Spring 2018 Generations

GENERATIONS – Journal of the American Society on Aging

every doubling of cumulated experience, pro­ duction costs per unit dropped by 20 percent. The learning effect has also been applied to service businesses. The mechanism for learn- ing resulting in cost reduction is intuitive: prof- ciency increases with repetition through newly discovered techniques, better training, labor- saving technologies, and more efficient staffing approaches. This added profciency reduces the input of time required for each unit of service provided. Thus, the more experience—that is, the longer and deeper the history of delivering a ser- vice—the lower will be the cost for each unit. The steepness of the learning curve refers to how dra- matically per-unit cost declines with experience. A CBO must recognize that in the early years of a multi-year contract, it may lose money. Let’s take a numerical example based on that rule of thumb that a unit of service will cost 20 percent less after cumulated experience (volume) doubles. What does this mean exactly? Doubling cumulated volume means that if the per-unit cost were $100 for a program that has delivered 100 units of service, when it delivers that 200th unit, cost will be just $80 per unit—a 20 percent reduction. Note that cumulated volume is not the same as the quantity of a service delivered per unit time. The quantity of a service delivered per unit time is the rate of service delivery—the number of care transitions in a year, for example. Cumu- lated volume, in contrast, has no time dimension. It refers to the number of such transitions that have been conducted over the many years of the CBO’s experience. It is crucial for a CBO to account for the learning effect and to build it into its fnancial calculations and decisions. For example, when a CBO conducts a pilot program for a new service, it is often for the purpose of assessing its cost once implemented. Knowing that costs will cer-

tainly drop if and when the pilot is implemented and brought to scale, the service can be budgeted and priced appropriately. But even if the service were not part of a pilot offering, the CBO should still consider the learning effect when budgeting and setting a price. It must recognize that in the early years of a multi-year contract, it may lose money. Later, however, that loss can be recov- ered as the learning that comes with cumulated experience will drive down per-unit costs. To maximize learning, an organization needs to create a culture where learning is an explicit goal, is formally documented, and is deliber- ately shared. Even if learning does become dif- fused throughout an organization, there will be key individuals that have exceptional profciency gained through deep experience. The organi- zation needs to exert strong retention efforts to ensure these employees’ continued tenure and loyalty A CBO can also attempt to accelerate down the learning curve by hiring experienced individuals from other organizations. Conclusion CBOs need to look beyond the standard income statement method of expressing costs by line items and in terms of a period of time. To sup- port sound management decisions, costs need to be divided between fxed and variable compo- nents: they also need to be arrayed by program, by volume, and by cumulated experience. Under- standing the meaning and fnancial implications of breakeven analysis, scale and scope econo- mies, and the learning effect are crucial aspects of building CBOs’ business acumen. Victor Tabbush, Ph.D., is professor emeritus at the UCLA Anderson School of Management in Los Angeles, specializing in healthcare economics, healthcare leadership, and management capacity- building. Since 2012, he has worked with The SCAN Foundation to build the management and leadership capacity of community-based organizations that provide long-term services and supports to older adults and disabled individuals.

64 | Spring 2018

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