair. LIMS costs are substantially higher. This means that instead of the price criterion, it is a good idea to apply a method of evaluation such as lifetime value to LIMS. LIMS is a durable product, and (as we have already written) laboratories hate to change them. Once purchased, you want to live with this system happily ever after, amortizing the cost of implementation.

Armed with this idea, let’s start cutting the path through the financial thicket.

1. Define the amortization horizon

This is a contextual parameter that depends only on you. Choose it yourself for your lab. Three years, five years, or seven years? For how long are you not planning to change your LIMS? At what point will you assess the financial value of this resource?

2. Set limits on LIMS costs

To determine a lifetime baseline, it’s a good idea to somehow relate the LIMS expenses within your chosen timeframe to the income you’ll earn during that time.

If you spend X dollars on LIMS in your timeframe and earn 1000X, that’s super. But if you spend X and make 2X, you are broke, even if the system is great (there are other cost items – rent, staff, reagents, instrumentation).

Even the most astute, talented, and intelligent managers can’t foresee everything that might happen. Will the need for laboratory research grow, and if so, which ones? Will there be a COVID outbreak, or will it wane, and will something else start to happen? Multiple factors pop up that make your revenue uncertain.

It turns out that you are dividing two unknown numbers by each other: what the LIMS will cost you in the interim, and how much you will earn over the life of the system. The task is complex, and you cannot solve it to the exact penny.

But it is possible to estimate approximately, and it is worth it.

To do this, first, ask yourself: what can the maximum level of your expenses be? And how is the LIMS pricing system organized so that at the time of purchase we can be sure that we will not pay more over that period?

3. Consider your resources: finances and personnel

It is most often new labs who need a LIMS assessment. You are only at the beginning of your way. You have an assumption that you will occupy a certain niche. Now, you have costs before you start collecting your revenue. The amount of money that you are shelling out directly from your pocket or borrowing is also significant.

The cost of running a LIMS varies greatly depending on whether you have a team capable of providing first-line support for the system. If you don’t have such a team in place, you will need to buy support from the vendor. If you have a qualified IT director who understands what it takes to make a LIMS run well, you will lower the costs of the LIMS operating, but pay that person more.

4. Don’t shake the vendor too much

It seems like if you shake down the vendor for discounts and pay less, you win. Strategically, however, it’s not a good idea.

Imagine you are a customer who brings the vendor only a little money. What does a prudent owner do with such customers? He cuts his costs. You are not a contributor, so why care? The vendor will optimize his strategy with you: he will come in, install the system, and then do nothing more. He will try to save himself money. And those savings will have a direct financial impact on you. Of course, the vendor will fulfill his contractual obligations, but when you need something else, you will hardly get it at a fair price. Therefore, it is dangerous to push for discounts. I am not encouraging you to pay any price without looking. But if the vendor is unhappy with the price, chances are you will get hit with a vengeance if you need his attention at some point.

Look at it from the vendor’s point of view. A good vendor likes to develop its system, and you give him that possibility. If you pay him enough, you can negotiate to change the system so its amortization period increases. When you buy a LIMS, you not only pay for what the vendor has already done, but you also partially offset the costs that await him in the future. You pay him so he can make his system smarter and earn more. If you pay little, the vendor cannot develop it, the system will degrade, your relative costs will increase, and as a result you will be able to squeeze less revenue from it. The lifespan of a system is not two days. Look to the future: you have a long way to go together.

5. Value-to-price ratio is the best criterion for evaluation

The higher the value of the LIMS, the better. The value of a system as a durable product is that it not only meets the requirements of our lab now but also remains relevant in the future.

And since we cannot predict what will happen in the external environment, our relationship with the vendor should be as predictable as possible. If the vendor has enough resources to keep the system up to date by making changes to it, you will earn more money.

So, the relationship with the vendor should be a symbiotic partnership:

– commit to supplying the vendor with resources to keep the system up to date, develop, maintain, and provide new features;

– make sure you pay the price you can afford.

This balance requires mutual trust. Understand how the vendor is using your money. Without this, you can’t evaluate the long-term usefulness of the product.

6. Find the balance between uniqueness and risk

Imagine you hired programmers and developed the LIMS for yourself. In this case, you bear the brunt of the cost. If you put the system in one more lab, your relative costs go down. The more labs that use your system, the lower your development costs are. On the other hand, if you develop LIMS for yourselves, you spend nothing on sales. The more popular you are, the higher your marketing costs.

In addition, the requirements for an in-house system and a system developed for others vary. They change with scale. Moreover, each laboratory adds its requirements and the general system accumulates a lot of things that your laboratory does not need.

So, development costs have not decreased in proportion to the number of labs. Find a balance. Developing an in-house system is a very high financial risk. With the most popular system, the risk seems low, but then customization management is a problem.

Again, think about the position of the vendor. If he has 5-10 customers, he will carefully get into the objectives of each lab. Now compare that to a company that has 1,000 customers. With whom can you bargain more effectively? Who is more motivated to have a private dialog with you? For a popular system, individualization increases costs hugely. It’s simply not cost-effective to cater to an individual customer.

Each lab finds its balance, moving the needle on the scale from in-house to popular solutions.

7. Look at exactly how the vendor is passing costs on to you

Let’s dig into how the vendor’s cost structure is organized and how they pass those costs on to their customers.

There are two possibilities. One is equalization. A socialist vendor, so to speak, splits the cost of creating a LIMS equally among users. Let’s say everyone pays $100 a month for a subscription to a certain system.

It’s simple, but it makes the price grow.

Such a system will appeal to those who, for their $100, get a bigger package of services than they bargained for. But it will not appeal to those who acquire less than anticipated. Such labs will not choose this system. As in any equalizing process, the big ones always benefit at the expense of the little ones.

Customers with more revenue and a low share of IT costs will love this socialism. Small clients will not benefit from it and will try to find something else. There will be fewer small clients, and in the end, no one to redistribute costs from. So the price of the system will increase.

The second possibility is the opposite: a system where every item has its price. Automate a test? Five dollars. And this one? Forty-seven dollars. A simple interface is X dollars. More complex wiring devices? Y dollars. You buy each module and each service separately.

The vendor devotes time and material to you. He wants to pass the costs he incurs onto you. Did you take a large package? So, you paid substantially more.

The problem is that your needs are unpredictable. A little different test structure? Invest. Buy a new instrument? Again invest. Oh, you didn’t know in advance that it was an instrument with complex integration? Now you wish you did.

Neither socialism nor a giant transaction list for every item is the optimal solution. Again, look for a sweet spot somewhere between these extremes.

8. Reduce everything to tests (or at least orders)

In a jungle, you cannot see the horizon: the vegetation is too dense. In the financial jungle, looking into the future is equally problematic.

One vendor says: “Pay $100K to buy a license, and I only charge you a small monthly fee”. (But how long should we spread this large payment over?)

Another says: “I need no money just now. Pay every month based on the volume of operations you will have”. (But what exactly will you need? How do you know if it will appear expensive or cheap?)

Never try to tell fortunes. Instead try to calculate the cost of a job over a short period. The basis for the calculations should be, as previously discussed, the ratio of price to value.

A test is what we technologically perform at a single point in time on a single instrument. For example, a clinical blood test is one test in terms of payment, although you may have forty lines on the report.

Your revenue relates to what tests you perform. There are CDC codes that insurance companies pay you for. You can compare LIS costs relative to those codes. You spent $1 on that code and got $10. And you spent $0.5 on another vendor and got 10. Thus, their system is better relative to that code.

It would be nice if the vendor charged you all these expenses in the following way: “Give us 50 cents for each test”. Then you could accurately calculate the ratio of value to price. What a pity no one on the market sets the price that way. Even those vendors who offer to pay variable costs charge prices per order. Acquisitions are unequal, and the average number of tests per order varies: in different labs, it can be 5 or 40 tests per order. But this adds just one more operation. You know the revenue, and the number of orders, and you can calculate the revenue per order. Compare it to the offer and calculate the value-to-price ratio.

Many vendors confuse things further by adding other fees to the variable costs (for the device driver, for integration with another system, for the patient portal, etc.). Technical support costs can count per month, year, or developer hours. Everyone counts costs in different units, so systems are not easy to balance against.

So, you know how many tests there will be and what average revenue you will get per test. Then compare all varying offers by our core indicator – value to price ratio.

Remember non-monetary factors: such as how user-friendly is the system, and what options are available as a free upgrade.

9. Avoid the trap of hidden costs

The main danger you face when doing your calculations is hidden costs.

– Infrastructure costs differ. What kind of computer hardware will the LIMS run on? The price of a cloud system includes the price of infrastructure. The need to buy servers is another cost. Then add the cost of running the infrastructure to the on-premise system.

– Systems may require different amounts of attention from your staff. This is difficult to assess when you have not operated the system. If you are already running it, there is a methodology of cost of process to evaluate each procedure within the company. Thus, you can estimate how much LIS reduces costs for a particular process. It is best to discuss the process cost together with the vendor.

– Be aware that the time you spend selecting a LIMS also costs money!

10. Never leave the CFO alone with LIMS estimating

Of course, cost estimation is the duty of the finance officer. But she may reduce everything to money, not tied to specific costs, trying to form an independent aggregate estimate. For value, this approach is hardly applicable.

People who fulfill the functional roles of CFO, medical director, and IT specialist must assess LIMS together. And since the issue is long-term and strategic, the CEO and the owner should be included in the evaluation committee. In a small lab, 1-2 people may represent this entire crowd.

Once you have your evaluations fixed, discuss them with any vendors you expect to engage. A vendor proposal is always a negotiation process. Show the structure of costs, and ask questions about strategy. Talk through everything so you can write it down in the contract later. The financial commitment should maximize value and give you the best value-to-cost ratio.