Most occupational health practitioners will face having to make a convincing argument to the budget setters for adequate resourcing of their department. Patricia Southworth offers some tips on how to get the best deal.
Few occupational health professionals will undertake a career in their chosen speciality without some involvement in budget or resource planning. This will either be as part of a commissioning exercise for OH services (poacher or gamekeeper) or in the form of managing an in-house service where preparation or justification of a budget is required.
The preparation of budgets, of whatever type, pivot around three fundamental elements as shown in diagram 1. It is essential to understand, in some depth, how the elements interact in the specific organisation you are dealing with. The greater the understanding at this stage of preparation the more accurate and meaningful the budget will be.
| Diagram 1: Overview of budget types |
First is the approach. This means the start point from which the accountants in the organisation begin to prepare budgets. Are figures based on previous years with a percentage increase (or in the current climate possibly a percentage decrease)? Are they flexible throughout the time period of the budget or does each year start as if it were the first year of business from a zero base? You should also ask yourself what other factors, external to OH, may be influencing the budget – and to what extent are these driving the budget?
All budgets are influenced by the national and international economic situation. Various sectors of the economy are affected differently. Higher education, for example, has been dramatically affected by changes to the fee structures and particularly the latent effect of old systems of imbursement being replaced by new. In comparison, retail has seen the immediate and direct effects of reduced spending on the high street. Some of the wider implications and impacts of chancellor George Osborne’s October 2010 spending review are discussed by Paton (2010). OH professionals involved in budget preparation would be wise to consider how wider economic developments may affect their practice even if OH is not mentioned directly, such as changes to retirement age.
Time period
The second of the three elements concerns the time period over which the budget is to be set.
Traditional annual budgets seem to be moving towards longer time periods and, for some organisations, rolling budgets are the norm. Fixed time period budgets may allow for accrual of income or expenditure from one period to the next. This staggers expenditure or buffers the effects of variation in income.
On this aspect it is important to monitor the budget over the reference period and obtain information on your budget throughout the year, ideally monthly. Along with the time period for setting the budget, you need to decide which way the budget will be set. Thornbory and Farley (2007) expand on the different ways budgets can be set. These include:
- top down (budgets imposed by senior management);
- bottom up (all levels of management participating in the budget setting); and
- parallel (goals set by senior managers for departmental managers to negotiate the resource implications).
The third element is the type of budget being planned. You will need to know whether it is a capital budget or revenue budget. Tiffin (1998) defines capital budgets as “expenditure of relatively large sums of money on long-term assets”. Typical examples are:
- replacement of worn-out assets with new ones; and
- development of new business opportunities.
Certainly most OH units will have some element of capital expenditure, whether this be expenditure directly on equipment or in development activities for staff. Importantly, where do the depreciation costs associated with the service, for example equipment, sit?
Revenue budgets are often called operating budgets and refer to the streams of incoming and outgoing money needed to run a business or unit. In the simplest terms, this may be a sum of money allocated to an in-house OH service to deliver the organisation’s OH needs.
It is important to know whether or not your budget is interdependent with another in the organisation. Many OH budgets are intertwined or are sub-budgets within the HR or health and safety allocation.
When it comes to budgets, it is best to know the beast with which you are working.
Considerations of budget planning
However the budget is organised or divided up, it is vital to become involved – because if you don’t influence your allocation, someone else will. It is also important to avoid any mismatch of expectations in what OH can deliver. Diagram 2 shows a hierarchy of budget planning objectives.
First, what are you expected to achieve by the organisation? Agreement on this, in writing and upfront, helps enormously with budget planning and ultimately provides a reference point for monitoring the budget against objectives. The OH objectives will (or at least should) be linked to the corporate plan. This reinforces the need to have a voice in the budget planning process.
Matching expectations to the strategic objectives of the organisation is essential because ultimately that is what OH will be judged against. Targets may also be set by the organisation for income generation or cost savings.
The objectives considered necessary for the OH facility to achieve are often driven by legislation and minimising risk or costs relating to health. Again, a good planning activity will define and agree these up front. By and large, it is for the OH professionals to define, based on risk assessment, what these are likely to be for an organisation. Other related professionals, such as those responsible for safety, may also have valuable data to assist in defining these. The actions associated with achieving these objectives will form the core of the OH activities – for example, health surveillance and advice on absence.
Many OH facilities forget to budget plan for what they want to do. This involves a degree of horizon planning in terms of upcoming industry changes that could affect OH; it may also involve planning to justify the unique points of the services in other than purely transactional OH activities.
|
|
Practitioners should be aware, especially when justifying an in-house service, if they rely solely on core activities the added value of OH may be lost and, inevitably, an outside service will offer to undertake those activities at a lower cost. An example is the planning to achieve the Safe Effective Quality Occupational Health Service (SEQOHS) standards and the costs associated with achieving them.
Having agreed what you want, need and are expected to achieve for the organisation, make sure to stick to it. If circumstances change, priorities shift or an unplanned event occurs that redirects the focus of OH activities, make sure you have an agreed, well-defined change-control process. If the drivers change, apply it. This may involve prioritising or reprioritising activities, so look at the evidence base for the tasks you are undertaking and focus your resources on the best return for the budget investment.
“Nice to have” is the mantra trotted out when it is not clear to the organisation what it is getting for its spend on OH (or indeed any activity). As Gregory, Lukes and Gregory (2002) discuss, “overhead” departments that cannot justify their contribution are subject to cost cutting.
The OH providers, therefore, whether in-house or contracted, must communicate their value to the organisation in terms that it will understand and regard as value. A well-planned budget is fundamental in achieving this.
Be as specific as possible about how the budget will be spent and, if possible, negotiate a little contingency budget.
Diagram 2: Hierarchy of budget planning
Considerations of resource planning
The financial considerations will largely be around staff costs, including those of direct labour – salary, tax, national insurance, pension and other benefits beyond the statutory minimum, including sickness pay, maternity and paternity pay and private health cover. Not only do these factors need to be considered and quantified when looking at the resource, but also where they are attributed to the organisation – whether they come straight off the OH budget bottom line or not, for example.
Non-direct costs, but ones that still relate to staff, will include training, supervision, development and the cost of achieving clinical governance. These can be straightforward in quantifying if the budget planning task (especially the agreement of objectives) has identified gaps in skills and knowledge. What is less quantifiable is the variation in staff achieving these aspects. Achieving competence in a new skill varies considerably from practitioner to practitioner, and therefore the training, supervision and development required.
Other tangible resource requirements cover the physical elements necessary to carry out the OH plan. In particular, these will relate to the overhead costs for premises, utilities and telephones, for example. Information technology is another often overlooked area. Although the basic IT costs may be picked up by the organisation (again, make sure this is clear), often the costs of any specialist OH software will not. Not only will a good IT system improve efficiency, it will also assist in monitoring OH activities and will be essential if you want meaningful data for management reports.
Specialist equipment may also be needed to achieve the OH objectives, for example an audio meter or spirometer and, with them, the replacement or depreciation costs.
Some of the less tangible resource considerations cannot be ignored when planning OH services. The investment required by the supplier of engaging with stakeholders is vital in providing a quality OH product. If you are truly going to understand the imperatives that drive the business and use them to align the OH service, you need to build and communicate the OH message. Ensure you understand clearly who has the responsibility, authority and control so that nothing falls into the gaps.
Future investment relating to budget and resource planning
Too often this is an area neglected by OH commissioners of services. Dame Carol Black recommended in her report (2008) several actions to ensure investment in the future of OH. These were:
- clear standards on practice and formal accreditation for providers;
- clear professional leadership;
- a revitalised OH workforce;
- a sound academic base;
- systematic gathering and analysis of data; and
- universal awareness and understanding of latest evidence and most effective interventions.
To an extent, the introduction of accreditation for OH services under SEQOHS has addressed the first point.
However, in my experience the others are still not given priority. Commissioners of OH services want the best service for the least cost. However, if their decision-making process is driven entirely by cost, there is a real risk that the opportunity for investment may be lost.
The model of costing services based entirely on price of transactions (for example, doctor or nurse time) is a false economy for the future of OH.
Suppliers have a responsibility when devising cost models and competing for services in tender situations to ensure enough resource is available to achieve these elements and thereby secure the future of OH for all.
Customer lifetime value
|
|
This is the cash flow in and out attributed to the customer relationship. As a metric, customer lifetime value places more emphasis on customer service and long-term customer satisfaction rather than on maximising short-term sales or returns. It is a useful element on which to put a value because it informs decisions about:
- which contracts you may want to pursue in tender situations;
- assessing and investing in the long-term value of the relation;ship; and
- refocuses on the customer relationship as an asset.
There is indeed some scope in OH to work smarter and reduce cost or improve efficiency – for example, by replacing some nurse activities with technicians where this is feasible and professionally acceptable, a point taken up by Preece (2010).
Eventually, however, there will be a finite limit on “hard” efficiencies gained by these approaches and ultimately the quality of the advice is what will make the difference between an effective OH service and a less effective one. This requires investment. We all know that commissioners will purchase the cheapest product if they perceive that all the choices are the same.
How do providers demonstrate value to their customers?
Most OH practitioners will have discussed the various tangible elements illustrated in diagram 3 and many will be working with their organisations to quantify them. Each of these variables has a direct cost associated with it.
Less tangible elements of demonstrating value are outlined in diagram 4. These may still be measured by the organisation and often require a more qualitative approach to measurement.
The psychological contract the employee has with his employer has a profound effect on health and yet is seldom measured or respected as a value element within an organisation. It is also an area where OH can deliver a significant impact.
The value of OH is more likely to have an impact in less tangible areas. The challenge facing OH is to demonstrate this in a meaningful and convincing way within the organisation.
Because OH does not manufacture a specific product, it is important that practitioners:
- minimise costs or maximise profits to the organisation to demonstrate the value of OH;
- understand what they will be judged on; and
- measure their value as quantifiably as possible and communicate it well.
It is important to remember that if they get it wrong the internal unit will be re-engineered, downsized or outsourced and, in a competition for tenders, the lowest price usually wins.
Diagram 3: Tangible elements of OH value
Diagram 4: Less tangible elements of OH value
Patricia Southworth is director of the Robens Centre for Occupational Health and Safety.
References
Black C (2008). “Working for a healthier tomorrow”. Department of Health, Department for Work and Pensions. London: TSO.
Gregory JW, Lukes E, Gregory CA (2002). “Using financial metrics to prove and communicate value to management”. AAOHN Journal, 50; (9) pp.400-405.
Paton N (2010). “Does OH face cuts?”, Occupational Health, 62; (12) p.8.
Preece R (2010). “Improving efficiency in OH”, Occupational Health, 62; (10) p.13.
Sign up to our weekly round-up of HR news and guidance
Receive the Personnel Today Direct e-newsletter every Wednesday
Thornbory G, Farley L (2007). “Budget basics”, Occupational Health, 59; (8) pp.20-21.
Tiffin R (1998). Finance and Accounting Desktop Guide for the Non-financial Manager. London: Thorogood Publishing.
