This week will wrap up our discussion of economies of scale and collaboration. We’ve discussed issues of size, overhead, and market positioning (see How Big Is Big Enough? all members, How Much Overhead Is Too Much Overhead? all members, and Hybrids Aren’t Just For Cars all members) – all key determinants of what assets an organization needs to succeed in an increasingly competitive market. And it is the acquisition of these “assets” that drives the answer to two key questions. First, should my organization use “collaboration” as a means of improving our competitive advantage? And, if so, what specifically does my organization need to get out of that collaboration to make it worth the cost?
Often, in my work with executive teams and boards, someone “puts the cart before the horse” so to speak. Before the strategy is even hatched, there is a proposal on the table for a specific collaboration tactic – to join a shared services organization or make an acquisition. And, usually that “tactic” doesn’t address the key strategic challenges the organization is facing – or doesn’t go far enough in addressing the strategic deficits to ensure success.
Some timeworn advice – don’t waste your time on a discussion of tactics before you have a solid strategy and have identified the impediments to market success – i.e. plan before you act. Do the market research. Set quantifiable objects with timelines. Use a structured, data-driven process to drive your decisions about collaborations. This will increase (though not guarantee) your likelihood of market success.
Assuming you’ve decided that some type of collaboration is what your organization needs, what are the options? The collaboration models fall in a few buckets:
Mergers and acquisition (M&A) – These actions combine two or more organizations in a model where one organization owns the other(s), and gains all controls, rights, and liabilities. Mergers are often the expedient way (if implemented well) to enhance efficiencies and improve market share (see Should Your Organization Explore Mergers & Acquisitions? all members).
Consolidations and “super parent” structures – Unlike M&A, in a consolidation, all participating organizations lose their identities and emerge as a new organization. The benefits can be similar to M&A. Participating organizations can spread the “overhead costs” for technology, financing expenses, compliance, marketing, legal counsel, and other core competencies over a larger revenue base (see Economies Of Scale 101 all members). One method to accomplish this is to create a new parent organization (the “super parent”) to control both organizations (see Survival Strategies For Community Hospitals).
Joint operating agreements – Joint operating agreements are a management agreement, typically between two organizations, that allows the organizations to share management services and some facilities, while retaining a separate board of directors. This is sometimes referred to as a virtual merger.
Shared services organizations (SSO) and administrative services organizations (ASO) – This is similar in intent to the joint operating agreement, but with the creation of a separate organization to provide management services (see Shared Administrative Service Models A Solution to Margin Problems for Social Service Organizations).
Purchasing cooperatives – Purchasing cooperatives are focused on a single objective: reducing costs through “volume” purchasing discounts. These can be large, national agreements for purchasing, such as Purchasing Partners of America and Partners in Pharmacy Cooperative. Or the model can be smaller partnerships between two organizations who may join together to save on the purchase of technology or medical supplies.
Virtual service partnerships – Virtual service partnerships are created between organizations to offer a specific service in the market (or respond to a specific RFP). The organization providing the service is “virtual.” It is usually a trade name that operates in the market by organizations that are joined only by a partnership agreement. It is the partnership agreement that spells out proceeds, roles, and responsibilities and ownership of intellectual property.
Which is the best option? It depends on your strategy. A collaboration without strategy is really a waste of time and effort – rarely producing the desired result. To quote Yogi Berra: “You’ve got to be very careful if you don’t know where you’re going, because you might not get there.”
For another free resource, see: Innovate. Coordinate. Collaborate. all members