Optometric Management Tip # 534   -   Wednesday, May 23, 2012
Reduce Your Expenses to Increase Practice Net

Today we reach the final article in a five part series covering ways to increase practice net income. I encourage you to develop an action plan that will improve your performance in all five of the factors. To review the other four ways to increase your net, just click here to go to the Optometric Management Tip of the Week archive.

It's certainly logical that if you cut your operating cost, you will increase your net, at least in the short term! But I urge you to consider the big picture of your practice and be very careful where and how you reduce expenses; I often say you can't cut your way to prosperity! Cutting expenses often means cutting service and quality, and that can lead to a loss of patient loyalty and reduced referrals. This can create a downward business cycle with reduced patient demand leading to reduced cash flow requiring more cuts to services. I think it's great to buy smart and shop for good values, but in some areas of your practice spending more will lead to higher profits in the long run.

Shop around
Most optometrists and their staffs already do an excellent job of finding good deals on all the supplies, products and services needed to operate a practice. We all have a natural tendency to shop for good values, change vendors when service or quality suffers and buy in bulk when it makes sense.

Some practices provide an incentive bonus to staff members based on net income or expense percentages, and I'm sure that can be effective, but if there is a good system of management and supervision in place, I don't think it is a necessity. My staff can only order from specific suppliers that are pre-approved.

How to negotiate with suppliers
While most ODs do a good job of comparing prices, most do not try to negotiate better deals. If they tried, they could save money. The best way to negotiate a better price is to have some form of leverage. You can't go to a supplier and just say you would like a better price. A better approach is to go to a competitive vendor and say you are considering moving some business to them and you would like the best price quote they can offer. Compare this pricing with what you are paying for similar products now. If it is much better, go to your current supplier and tell them XYZ company has offered you better pricing and you wanted to give them a chance to keep your business and see if they can do better.

It is very important, however, to realize that changing suppliers can easily result in unhappiness. The cheaper company may not provide as good service or quality or speed of delivery. Your staff may be very unhappy dealing with the new company. Patients may be disappointed in the product. All of this may not be worth the lower price! Be careful not to burn bridges. I would send only a small percentage of orders to the new company first and even if you switch to a large degree, keep a good relationship with the first vendor because you may want to go back.

I think we have a responsibility to negotiate in an ethical way with suppliers. It will work in your best interest in the long run because business relationships are important. One way to do this is to not share price lists or invoices from one competitor to the other. In my example above, you obtained the pricing information and made the decision yourself without giving copies of invoices and saying can you beat this pricing? Each vendor quotes the best price they can offer and they compete in the marketplace.

Return products
Be sure your staff keeps up to date with returning products that are covered under warranty or can be returned or exchanged. Sales reps may assist with this in many cases, but there are plenty of returned products that must be packaged and addressed and shipped back. If an office is understaffed, there may not be time to get around to this and the products pile up in a drawer or a box and eventually no one knows what to do with them.

Every staff member should have a side job that he or she is responsible to manage as time permits. Be sure products are retuned for credit in a timely manner and the credits are received on your account.

Buying groups and doctor alliances
One way for independent ODs to get optimum pricing is to belong to a group purchasing organization. By way of disclosure, I recently started a doctor's alliance company in partnership with Jerry Hayes, OD called Prima Eye Group. There are many different ways that these groups work, but the new generation of alliances is different than traditional buying groups because they additionally bring practice management services and educational programs to doctors and staff members. Alliances also differ because they do not typically bill and collect payments from members for purchases. The member doctors maintain direct accounts with vendors and they are afforded excellent discounts and rebates that are typically not available to individual practices or small chains. The basis for the increased discount is that the alliance group will work to build loyalty and increase purchasing volume for these preferred vendors. There is often some exclusivity of vendors within business categories with alliances, while buying groups typically represent nearly all vendors. Alliance groups typically charge a membership fee in the form of monthly dues; buying groups often keep a percentage of the discount the account earns as an administrative fee.

Best wishes for continued success,

Neil B. Gailmard, OD, MBA, FAAO
Chief Optometric Editor, Optometric Management