Too much is lost when companies try to combine into one overstretched entity. Strategic partnerships allow companies to take advantage of complementary offerings while not taking the attention away from fixing profitability, becoming more agile and supporting appropriate uses of technology to support the strategy.
Healthcare mergers are hot right now. How many health system mergers were completed last year? Let’s use Aurora Health and Advocate; Dignity and CHI, etc. CVS Health's planned purchase of Aetna was the headliner for a series of blockbuster mergers to close out 2017, and the trend has raged on this year, with the sector reporting $156 billion in deals in the first quarter -- the highest in years.
While it’s often in pursuit of savings -- for health systems and, theoretically, consumers -- we need to slow down. Mergers are not a panacea. Monoliths are not going to fix the fundamental problems we are facing; they will be making things worse because the integration activity takes away the attention from fixing underlining cost/profitability and the use of technology to support the strategy.
To deliver the best care at the best value, health systems, health plans and pharma companies need to hone in on their core competencies, shed operations that are not part of their central mission, and form agile ecosystems of partnerships that can rapidly respond to patients’ evolving needs and new business models being driven by health payers and consumers.
I’m not the first person to point out that economies of scale created by mega-systems do not necessarily mean savings for consumers, improvement in quality of care or profitability to the health system or provider. Mega-systems can slow down the fixing of cost structures when it is needed, the evaluation of business model evolutions and the application of advances in quality of care, which should be our top priority.
As companies try to merge themselves to success -- they become increasingly vulnerable to disruption by smaller players, specialized healthcare providers and plans. Innovation is coming from new healthcare delivery models and specialized health plans, both use technology to enable efficiencies and consumer focus.
Call it the GE effect, or pick any one of dozens of other companies that tried to be the best at everything and over time failed to be great at anything. Many healthcare providers are ignoring this lesson from the corporate world; speed and agility define the most successful companies, and prevent the complacency that leaves them vulnerable to losing that spot. It should be the focus of all entities to ask themselves the question, “How should we be disrupting ourselves, before we’re disrupted?” Asking the question is the first step, now you have to have the courage to do something about it!
Disruptors are nimble. Behemoths are slow. And America’s healthcare system needs change, fast; the kind of change that can’t sometimes come from within, therefore, using outside assistance for strategy, but the entity must have their teams all engaged in the execution, with oversight of the consultants.
Here are a few of the reasons why mergers move companies in the wrong direction:
• It’s an act of self-sabotage. Mergers require companies to choose between two distinct cultures and cause the partial destruction of both. This is a key reason for why most corporate mergers fail to make companies more valuable (or pass on value to consumers).
• At the topmost layer of most companies, a game of musical chairs ensues, in what is often an exercise in culling talent and leadership. Finding synergy through partnership, on the other hand, means leaders can remain narrowly focused on what they do best.
• Mergers inherently undervalue the companies involved, and often undermine the distinct competitive advantages each entity may have had in its core competency. An internal balancing act -- as with company culture -- leads to lower performance and the entity becomes internally focused on all the wrong things that don’t deliver value to the consumer.
While the financial benefits of these mergers might look good on paper, the ability of companies to actually operate at a world-class level -- and innovate faster than the competition -- is almost invariably compromised in the merger process. Why is that? The focus becomes who is going to sit in what position of power versus what and how are we going to deliver value to the market. There’s very little discussion about what are the services we offer, how will we deliver them and what do we do as separate entities that we will no longer do as a joint one? Once those questions are answered, then we should follow up with what is the delivery model that will differentiate us in the market, how will we deliver and who on the two teams are best qualified to execute.
The vision we should be chasing should mirror the leaders in the tech space. Alphabet, which is careful to keep its core competency -- web search and associated advertising -- separate from its other companies, is singularly focused on delivering the best product possible, again with a flexible and vast network of partners to maximize its effectiveness. Alphabet is one of the best in the industry in killing products that take away from their core focus. For example, Google Reader was one of the best reader products in the industry, but they decided it was not aligned to their core strategy and they stopped development and support. Just do a Google search on The Google Graveyard. Being able to kill products, services and projects is a key DNA capability to be a “best in class” company.
In pursuing higher value for shareholders, or simply a viable business model, expansion and scale are often essential. However, companies must be wary of achieving this growth by trying to expand expertise -- there is a more effective strategy, which also carries far less risk.
Companies that develop a reputation for delivering valuable services to an industry desperate to deliver more efficient care will be able to expand through more partnerships, and deeper relationships with existing partners.
Hospitals that hone in on delivering the best clinical care in their specialty areas can target a nationwide client base and attract cutting-edge partners to provide other services that support their core specialty offerings and/or technology solutions that will help execute and accelerate the delivery of their clinical services.
While mergers might continue grabbing headlines that should not be confused with business success. When the story of our medical revolution is written years from now, it will be about how an array of agile, specialized companies disrupted gigantic networks too slow to keep up and failed in being innovative.
The footnotes will mention that mergers were a final gasp in an antiquated notion of how healthcare companies remain vital -- a relic of how companies operated before the healthcare industry caught up with the rest of the corporate world.
Sheila Talton is President and CEO of Gray Matter Analytics and serves on the board of directors for Deere & Co., Wintrust Financial Corp., Sysco Foods and OGE, along with some non-for-profit boards, including Chicago’s Northwestern Memorial Hospital Foundation.