We launched last week’s 2016 OPEN MINDS Performance Management Institute with an opening keynote, The Strategic Advantages & Challenges Of Mergers & Acquisitions, by David C. Guth, Jr., Chief Executive Officer of Centerstone. The issue of consolidation is top of mind for most boards and executive teams (see One More ‘People Factor’ In Non-Profit Mergers and In Non-Profit Mergers, People Trump Positioning). It’s driven by the question – are we big enough to develop the infrastructure we need to thrive in the emerging market?
In his remarks, Mr. Guth addressed that question head on, discussing the framework for thinking of consolidation as a strategic issue. He pointed out the opportunity to rebrand, the opportunity for service line diversification, the ability to spread the costs of enhanced infrastructure across a larger organization, and the ability to build redundancies in the leadership team. But how to make decisions about consolidation as a strategy? That requires ten-year thinking – thinking about what your organization needs to look like to thrive and have optimal operations a decade in the future. This involves thinking about economies of scale and the optimal scale for your organization.
So what is scale from a business perspective? “Economies of scale” or “scale economics” is the phenomenon that “production becomes more efficient as the number of goods being produced increases.” In other words, larger organizations have in theory (and often in practice) the ability to lower their cost per unit – thanks to the ability to spread their “overhead expenses” over a larger number of units (see Economies Of Scale 101).
In his thinking about the community-based behavioral health field, Mr. Guth remarked that Centerstone is thinking about $400 million in annual revenue as the “optimal scale” for an organization delivering specialty outpatient health care-related services. And more if an organization is looking at other service lines – like residential or inpatient services or specialty disability supports services.
That number is one that has generated much discussion about how best to define markets and estimate scale. It is certainly larger than most organizations in the field. So to put that number in perspective, about how “big” are organizations in the field that you may have heard of?
- Vinfen: $116.7 million
- ResCare: $1.0 billion
- The Mayo Clinic: $3.1 billion
- Thresholds: $63.2 million
- Gateway Rehabilitation: $32.8 million
- Hazelden: $164.4 million
- Providence Center: $43.1 million
- Jefferson Center: $44.7 million
- Altapointe: $42.2 million
There is no “right” number in the discussion of financing, infrastructure, and scale. But the discussion should be a part of every strategic plan. For more on the issues of scale and strategy, check out these resources in the OPEN MINDS Industry Library:
- Be Big Or Be A Boutique: Economies Of Scale In Health & Human Services
- Partnerships, Collaborations, & Mergers: Opportunities To Gain Economies Of Scale &
- Competitive Edge In A Changing Children’s Service Market
- The Challenges Of Size & Scale: The Experience (& Advice) Of Executives In Large Provider Organizations
And for an executive update on best practices in strategic planning, join me and my colleague Joe Naughton-Travers, Ed.M. on June 8 for The Challenges Of Implementing A Strategic Plan: An Executive Discussion Session, at The 2016 OPEN MINDS Strategy & Innovation Institute.