This article is the fifth in a series examining the writings of well-known economic thinkers in light of the modern healthcare organization. Previous articles in the series examined Alfred Marshall’s perspective of growth, Marx’s ideas about capital, Joseph Schumpeter’s thoughts on the necessity of innovation, and F.A. Hayek’s perspective on prices. This article explores Frank Knight’s ideas about risk and uncertainty.
"We have to adapt and overcome, that's all we can do." Frank Knight, a founder of the Chicago School of Economics, knew life and business require risk and uncertainty — because we must adapt to the changing world around us. Healthcare is changing rapidly, exposing health systems to new risks and an unknown future. Many leaders and hospitals have responded by sitting idle, shunning risk and turning away from uncertainty.
As a teacher and mentor to Milton Friedman and other great economists, Frank Knight pointed to the differences between risk and uncertainty, and preached the necessity of both. Risk is a calculable amount of cost, benefit and failure. Uncertainty is the "absolute unpredictability of things, out of the sheer, brute fact that the results of human activity cannot be anticipated."
Profit and success require a possibility of failure. Some successes and failures are calculable, allowing us to weigh risks against the potential payoff. Other successes and failures are unforeseen. We do not know with certainty the outcomes of capital investments, nor do we know how Americans will respond to the changing healthcare environment. But uncertainty is exactly where investment, innovation and success are born. Mark Zuckerberg, as an insightful 28-year-old entrepreneur, guaranteed only one thing in a quickly changing world: "The only strategy that is guaranteed to fail is not taking risks."
Here are five strategies for health system leaders to employ when approaching risk and uncertainty.
1. Develop a pragmatic approach to undertaking risk and uncertainty. Start by defining the problem or opportunity. There is nothing worse than a misdirected solution to an opportunity or problem. Clearly define the knowns and unknowns of the opportunity, and determine which unknowns can be resolved — keeping in mind that not all unknowns can be known. Use this information to create a plan and understand the downsides and upsides. Always measure the possible rewards of a decision, along with the potential cost of failure. If the cost of failure jeopardizes the entire health system, then reconsider the risk. Also, if you cannot define what success is, then the reward may not outweigh the risk. Jim Collins' book, "How the Mighty Fall," highlights IBM in its fall from grace when the company failed to realize the future of personal computing. But the company went on to reinvent itself, undertaking risk and uncertainty, and morphing into an IT and systems consulting giant.
2. Establish a culture where bold risk-taking is encouraged. Some healthcare executives try to manage organizations, expenses and opportunities with zero tolerance for risk and uncertainty. This is the wrong approach. It is necessary to grab opportunities and take calculated risks, knowing that some will succeed and some will fail. Charlie Martin, CEO of Vanguard Health Systems, created a culture of risk-taking at Vanguard. Under his leadership, Vanguard purchased several struggling hospitals from Resurrection Heath Care in Chicago in 2010 —at a time when other systems were abandoning hospitals in large northern cities. Mr. Martin's unconventional wisdom led to value creation and paved the way for a substantial acquisition premium paid by Tenet Healthcare Corp. The culture of an organization begins with leadership.
3. Recognize the reality that all information will not be available to make a decision. We live in an imperfect world, and information will not always be perfect or even available, but that should not prevent us from making decisions. Be comfortable making a decision with only 80 percent of the available or verified data. Waiting until you have 100 percent will usually result in missed opportunities. Set a timeline for decision points for each opportunity. This will help prevent your organization from falling into "analysis paralysis." A Massachusetts hospital had MRI backlogs of one to two weeks, was considering a second MRI unit to expand capacity and grow. The hospital was stuck in analysis and failed to move forward. Meanwhile, the local competitor bought an additional MRI, expanded capacity and took market share from the slow-moving hospital. Indecision has more downside than upside.
4. Create a sensible plan. The plan should take into account the realities of your capabilities, team experience and resources. Overextending yourself, or your organization, opens you up to unnecessary risk and uncertainty. Many individuals or organizations have big ideas that may require millions or billions of dollars, but the capital or know-how might not be available to execute. Many opportunities are missed, and many failures occur, when projects are under-resourced with money, time or talent — or when plans are not followed. When executing any plan, you must understand the risk and uncertainty involved, and make the appropriate commitment of resources required for implementation. Many hospitals have failed IT transitions because of plans that were not allocated sufficient resources — resulting in timelines that were not kept and responsibilities that were not met. When that happens, you risk upsetting patients and physicians, the lifeblood of the hospital.
5. Accept failure. Failure can be an opportunity to learn. Successful executives work on their decision-making to improve their percentage of successful projects. They learn better ways to identify key factors of success and find methods to gather more accurate information before decisions are made. If it looks like a project or decision is headed toward failure, admit the failure and try to set the project back on course. Don't be afraid to stop a project that is failing. Walt Disney was once fired by a news editor because he lacked imagination; his first animation company went bankrupt, and it is said he was turned down 302 times before securing financing for Disney World. So, accept failure, but don't stop there.
Taking risk is the lever that leads to growth and profit, but it's not always a smooth line. Recognize that innovation and uncertainty are found together, and that failures and successes can be great lessons. John Paul Jones, the father of the United States Navy said, "It seems to be a law of nature, inflexible and inexorable, that those who will not risk cannot win." Hospital systems and healthcare leaders should approach today's industry environment with a willingness to be bold in uncertainty — and to risk failure for the prospect of reshaping the marketplace for the betterment of the customer, the patient.
Barrett Clark is the director of strategy and analytics at Ivy Ventures, LLC, a consulting firm that helps hospitals grow outpatient service lines. His focus is on identifying and implementing strategic initiatives to help health systems grow profits. Prior to joining Ivy Ventures, Mr. Barrett was a financial analyst for the Financial Planning & Analysis Team at Wachovia Securities (now Wells Fargo Securities). He can be reached at bclark@ivyventures.com.
J. Stephen Lindsey, FACHE, was CEO at HCA Henrico Doctors’ Hospital for 16 years. He has served as an affiliate professor in the MHA program at Virginia Commonwealth University. Mr. Lindsey is a principal of Ivy Ventures, LLC, a consulting firm that helps hospitals grow outpatient service lines. He is a fellow of the American College of Healthcare Executives. He can be reached at slindsey@ivyventures.com.