Merger and acquisition activity among hospitals and health systems has been on the rise, and many expect this trend to continue. Whether your organization has undergone many prior transactions or you're pursuing your first transactions in years, you need to be prepared. Even if you have no M&A activity in mind, in order to effectively navigate the current healthcare landscape, you need to be able to systematically evaluate opportunities as they arise.
A tool that is often described as being essential to this preparation is an "M&A playbook." But what, exactly, is an M&A playbook? Is such a tool really effective? How does an organization use it? Should your organization buy one? Build one?
The Good
An M&A playbook is a published set of best practices that can help guide an organization through the complex stages involved in a successful transaction. Your workforce is most likely busy executing day-to-day business and a set of best practices can save time when it comes to integrating or divesting during a transaction. To illustrate areas that can be streamlined, a hospital-specific playbook may include the following:
- Due Diligence – Preliminary research guides to assess a partner (e.g. cultural questions to ask, operational metrics around ADT to consider)
- Integration – Templates for planning and executing the merger (e.g. tools to evaluate and integrate clinical pathways, care coordination processes, revenue cycle processes while positioning for scale)
- Long-term value capture – Tools to calculate and track progress towards initial integration goal (e.g. synergy models)
In addition to saving time from an already stretched workforce, an M&A playbook also helps keep the wide array of stakeholders aligned throughout the process. The playbook can help set and manage expectations, ensuring that everyone understands the deliverables for which team is responsible. A large hospital merger may involve upwards of 50 different project managers and participants, so a mechanism that creates consistency and common understanding of processes and purpose can maintain efficiency and save ongoing execution times.
Lastly, the playbook should also incorporate lessons learned – and particularly the "hard" lessons – from previous transactions. As such, it becomes a living document that your organization updates after each transaction so that you are better prepared for the next one.
The Bad
You often hear that 70 percent of M&A transactions fail to achieve their strategic and financial objectives. So, an M&A playbook is the "secret sauce" that ensures you're one of the 30 percent who get it correct, right? Wrong. Many organizations mistakenly view the M&A playbook as a cookbook full of recipes that guarantee a successful transaction, but blindly following a playbook can be disastrous. Rather, look at the playbook as a resource to expedite and accelerate your execution process. Using a playbook, you can blend in your organization's prior M&A experience, as well as careful consideration for elements unique to the specific transaction. Anyone can read a book on how to perform a heart transplant, but a surgeon requires "on-the-job" training to actually perform one. Put another way, a playbook is not a substitute for experience and knowledge, but more of a guide to expedite and accelerate the process.
The lesson here is that every organization should decide what makes sense for its own M&A strategy. For example, a large hospital organization may focus on scripting repeatable parts of the pre-merger process in order to evaluate targets more efficiently. As a result, a large majority of its playbook may focus on diligence. In the healthcare provider industry particularly, there is no cookie-cutter approach to handling the operational and regulatory aspects of a deal. Integration and other implications will depend on the local patient population, regional competitors, clinical services provided, and healthcare regulations, amongst other factors. Playbooks provide a guide and a checklist. Experience drives the rest.
The Ugly
An M&A playbook can shine light on serious gaps in your M&A strategy. As you begin to define what you expect to gain from a possible transaction, consider seven possible strategic themes:
- Scale
- Scope
- Efficiency
- Leverage
- R&D/Talent
- Diversification
- Transformation
Context is extremely important for a successful transaction. In some cases, that context doesn't exist, and teams may feel like they are going through the motions without understanding what drove the deal in the first place. Worse yet, they are not provided a clear picture of the strategic theme and the value the stakeholders are expecting to realize. For example, what does an acquisition for transformation mean? What exactly is being transformed? How do you know that the transformation is complete? How can you measure it? What jobs will be affected and how? These are questions that need to be answered in appropriate fashion for all participants involved in the transaction.
Certain themes come with particular challenges. For example, if the goal of your transaction is innovation in the form of a novel patient care model, time and money must be invested and an inherent risk will be involved. Simply integrating people, processes and systems doesn't ensure clinical advancement. You need the brains behind that intellectual property – and knowledge transfer is challenging. You also need to ensure a culture that continues to foster and grow new ideas. Sometimes, provider organizations may strive for vertical integration by acquiring a software or process-related intellectual property but forget that they don't possess the organizational culture and structure to maximize the benefits latent within that IP.
At the end of the day, your clinical and operational team will be stretched and change will be difficult. Most provider transactions do not pay proper attention to change management and emotional implications to the organization, leaving memories of a negative experience in most who are involved. As a result, the organization is "trained" to resist future transactions. By using an M&A playbook and particularly the people and culture side of transactions, you can minimize this affect and perhaps even provide your health system a competitive edge by training your organization to be "M&A ready".
You're ready to create (or revise) your playbook. Where do you start?
Through trial and error, you've learned many lessons—and these should become part of your playbook. But, you can also benefit from other lessons learned. Here are a few we've picked up along the way in our transaction work:
1. Perform an independent integration assessment: Hire an external partner to assess your last transaction. An objective analysis can help identify gaps in your process, gain candid feedback from integration teams and highlight potential areas for improvement.
2. Understand the risks when acquiring smaller target: Small targets have maturing processes and sometimes early stage technologies that may not conform to regulatory standards. For example, in a recent diligence we found a small specialty practice to be missing proper controls and security related to HIPAA/HITECH regulations. By acquiring such a target, you may be inviting greater risks than apparent. Any financial liabilities become yours on Day 1, so plan accordingly.
3. Be realistic about regulatory compliance: Almost all healthcare organizations present some quality or compliance risks. Solving for all of these on Day 1 may not be feasible. On the other hand, waiting to find an organization that is 100-percent "clean" might result in no possibility of a completed transaction. Instead, focus on how to minimize risk. Put a plan in place to remediate compliance issues to show a "good faith" effort—but understand that some of these changes are significant and may take time. Build that into your 90-day (and beyond) plan, and show this plan to the regulators—proactively. They can read the papers. They know you did a transaction and can come in for an inspection "loaded for bear." Informing regulators of your compliance plan can save you headaches down the road.
4. Create accountability: There's nothing worse than an M&A team on autopilot. Successful acquirers name a single point of responsibility for each key area of diligence and post-close integration (e.g., IT, finance, HR, etc.). Spreading responsibility across too many people is a sure way to guarantee that no one is responsible. Don't allow employees to "pass the buck." Their marching orders should be to achieve the pro forma deal synergies that "sold" the deal in the first place.
5. Don't be afraid to dream big (but understand it may not happen overnight): A transaction is often the best time to go for completing the "nice to have" items you've dreamt of but never had the time or energy to complete. For example, it is ideal to inherit well-documented systems architecture for the whole IT environment, including system interfaces as well as cost of ownership information. It may take time to put such documentation together, but it can yield significant rewards in planning for future transactions.
6. Don't fall into the trap of information overload: Include research, context, tools and templates in your playbook. Articulate the goals of the transaction up front and then give your team guidelines on how and when to use the playbook to support those goals. Don't create dense content that users can't digest. If they don't understand it or it is too cumbersome, they won't use it. Change management and adoption is key – not just for the business you acquire but for your own teams as well.
If you are creating or revising an existing M&A playbook for your health system, an even better name for this living document might be your M&A "storybook." Successful transactions are the result of strong M&A managers who ask good questions, learn as they go and add their success stories to the playbook for the benefit of future users.
Jim Bedford is a director with West Monroe Partners in Chicago, where he is responsible for building the firm's Healthcare, Pharmaceuticals, Medical Devices & Life Sciences practice.
Munzoor Shaikh is a senior manager in the firm's Healthcare practice, with a primary focus on Managed Care, Health Insurance, Population Health and Wellness.
Mani Kumar, M.D. is a senior consultant in West Monroe Partners' healthcare practice
The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.