On The True Measure of Success


Posted by Tony Kovner

I recently read a great article in Harvard Business Review which proposed four steps in measuring success in the organization you work for.  (To my knowledge, it is uncommon for many organizations, including health care organizations and schools of public administration, to follow these steps as part of standard practice):

– Define your governing objective.

– Develop a theory of cause and effect to assess presumed drivers of the objective. (the step that’s usually left out)

– Identify the specific activities to help achieve the governing objective.

– Evaluate your statistics (reevaluate the measures you are using to link employee activities with the governing objective (also lacking in practice).

I’m interested in learning more about organizations that carry out these steps well.  Please share your thoughts.

Suggested reading: “The True Measure of Success” HBR by Michael J Maubossin, Harvard Business Review, October 2012 page 48.


The Role of Mergers and Aquisitions in the Not-For-Profit Healthcare Sector: Part II


Posted By Joel Wittman

Part II: Part II – What to consider when a not-for-profit is the acquirer

In last month’s post, I wrote about the considerations to take into account when evaluating the sale of a not-for-profit health care entity.  In this month’s article, I will look at the issues to consider when a non-profit is the acquirer.

Since Congress enacted health reform legislation in 2010, there has been a marked increase in mergers and acquisitions in the healthcare space. Although for-profit organizations drove the bulk of the nearly 1,000 transactions taking place in 2011, a growing number of nonprofits have begun to see mergers and acquisitions as part of a larger strategy to effectively navigate the reformed healthcare marketplace. This reflects the increasing role that nonprofit organizations play in the delivery and financing of healthcare in the US – according to an estimate by a nonprofit healthcare trade group, about 60 percent of community hospitals are nonprofit, roughly one-third of nursing homes are nonprofit, and almost 20 percent of home health agencies are nonprofit. Further, over 40 percent of all private health insurance enrollees receive services from a nonprofit health plan.

Nonprofit healthcare organizations consider mergers and acquisitions for the same reasons for-profit entities do. They seek to improve quality or efficiency; they desire increased access to capital, enhanced capital base or expansion of cash flow; they want to expand service lines, enhance product offerings or target other geographic areas; or they seek to gain specific types of talent or other assets. But unlike the for-profit environment, nonprofit organizations have other specific issues to consider as they plot a merger or an acquisition strategy. It is recommended that a nonprofit organization’s board and management perform a detailed strategic analysis before executing an M&A strategy.  The following four considerations are a solid start.
Fit. The idea of considering organizational fit when thinking about pursuing a merger or an acquisition with another company seems simple, but it can be a rather complicated matter. Although for-profit companies also consider whether a potential buyer or acquisition fits strategically or organizationally, nonprofit organizations have their mission to the communities they serve to consider beyond these primary issues when it comes to fit. Unlike for-profit companies, nonprofit healthcare organizations exist within a framework of mission-based operations, and the mission colors everything from operational strategy to daily execution. The leadership of every nonprofit organization considering an M&A strategy needs to be clear about its mission, how open to change that mission might be, how an M&A strategy will affect that mission, and what limitations – or opportunities – that mission offers. And if acquiring another non-profit, boards must think about how changing the target’s mission affects perception or buy-in among the target’s patients, providers, staff or payers.

Financial impact. Nonprofit board members and staff management need to think carefully about the financial implications of the potential transaction. Naturally, a common part of the M&A process is to weigh the financial advantages and disadvantages of the transaction, as well as to evaluate an organization’s financials and assess its real value. Part of the discussion is whether an acquisition is best the use of funds to further the organization’s mission.  In today’s environment, many providers are leveraging their healthy balance sheets to reach a level of scale that can offset future reimbursement cuts.  This may be an appropriate strategy, but an organization that may not have internal acquisition and integration experts must evaluate if the use of funds for an acquisition is priced appropriately considering the internal and external integration risk.  Nonprofits also need to consider additional layers of financial impact; any partners advising a nonprofit about a transaction need to be well-versed in these layers. Special tax situations must be considered, as well as the value and disposition of certain types of charitable assets.
Process. There is a logical process to every transaction – but nonprofit organizations have additional steps to follow and angles to consider. The additional steps can extend the acquisition timeline and put the nonprofit buyer at a disadvantage when they are competing for a target.  An experienced advisor can help a nonprofit board and leadership prepare and execute the specific processes that need to happen and minimize the potential disadvantages. All nonprofit M&A transactions will naturally need to involve a realistic valuation of the transaction, a substantive due diligence process, evaluation of legal and antitrust issues and a detailed analysis of financial impact. The legal and financial implications of a nonprofit transaction differ from those of a for-profit transaction, so any strategic process should accommodate not only specific evaluation and analysis of these implications, but appropriate planning to execute them.

Access. Probably the biggest difference between a for-profit entity considering a merger or an acquisition and a nonprofit entity is that in the nonprofit world, there are relatively few knowledgeable financial and strategic advisors who understand the nonprofit environment, and of these, even fewer have significant access and deep relationships across the industry. As your organization considers an M&A strategy, ask yourself whether you have the right access – not just to sources of capital, but also to potential buyers or acquisition targets. Do you know how to source and evaluate potential targets? Do you how to begin a conversation with a target? Finding the right partner with the right access and market credibility is critical to the success of your M&A strategy.

Last month’s and this month’s postings provided the reader with some thoughts about both the sell and buy sides of mergers and acquisitions in the non-profit health care community.  So, for all of you not-for-profit health care organizations out there, are you a seller or, perhaps, a buyer?  Either consideration will require a thoughtful and careful approach.   Please let me know what you decide to do.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry.  He can be reached at joel.wittman@verizon.net.


Let’s Meet to Meet


Posted by Jacob Victory

The routine is the same every morning. I enter my office. I walk in, put my large coffee, banana and yogurt (creamy, please) on my desk, hike off my hiking boots (I walk to work) and look for that button under my desk that officially starts the day: the “on” button on the computer. I guzzle a few sips of the piping hot coffee as I wait for the computer to boot up. Once the computer’s ready (it’s temperamental), I search not for new emails, not for documents, but I search for my schedule as I know they’ll be something (or, a lot of things these days) on my calendar that makes me wince. There is always one (or three) meetings staring back at me that garners the “I-don’t-want-to-meet-just-to-meet-anymore” sentiment.

In a time of doing more with less, with job cuts eating into staff productivity, with the excessive amount of presentations executives must present to other executives, most meetings don’t make sense anymore. I’ve reported to “Ms. Healthcare” for awhile now. She is brilliant, fun and very driven. Yet, she is obsessed with meetings—so much so that she proposes pre-meeting meetings to meet about what to meet about. She also requests that I prepare documents for these pre-meetings and send them to her 24 hours prior our meeting. Here’s how one typical meeting rolls:

First 10 meetings: I wait outside her door for her to wrap up her last meeting.

First “official” 5 minutes of the meeting: “What are we meeting about again?” she asks with her arms folded.

Next 10 minutes: I’m trying to walk her through the rationale of why I was asked to prepare a document for this meeting and guide her on what was in the document. It is clear she has not read it.

Next 20 minutes: We spend only 5 minutes talking about the relevant items and the next 15 trying to undo everything we discussed in the last 30.

Last 15 minutes: We discuss alternatives to what we think trying to do, only to nix all of the options in every second that follows.

Last 30 seconds: “I’m late for my next meeting,” I’m told, as I collect my pad and walk out of there with a bewildered look that leaves me confused on my next steps.

Amusingly, I’ve noticed that my meetings are scheduled only on Mondays and Fridays, which leaves me anxious on Sundays and exclaiming TGIF! on most Friday afternoons.  I will bet you cash-money that if you ask a fellow executive, you’ll get a similar response on what a typical meeting feels like. You may ask, “Why don’t you just refocus your boss and do a better job managing up?” Well, our response will be that the executives are not listening to their staff and are so immersed in meetings that they don’t realize this pattern of unproductive busy-ness that most take so much pride in.

Here’s how I’ve learned to focus the meetings that I lead:

  1. Send out the documents prior to the meeting and require people to read them before the meeting.
  2. Do not bring copies of the documents to the meetings. For the non-readers, they will quickly learn that you mean business!
  3. Send an agenda prior to the meeting. Keep it less than 4 bullets.
  4. With the agenda, send out the question you need to answer with the meeting members before the meeting ends. This will focus the meeting.
  5. Respect people’s time—you get extra brownie points for ending the meeting earlier than planned.
  6. Thank people for their work and make sure there are next steps, with accountable folks and deadlines.
  7. Set up the next meeting immediately, following the timelines given at the meeting.
  8. Presto. Here’s another cash-money bet: You’ll end the meeting in less than 40 minutes.

Now, I’m not espousing that we don’t connect with our fellow workers, and that we don’t mingle, schmooz and banter around. But we’re all busy and we’re all drowning in governmental regulations, expenditure reduction initiatives, staff shortages and changing policies due to the new health reform projects. To keep the ship afloat, let’s meet more efficiently!

Here’s another quick solution to reduce meeting time and keep things focused: conference calls. There is no better way to get a one hour meeting condensed into a 10 minute discussion that is pointed, productive and empowering. Chat away!

Jacob Victory, an NYU-Wagner alum, is the Vice President of Performance Management Projects at the Visiting Nurse Service of New York. Jacob spends his days getting excited about initiatives that aim to reform and restructure health care.  He’s held strategic planning, clinical operations and performance improvement roles at academic medical centers, in home health care and at medical schools. Jacob also exercises the right side of his brain. Besides drawing flow charts and crunching numbers all day, he makes a mean pot of stew and does abstract paintings, often interpreting faces he finds intriguing.


What Is My Company Worth – Part I


Posted By Joel Wittman, MS,MBA

Given the uncertainty created by Obamacare, health care companies have begun seeking consolidations through mergers and acquisitions as one of their future survival strategies.

This question of the value of a company frequently arises in conversations with owners, principals, and management of health care entities.  “Sure I’d sell my business.  Sure I think that we’d make a powerful team.  One question, though: How much is the business worth?”  The short answer is – it all depends.

To begin to understand the value of a company, the fundamentals of value must be explained.  A correct standard of value has to be established.  Fair market value fundamentals are based on the average price for the average buyer with neither party compelled to buy or sell and both parties being informed of the relevant facts.  Consequently, fair market valuations are typically at the lower range of the market.  Investment value fundamentals, however, are based on a specific price for a specific buyer and are based on an investor specific basis.  Ergo, value is extremely buyer dependent.  A company is worth what a buyer is willing to pay for it.  It’s like a home plate umpire in baseball.  The batter lets a pitch go by and then asks if it was a ball or a strike. The umpire’s answer: “It’s nothing until I make the call.”  It’s the same with the value of a business – it is worth what a buyer is willing and able to pay.

It is not my intention to be facetious about this topic but there is not a clear answer to the question.  There are common valuation techniques that establish parameters and metrics for valuing businesses.  Among these techniques are the calculation of the Net Book Value of a company, the use of Public Market Comparables, the creation of a Discounted Cash Flow model favored by financial buyers, the use of Comparable Transactions of similar companies if the data is available, and ,the most common metric,  the application of a Multiple of Earnings (after the appropriate level of earnings has been established – but that’s for another time).  Which leads to the question of how are multiples established?  Remember, value is extremely buyer dependent: one buyer may be inclined to assign a higher multiple to earnings than another buyer based on the first buyer’s reasons to complete an acquisition.  However, the range of multiples can be tied to the level of risk the buyer is willing to tolerate to “make the deal.”  Each buyer has a specific rate of return they would like to achieve from their investments.  An acquisition is another form of investment and can this investment earn a return comparable to, or greater than, other investment opportunities.

The range of value and assignment of a valuation metric is dependent on the risk of the investment.  The risk reflects the buyer’s required rate of return.  The lower the perceived risk, the higher the value metric; the higher the risk, the lower the metric and, intuitively, the lower the price.  However, there are determinants of risk that are specific to a company and can be managed by the company.  Among these are having:
•    diverse referral sources (the more, the better; the company is not overly reliant on one or two sources for its revenue stream)
•    a diversified product and revenue mix which can lead to a more predictable revenue stream
•    a diversified payer mix – don’t be too susceptible to changes in reimbursement
•    the influence of managed care on the company’s revenue stream – This typically
leads to lower reimbursement.  If a client of a medical staffing company ( such as a hospital) receives a large portion of its reimbursement from managed care payers they are less able and willing to pay full amounts for your company’s services.
•    middle management strength –  One of the most harmful things that you can indicate to a prospective buyer is that “you are the business” and that it cannot function without you.  Buyers are justifiably concerned that there will be a precipitous decline in revenues post transaction if this exists.  It is imperative to develop your management staff to the level of being able to function in your absence.
•     knowledge of your current business trends.  Is yours a stable and growing business that presents lower risk to a buyer?  What are the business trends in your marketplace?
•    knowledge of your competitors – Are they aggressively soliciting business? How many competitors are there in your market?  The fewer the number of competitors, the more predictable is your company’s revenue stream.
•    efficient accounts receivable management – This provides a snapshot of your operating infrastructure and management capabilities to a buyer.  The lower your company’s bad debt expense and days sales outstanding (the average time it takes to convert a sale into cash), the more predictable is your revenue stream, the lower is the perceived risk to the buyer, the higher valuation metric can be assigned to your business. Management and control of these company specific determinants of risk to the extent possible will increase the potential purchase price of a company.

Read my post in next month’s blog to learn about what strategies to implement to enhance the value of an M&A transaction.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.