Benchmarking Part 2
This is the second installment in a two-part series on benchmarking optical dispensaries for ophthalmic practices.
ARTHUR DE GENNARO

Behind the cost of goods sold, payroll is the second most significant cost involved in operating a dispensary. Payroll is monitored not only as a means of cost containment but as a measure of the efficient use of cash in delivering the practice's goods and services to patients. For this discussion, we will focus on one area of payroll management: retail selling payroll (RSP).

Setting a benchmark for payroll presents some difficulties. RSP is defined as only the wages and bonuses that are being paid to employees who are within the considered workgroup: fringe benefits are not included. This is an important distinction because the pay rates for opticians are far closer in their range than the value of the benefits they receive. For example, in a unionized organization, the benefits' value could be more than double the norm.

Also, when referring to RSP, I am including only dispensary employees; all of whom may or may not be directly engaged in the selling process. If your dispensary has only one employee, it is the optician. Its RSP would be the wages and bonuses for that person. This employee, however, is also the receptionist, third party claims processor and file clerk. If you have a receptionist and 2 opticians, the receptionist would greet the patients, file the third party claims and file the patient records. Since these duties were part of the original job of the optician, that person's wages and bonuses would be included in the computation.

If you have multiple locations, you may have an employee who picks up orders for the laboratory. This person's delivering duty is not part of an optician's job description, so his wages would not be included in the RSP.

Net Retail Sales

Net retail sales can be defined as gross sales (charges), less discounts, less contractual discounts, and minus other adjustments. The reference here is to sales, not collections. This is an important distinction because every ophthalmology practice I have worked with used a cash basis of accounting. Cash accounting places the focus on collections. Managers for these dispensaries tend to be more focused on dollars collected on a given day as opposed to fees charged.

Such a focus on sales has its place within practices; however, RSPs can be skewed by causing payroll percentages to fluctuate from month-to-month measuring by collections. This is because collections are unpredictable. If a sale is made today, we do not know when the patient will take delivery, or when the third party insurer will pay.

For organizations who are sales focused, they use sales to measure results, not collections. I am not advocating you convert to accrual basis accounting; however, if you are exploring financial options, consider making an adjustment. Simply set up some payroll records that use retail sales as the basis for the computations instead of collections.

Normal Limits

Normal limits for payroll are between 18% and 20% of net retail sales. When payroll is below 18%, patient care can suffer. Opticians may take short cuts, hoping to see patients more quickly, but this results in lower average unit sales.

Conversely, when RSP exceeds 20%, man/hours in the dispensary are likely excessive. This is harder to evaluate because "work expands to meet the time." Some employees ritualize their work, doing it slowly and methodically.

Individual Dispenser Productivity

Opticians rarely have the same level of experience, earn the same compensation or have the same productivity. This makes looking at payroll percentages misleading; therefore, another measure to consider is the productivity of the dispensers as individuals — separating individual performances can provide clues to which dispensers need coaching. In this regard, there are two measures to consider.

Net sales contribution by dispenser. This is the number of dollars of net retail sales contributed by each employee. As a benchmark, best-in-class performances in this category will exceed $350,000 per full time employee; acceptable performances will be in the $250,000 to $275,000 range; and subpar performances will trail $225,000. Here are some examples of how net sales contribution by dispenser can help.

In order to maintain a 20% payroll percentage, an optician who earns $50,000 a year in wages and bonuses will need to generate $250,000 in net sales. What makes taking individual contributions into consideration helpful is those opticians with the highest salaries are generally the ones with the greatest experience and who need to generate the most sales to meet their work standards. Nonetheless, those dispensers who have less experience and earn lower wages can perform up to this work standard while posting lesser sales volumes. This should encourage employees who earn less to work hard to gain higher wages.

Sell-through of add-ons. Payroll percentages and individual contributions by dispensers help to define the quantity of the selling performance of the opticians. Evaluating the quality of those efforts means looking at the volumes of the different products that patients agree to purchase. This is referred to as the sell-through of add-ons.

For example, 25% of the patients who are encountered by one optician agree to purchase anti-reflective (AR) coated lenses, while 50% of the patients seen by another optician agree to do so. If all recommendations to patients were appropriate, obviously the second optician has acquired selling skills that are working more effectively. For this reason, a benchmark to measure individual performances is helpful.

Average Unit Sale

The average unit sale is the dollar volume spent by the average patient for each eyeglass unit. Simply stated, revenues increase if and when patients agree to purchase products that command higher prices. Before discussing a benchmark, it is helpful to qualify the term "average unit sale." I am referring to the net fee charged for a complete pair of eyeglasses — both a frame and a pair of lenses. Job orders for "frame only," "lenses only" and "one lens only" are not included, because a fluctuation during the measurement period in the quantity of those orders will skew the results.

An ophthalmology-specific benchmark is warranted because the needs and purchasing patterns of patients who visit ophthalmologists are different from those who visit independent optometric offices or chain optical stores. Therefore, published statistics based on industry-wide surveys, (known as "all doors" surveys, that is all 3 O's) will prove misleading. Generally, these are understated for a number of reasons, not the least of which is the volume of managed eyecare programs that are accepted by independent optometric offices and chain optical stores.

A reasonable average unit sale benchmark for this type of dispensary is $350; best-in-class performances will meet or exceed $450; and substandard performances will lag $325.

Increases in the average unit sale over the past several years have come from the sale of premium lens products and lens treatments, not frames. Such items as AR coating, high index lenses and photochromic lenses are leading the way. Products that enhance vision or are the most technologically sophisticated are driving the market.

Hazards

One of the dangers encountered when using the average unit sale computation is over emphasizing this statistic. It is possible to increase the average unit sale to a point where it becomes counterproductive. Opticians who are being asked to continually improve their average unit sale may begin to feel pressured to offer patients products they do not need.

It is a better strategy to set an average unit sale target and maintain it. As with all merchandising and positioning within a dispensary, the decision of what this benchmark should be will be wholly dependent on the demographics and the market position that the practice has chosen.

Another issue in focusing on average unit sale enhancement is that of improving one statistic at the cost of another. For example, an optician could improve their average unit sale performance by not diligently attempting to close those sales where the average unit sale will be low. This is known as allowing a patient to �walk.� Generally, this will include managed care patients and patients on tighter budgets.

Benchmarks significantly control costs. When used properly, they can provide staff with valuable information to guide and shape the future direction of the business.

Arthur De Gennaro is president of Arthur De Gennaro & Associates LLC, an ophthalmic practice management consulting firm that specializes in dispensary issues. He can be reached by phone at (803) 359-7887 or by e-mail at IsForU@aol.com.