CEO SUMMARY: Careful study of the most successful lab oratories operating today reveals a common characteristic: the effective use of sale s and marketing methods to boost specimen volume, revenue, and operating profits. This is true whether it’s a hospital lab outreach program, a commercial laboratory company, or an anatomic pathology practice. These laboratories are dynamic, expanding, and financially solvent. Here’s a look at why effective use of sales and marketing is fast becoming a critical success factor for all labs.
TODAY’S MOST PROFITABLE clinical laboratories and pathology practices share one thing in common. They understand the value of professional sales and marketing and use it to their best financial advantage.
Effective sales programs generate revenue growth and increased profits. This is true whether it’s a hospital-based laboratory outreach sales program, a commercial laboratory, or a pathology practice offering services to physicians.
It’s the opinion of THE DARK REPORT that effective sales and marketing will become a critical success factor for all clinical laboratories and pathology practices. This definitive prediction is based on two characteristics of the laboratory testing marketplace.
First, the operational structure of laboratories makes it easier to lower the average cost per test by increasing specimen volume than by internal cost reductions. A laboratory sales and marketing program gives the lab a way to increase specimen volume.
Second, the arrival of customer-driven management philosophies means that laboratories must pay close attention to their clients. An increasing number of labs will adopt the goal of “meeting and exceeding the expectations of its customers.”
To accomplish this, the lab will need to interact intimately with its client base. Sales and marketing tools can accomplish this with maximum efficiency. By definition, it is the function of sales and marketing to regularly interact with both existing customers and new client prospects.
Taken together, these two market characteristics demonstrate why effective sales and marketing programs will be a critical success factor for laboratories and pathology practices.
Naysayers exist within the lab industry. These are individuals who cannot see a relevant role for sales and marketing in their particular lab. On the surface, that view might seem to be true for labs organized to serve an internal base of customers, such as hospital laboratories.
However, when any hospital’s senior management creates a performance measure of “meeting and exceeding customer expectations” for all ancillary services, it will require the laboratory to interact with its internal customers.
This means the lab must interview clinicians, nurses, hospital staff, and patients to identify what expectations they have. The lab must then create and implement services designed to meet and exceed those expectations. Finally, the lab must go back and assess whether new services successfully meet the needs and expectations of the lab’s customers.
These steps certainly describe an effec- tive marketing and sales campaign from start to finish. It’s why THE DARK REPORT believes that effective sales and marketing programs will be a critical success factor for every category of clinical laboratory and pathology practice during the next few years.
Dynamic, Thriving Labs
Our definitive prediction is supported by events currently under way in the marketplace. In recent years, THE DARK REPORT chronicled the stories of many dynamic, thriving laboratory organizations. Remember Presbyterian Laboratory Services of Charlotte, North Carolina? Their outreach lab revenues grew from $3.5 million to $22 million between 1992 and 1997. (See TDR, October 27 and November 17, 1997.)
It was a similar story at 120-bed Olympic Memorial Hospital in Port Townsend, Washington. During a three- year period, the number of tests performed climbed 25% because of a sustained lab outreach sales effort in the rural Olympic Peninsula. It showed how even rural hospital laboratories can sell lab testing to physician offices and harvest major financial benefits. (See TDR, October 6, 1997.)
During the last two years, PacLab Network Laboratories, a regional lab network of nine hospitals and one commercial lab in Washington state, demonstrated that a regional laboratory network could become more than the sum of its parts through effective sales and mar- keting. Total specimen volume grew 25% in the first two years of operations while average cost per test declined 18% for member labs. (See TDR, October 19, 1998.)
Similar stories abound from the podium of our annual Executive War College, held every May in New Orleans. Last year, Dynacare Hermann Laboratory Services from Houston detailed how it aggressively sold the new combination of commercial lab-hospital lab joint venture to the local physician community. From 1996 through the end of 1998, outreach specimen volume grew from 20,000 per year to 180,000 per year!
Successful Outreach Sales
Much the same type of growth in specimen volume and revenue was generated at UMASS Health System Laboratory in Worcester, Massachusetts (War College-1998) and Centrex Clinical Laboratories in New Hartford, New York (War College-1997). Both are hospital-owned labs with successful outreach sales programs.
Each organization listed above recognized a simple fact about operating a laboratory: if the number of specimens remains flat or declines, then cost per test will increase from year to year.
These labs’ administrators and pathologists understood the consequences of that simple arithmetic—to stand still is to wither and go broke. Basic survival required them to increase the volume of specimens coming into their laboratories.
The business options they weighed are familiar: 1) buy someone else’s lab and add those specimens to your lab; 2) consolidate specimens from several laboratory sites to increase volume at the core lab; 3)send out testing to a cheaper source; and 4) use sales and marketing to compete for specimens now flowing to other labs.
Look at the pros and cons of each option. Buying another laboratory to
close it and divert specimens to the acquiring laboratory is a strategy that was never totally successful in the past. Clients of the acquired laboratory tended to switch their lab work to competitors in response to service breakdowns that occurred during the acquisition process.
Hospital Lab Consolidation
Option number two is lab consolidation. That is the most common strategy used by hospital systems when they rationalize lab resources across the multiple hospitals. It is also the formula used by the three national laboratories in recent years to lower their cost per test in the face of declining reimbursement.
It is certainly a business strategy that cuts costs. But it comes at great pain to employees, clients and the community. Main labs and satellite labs are closed to shift specimens to the core lab. Med techs and staff are laid off. Services are cut back or eliminated, antagonizing physicians and clients. Even though costs are reduced, it is not a happy process for anyone involved in the downsized laboratories.
Sending Out Tests
The third option, sending out lab tests to cheaper testing sources, certainly can lower costs. But it also comes with con- sequences. Turnaround time is increased while service to clients is reduced. The savings which result from sending work to cheaper laboratories must be realized by terminating experienced staff. As with consolidation, these are not positive consequences for the lab, its administration, employees, and clients.
Using sales and marketing to boost specimen volume is the fourth option. On the plus side, a sales program that produces regular increases in the volume of specimens means that average cost per test will decline. Increased specimen volume generally means, at worst, that staff remains constant or can be reduced through attrition. At best, it may require additional staff to be hired.
Increased specimens from the sales program may allow the lab to internalize testing formerly referred elsewhere. The improved turnaround time and service may strengthen that lab’s competitive position in the local marketplace. It might even make it easier to gain more managed care contracts.
Another benefit is that the laboratory can direct the sales people to pursue only those tests which have maximum value to the lab, either because of existing excess capacity, ample reimbursement or other factors.
Despite the “pros” in favor of a sales program, there are certainly “cons.” The sidebar at right lists six significant challenges which must be addressed before any laboratory sales program can succeed.
List Of Sales Negatives
Many laboratorians reading this list of sales negatives will nod their heads in full agreement. It’s true that creating a sales program is expensive, complicated, time consuming, and frequently unproductive. Sales people have a justifiable reputation for being difficult, causing problems, and failing to produce enough sales volume to make quota.
These arguments against a sales program can be difficult to refute. Yet, an effective sales program offers laboratories a business option not matched by the other options listed earlier. That is control. An effective sales program gives the laboratory control over its destiny.
Control over one’s business destiny is the holy grail for all laboratories. If managers have control, they can provide a good working environment for their staff. They can offer clients and patients a significantly higher level of laboratory services. There is enough profit margin so that owners, be they hospitals or shareholders, consider the laboratory an asset and continue to make investments in new technology and expansion of laboratory services.
The rewards of an effective sales program outweigh the risks and inconvenience. Moreover, an increasing number of laboratory executives and pathologists realize that a “do nothing” strategy for their laboratory guarantees failure in today’s healthcare market- place. Keep the status quo and your laboratory will slowly disappear.
Given the options of 1) acquisition; 2) consolidation; 3) send out; or
4)sales, it becomes easy to understand why today’s most financially successful laboratories and pathology practices chose sales as the key driver to survival.
…an increasing number of laboratory executives and pathologists realize that a “do nothing” strategy for their laboratory guarantees failure in today’s healthcare marketplace.
First, successful organizations want control over their destiny. An effective sales program can deliver that. Second, successful laboratories want adequate profit margins to support state-of-the- art testing capabilities and good employee benefits. Targeted sales programs make that possible.
Third, successful organizations want to stabilize their market position and gain clout with HMOs and physicians. Good sales programs create clout in the marketplace and strength at the managed care contracting table.
Sales Programs Have Their Own Challenges
Even though a laboratory sales program can deliver positive benefits, it certainly comes with its own set of management challenges. Here’s a partial list.
•First, it is expensive to design and implement a sales program. There are significant up-front costs.
•Second, it takes competent sales representatives to generate sufficient sales volume to recover costs and contribute operating profits.
•Third, sales people require active and diligent management, by someone knowledgeable about sales. Most lab managers lack this particular skill and experience.
•Fourth, the marketplace is always changing, many times for the worse. That means the “perfect” sales plan of January may be a “money-loser” by September. Effective sales programs must evolve with the market.
•Fifth, sales people will often sell unprofitable business. They can do this by offering discounted pricing, giving away too much in services (courier pick-ups every two hours), or signing up a client whose patients represent poor reimbursement prospects because of their payer mix.
•Sixth, sales is a “people process.” Sales reps are notoriously unpredictable. They are emotional, willing to take chances that upset established practices, and can often be excellent at dodging responsibility for their actions, and their lack of sales success. Simply put, managing sales people is challenging at best, frustrating at worst
Weigh The Facts
Lab executives and pathologists will soon have to weigh the facts and make their own decision. Are the many “cons” of a sales program really daunting? In the face of the laboratory sales successes demonstrated by Dynacare Hermann, PacLab, Olympic Memorial Hospital, Centrex, and UMASS mentioned earlier, can concerned managers continue to ignore the power of sales and marketing to give their laboratories stability and financial strength? Probably not.
For those laboratories that decide to pursue a sales and marketing strategy, the next question becomes “How do we maximize our chances of success?” That question has a simple answer.
Laboratories should pursue excellence in sales and marketing with the same vigor and commitment that they pursue a superior quality of test results. This requires them to do several things.
One, commit to dealing with, and solving, the people issues necessary to manage sales reps. It’s a “messy” process, but it has great rewards.
Two, hire professional sales people with a demonstrated record of past success. This usually means your existing med techs are your worst candidates for the sales rep position.
Three, get access to a professional sales manager. Sales managers know how to manage sales people and help them achieve quota—or find a new job. Contract or part-time sales management is used by a number of hospital laboratory outreach programs.
Four, appreciate the distinction between sales and marketing—give each its fair share of resources.
Five, develop a good sales incentive plan. Pay not on gross revenue, but on net profit earned by the laboratory.
Six, benchmark “world class” laboratory sales programs. Go on site visits. Learn and borrow from the best. Let winning labs teach you how to succeed with your own lab sales program.
Every laboratory which makes a definitive commitment to sales and marketing excellence will find the path to be difficult and challenging. But effective sales and marketing is the critical success factor. In the coming market cycle, it will be what separates winning labs from losing labs.