Business

Comparative advantage: Analysing your practice

One of the challenges with running an allied health practice is the small margins we work with to achieve profitability.

There are plenty of ways to improve your margins and they generally rely on a reduced cost for the output achieved. This is why I wanted to talk about comparative advantage (Ricardo) and how this simple principle should at least be thought about in task distribution in your practice.

There are three main terms I want you to learn from this article:

  1. Opportunity cost
  2. Absolute advantage
  3. Comparative advantage

Opportunity cost

This is a fairly common term that people use in business and even in everyday life. I’ll use an example of a practice that will make it easy to understand.

You are a director of North Betoota Physiotherapy and you do roughly 2hrs of admin work every day, 1 hr before you start seeing patients and 1 hr after. This work is completely not related to the revenue generated during the individual sessions but is essential to running the practice. The 2 hours spent daily on this task does not increase or decrease revenue or do the same to the practices costs. Now, as a director your consult fee is $130 for a 20 minute session. So for every hour you are not seeing patients you could be making $390. So for you the opportunity cost of the 2 hours of admin you are doing every day is $780. So in this instance opportunity cost is a cost, in theory, of performing these other tasks. It has no direct cost but more a loss of revenue of completing the tasks. Make sense? Cool let’s move on.

Absolute advantage

Because we want to talk later about the cost of time spent on certain tasks we will use this as an example for absolute advantage also. At North Betoota Physiotherapy you and another Physio both lock up together at the end of the day which includes, cleaning the beds, vacuuming the floor, counting and reconciling cash and receipts, counting stock and consumables. You seem to be a lot quicker at every one of these tasks than your subordinate. This means you have an absolute advantage completing all of these tasks. You decide to split the tasks 50/50 and it takes you both 45 minutes to complete all tasks and shut up shop. This leads to the importance of comparative advantage.

Comparative advantage

This is where it becomes a little more complex but we’ll try to keep it simple. Now let’s say you want to reduce the time it takes to pack up and shut the clinic. Let’s break down our four tasks in to the time it takes you (check out online time management software such as Harvest), Practitioner A and your subordinate, Practitioner B to perform each task.

Practitioner A:

  • Cleaning beds – 11 minutes
  • Vacuuming the floor – 10 minutes
  • Counting and reconciling cash and receipts – 30 minutes
  • Counting Stock and consumables – 15 minutes

Practitioner B:

  • Cleaning beds – 22.5 minutes
  • Vacuuming the floor – 22.5 minutes
  • Counting and reconciling cash and receipts – 35 minutes
  • Counting Stock and consumables – 20 minutes

 

Comparative Advantage

The way you guys have been doing it the last 6 months makes sense, you perform two tasks each (which seem fair, right?) and it takes exactly 45 minutes. But you haven’t fully assessed the benefit of analysing the tasks and the fastest way to perform them. So my proposed change in structure would be this:

Practitioner A:

  • Cleaning beds – 11 minutes
  • Vacuuming the floor – 10 minutes
  • Counting Stock and consumables – 15 minutes

Practitioner B:

  • Counting and reconciling cash and receipts – 35 minutes

Comparative Advantage - Analysing your practice

This gets you out of the office 9 minutes earlier each day of the working week for the entire year. It ends up a saving of $1080 in staff wages (for the one extra employee’s time) for a slight change in the task profile. Ultimately, in this example the employee may be full time or may be completing these tasks before leaving as part of the employment package but it is aimed at highlighting the fact that analysing tasks and the time they take isn’t a waste of your time. Being able to reduce practitioners time spent on non-billable (or the opportunity cost of doing so) work will help increase revenue. And decreasing overall admin time should save you money in decrease wages.

You should start having your employee’s measure the time it takes to complete each task and divide based on what you now know. I can guarantee there will be a few instances where you will be able to make this work. The original theory is a little more complicated but we’ve adapted it to help you out.

If you have any questions on the above info or how to implement in your practice shoot us an email at hello@hippocamp.org

Leave a Reply

Your email address will not be published. Required fields are marked *