“No one wants to give a significant contribution to an organization that is circling the drain.” This comment was made by a board member of a community foundation in a recent meeting. The discussion was whether they were going to provide funding for a local provider organization that has been hard hit by the pandemic crisis. The board member said there were many organizations (more than they could fund) asking for financial relief and that this particular organization didn’t appear to be sustainable going forward, even with the financial relief. As the conversation continued, the suggestion was made that the organization’s board consider a merger with another similar organization to stabilize its financial future.
This conversation illustrates the problem faced by many organizations right now (whether non-profit or for-profit, by the way). It’s not that they are going to run out of cash over the next couple months, but they don’t have a recovery plan and sustainable business model for the next year or two. And they have an urgent need for cash and capital. Using collaborations to address this very situation was the focus of the recent web briefing, Using Mergers, Acquisitions & Affiliations To Address ‘Urgent’ Cashflow Needs, by my colleague and OPEN MINDS Senior Associate, Ken Carr. His advice—recognize that it’s not enough to find cash to run the business for a couple more months. What recovery really requires is building a sustainability plan for the next 12 to 18 months.
In his briefing, Mr. Carr addressed the big questions every health and human service executive team and board member needs to answer in the recovery planning process:
- Are we financially sustainable right now, during the crisis?
- As the economy moves from crisis to post-crisis normal, will we be financially sustainable?
- If yes, what are the market scenarios that would potentially harm our sustainability?
- If no, what growth strategy do we need to become financially sustainable? And is size alone enough?
While size is an element in sustainability (for the many reasons I’ve discussed before in How Big Is Big Enough? Making Sense Of Mergers, Acquisitions & Affiliations: The Collaboration Issue and The Strategic Issue Of Size: How Big Is Big Enough?), size alone is not enough. Mr. Carr said, “For your specific market, in your state, you need to look where you are going and utilize this as a strategy, not to just get larger but to prepare for the future. You will need to review and assess your diversity of revenue sources, service lines, profitability, debt ratio, and cash on hand, all so that whether you are an acquiring organization or want to be acquired, you have more information to put out there with which to create a better relationship with someone who is looking to partner.”
And now is not the time for the wishful thinking that many board members engage in. The “Recovery Tracker” from Harvard University, Brown, and the Bill and Melinda Gates Foundation (see The Opportunity Insights Economic Tracker: Supporting The Recovery From COVID-19), presents a grim picture—consumer spending across the U.S. has decreased by 8.5% from January to June 2020. And two-thirds of the total reduction in spending came from households in the top 25 percent of the income distribution, causing businesses in the most affluent neighborhoods in America to lose more than 70% of their revenue and lay off people. As a result, household names like Virgin Airlines, General Nutrition, Chuck E. Cheese, Hertz, and Cirque de Soleil are filing for bankruptcy and likely going out of business. And health care organizations are feeling the pinch. Trinity Health announced an expected $2 billion in losses and another 1,000 layoffs, in addition to the 2,500 furloughs previously announced (see Trinity Health Corporation Voluntary Disclosure). Tower Health is down $212 million and cutting more jobs (see Tower Health Is Cutting 1,000 Jobs As Coronavirus Losses Mount), and Signature HealthCARE has reported 100 layoffs at its corporate headquarters (see Signature HealthCARE Lays Off 100 Corporate Employees Amid COVID-19 Pandemic).
At the same time, there is a stream of new competitors entering the space. Walmart is planning to launch what it calls “healthcare supercenters” (see Walmart Announces Opening Of Walmart Health In Arkansas Adding To Its ‘Healthcare Supercenters), tech-enabled in-home health care provider organization, DispatchHealth, announced $135.8 million in growth capital financing (see In-Home Care Company DispatchHealth Raises $135.8 Million, Backed By Optum Ventures & Humana), and virtual mental health services provider organization, AbleTo, expanded its suite of mental health services (see AbleTo Launches Full Suite Of Mental Health Solutions To Address Growing Demand For Care).
This is the time to be clear-eyed about the need for affiliations and the opportunities in those affiliations. Mr. Carr noted, “As you move forward, how big you are can determine goals. Ask some questions. Why do you want to move forward? What collaboration model would work best? How do you get engagement from the board and executive team for both considering and escalating this strategy? All are critical questions.”
And maybe answers will lead us to reprise the famous lines from the Joseph Stein musical, Fiddler on the Roof, “Matchmaker, Matchmaker/make me a match/find me a find/catch me a catch.”
While the natural tendency is for every organization to “find the catch” or be the acquirer, it is important to be realistic about the limits of any organization’s cash and management talent—often assets that come from being acquired by a larger organization.
In this fluid market, executive teams need to speed up their processes for developing a recovery strategy, determining whether/how affiliations fit in that strategy, and executing the process. To do this, they must determine their goals, build a plan based on organizational needs, and maximize the return on investment in terms of finances as well as leadership time spent. Then they must review and assess their organizational potential through a “market positioning” lens that spells out exactly what their efficiencies and prospects are or are not. Next, they need to assess the current market and build a “go forward plan” to identify the structure for the ideal collaboration. Finally, they can start identifying potential collaboration partners, and due diligence beforehand will reveal if the goals, resources, and market potential of the potential partners line up or not.
Mergers are not a popular option, particularly for non-profit organizations where boards and executive team members fear loss of their positions, changing the mission, or altering the brand (see The Merger Blind Eye). Mr. Carr shared that in a recent study of non-profit mergers (see Mergers As A Strategy For Success), 88% of participating organizations reported that they were better off after the merger.
The right affiliation executed at the right time can be like a healthy dose of vitamins for the overall health of a provider organization and can bring in an infusion of funding, staffing, services, reach, and consumers to keep the doors from closing for good.
For more, check out these resources in The OPEN MINDS Circle Library:
- Reopening Is Not Recovery
- M&A ‘Tips, Tricks & Advice’
- Planning To Buy Another Organization?
- Other Weird Arrangements
- Collaborations Demand ‘Proving Your Business Case’
- In Mergers & Collaborations, Don’t Forget The Tech Plan
- How Do Meta-Leaders Create The Collaborations That Matter?
- The Challenge Of Collaboration Is To Do What We Do Not Want To Do
- Viewing Collaboration As A Strategic Art As Opposed To The Option Of Last Resort
- 10 Keys To Successful Collaboration
Be sure to register for our upcoming web briefings in our Executive Blueprint For Crisis Recovery series:
- Planning For Revenue Expansion By Expanding Your Service Area – From Market Analysis To Launch
- Collaboration As A Strategic Tactic – Using Mergers, Acquisitions & Affiliations To Achieve Your Strategic Objectives & Assure Sustainability
And for even more, mark your calendar for The 2020 OPEN MINDS Executive Leadership Retreat, including the session “The Mission/Margin Balancing Act” featuring Toni Pergolin, president and chief executive officer at Bancroft NeuroHealth on September 16.