Economy of scale. We may not use the term much, but it is the concept that is driving many mergers in the health and human service field. By definition, economies of scale are “the increase in efficiency of production as the number of goods being produced increases…” The assumption being that if an organization can produce more of something, the cost per unit of that something will go down. This would be due to ‘scale’ – lower amount of overhead in proportion to direct costs and the effect of volume in getting maximum yield from infrastructure and staffing.
Larger organizations can spread the “overhead costs” for technology, financing expenses, compliance, marketing, legal counsel, and other core competencies over a larger revenue base – which gives them a lower unit cost in many cases. When you look at the “value equation” for health and human services, if benefits and brand are equal, the larger organization with the lower ‘price’ will be the better value and more competitive in the market place.
This concept of “internal” economies of scale is the most common. But, as explained in The Economist, there is another type of economies of scale to consider – “external” economies of scale. External economies of scale lower an organization’s costs due to environmental factors outside of the control of an organization’s management team. Examples include subsidies paid to particular types of organizations (FQHC safety net subsidies, disproportionate share payment to hospitals, etc.) or favorable tax treatment (tax-exempt status, tax incentives for investments, etc.) that affect an entire class or category of organization.
Larger organizations have a shot at “making their market” when it comes to the benefits of external economies of scale – largely through lobbying and political clout. The largest organizations have the resources, reputation, and connections to (somewhat) shape the market to their advantage. There is a reason that Medicare Advantage plans were able to defy the effects of the sequester and get a rate increase, or that certain mental health centers have preferred referrals in some states. I’m not saying that these are good or bad developments – merely that they reflect the advantage of size (individually and collectively).
There are many models—mergers, consolidations, and a variety of collaborations—that can be a path to achieving economies of scale, both internal and external (see Sustainability – During & After The Perfect Storm all members). But size alone is not a solution to strategic challenges.
In maintaining competitive advantage in a changing market, size and scale are just part of the equation. A large organization that is unwilling or unable to adapt to a changing marketplace is just as susceptible to failure as a small organization – just look at the recent challenges facing large companies like Dell, Blockbuster, American Airlines, and Borders Books.
This is why your path to collaboration (and consideration of size and scale) needs to be part of an overall long-term sustainability strategy – a concept that we’ll continue to explore over the next few weeks.
For another free resource, see: Be Big? Be Like The Cheesecake Factory all members