Yesterday, I wrote about the change needed in leadership mindset to navigate this time of crisis and likely discontinuous sudden change (see From Crisis To Growth: A New Leadership Mindset). The challenge? As extreme changes happen in the financing and delivery of health and human services, extreme changes in market positioning and service lines are needed for future success. To do this, leaders need to disconnect their perception of their organizations’ mission from its brand and how it does business.
In no area of strategy development is the problem of mission and brand confusion more pronounced than when executive teams and boards of directors consider mergers and acquisitions (M&A). Over the past decade, we have seen a wave of M&A across all sectors of the economy—and will likely see even more during the recession that will follow this pandemic crisis. But the nature of M&A is different in for-profit and non-profit health and human service organizations. My colleague Ken Carr put it eloquently—“Financial incentives drive M&A in for-profit organizations. Unfortunately, it is often financial challenges that motivate non-profit leadership to consider new organizational structures.”
The challenge in for-profit M&A is largely around disagreements about financial valuation and related terms. There are start-up executives who want to “flip” their creation but disagree with the cash out amount. There are entrepreneurs whose idea of the value of their “baby” is highly variable. There are “hostile takeovers” in the face of offers that shareholders believe are inadequate.
But M&A in the non-profit sector is a different story—usually (but not always) driven by financial desperation. It is not unusual to be in any city and talk to local foundations and donors who bemoan how many (too many) non-profit organizations there are. But they quickly dismiss the possibility that those organizations would consider a merger (see Why Nonprofit Mergers Continue To Lag).
In non-profit organizations, mergers are often considered an option only when there is a cash crisis or the retirement of a chief executive officer (CEO). I have personally witnessed (many times) the wishful thinking of boards of directors of non-profit organizations staring into a coming financial meltdown and responding with a plan that is the equivalent of a “bake sale.” This collective blind eye results in reactive rather than strategic M&A. The reasons are many—most often the “love” of the history and the brand of the organization, or the self-preservation motives of the board members or the executive team. As Mr. Carr said, it is the inability to separate the successful achievement of the mission and the work of the organization from its staff, structure, and brand.
Before the current crisis, the financial position of many health and human service organizations was tenuous. But the sudden decline in revenue and (for many) increases in costs with no price increase will likely result in closure. Executive teams and boards that can’t see a path to financial solvency until the end of the crisis and the resumption of services at a profitable margin should consider the option of M&A as a means of preserving the mission and services to consumers.
But even for other organizations who, in the short-term, are surviving the cash crunch, M&A should be considered a strategic tool. The right merger is an opportunity to improve the balance sheet and cost structure of the organization. It can bring the expanded revenue potential, including new clients, geographic areas of services, expansion of service array, new payer contracts, donor development, and integration of new revenue-producing talent (see Nonprofit Mergers And Acquisitions: More Than A Tool For Tough Times).
So, I asked Mr. Carr what advice he has for organizations that are considering a merger as a strategic option. Where do you start? (He will be doing a deeper dive into this topic in his web briefing on June 25, Using Mergers, Acquisitions & Affiliations To Address ‘Urgent’ Cashflow Needs). He suggested three steps for evaluating M&A as a strategic tool:
Understand your goals for moving into a merger—Create the rationale for moving ahead and give direction to understanding what type of organization to pursue. Are you seeking growth by expanding your service array? Do you need better cash reserves? Do you need to extend your health plan contracting across a statewide or regional geography? Do you need more experienced financial, marketing, or program development talent? Each of these goals gives direction to your plan and can help identify organizations that are a fit with that plan.
Identify how you can understand and connect with organizations that might be a good fit—With a set of strategic goals, it is easier to identify potential organizations for M&A. Developing this prospect list is the most straightforward part of the process: identifying organizations by size, service lines, geography, or other assets that would be a strategic fit. To reach out to these organizations, many executive teams often use a third-party intermediary to ensure confidentiality. But moving from a prospect list to identifying potential M&A partners is a more complicated step. High-level outreach is essential to finding the right organization.
Work closely with key stakeholders—Once you have identified possible M&A partner organizations (whether larger or smaller than your organization), all involved stakeholders need to understand how the new combination will expand or protect mission and services in the community. Merger discussions often start between two CEOs, but to be successful, the discussions must involve and address the goals and concerns of both boards and executive teams. That said, timing is everything. There is no point in broad involvement until there is validation of good strategic fit and intent on both sides. But at that point, having a structure and prompt process for addressing the concerns of stakeholders is essential to success. Key stakeholders will need to face and discuss their concerns: loss of control, elimination of their role, or changing the ways things have always been done. Another element in this process is the discussion of whether and how to preserve brand identity of the organization and understanding how important (or not) brand identity is to consumers, payers, donors, and potential talent.
I don’t think M&A is the solution to every strategic problem facing health and human service organizations, but it is a solution that should be seriously considered in a systematic way in every planning cycle. To wait until the financial situation of an organization is compromised to explore M&A limits the effectiveness of an M&A strategy. For more, check out these resources in The OPEN MINDS Circle Library:
- 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
- How Do You Pick The Right ‘Partner’?
And be sure to register for our upcoming web briefings in our Executive Blueprint For Crisis Management series:
- June 25: Using Mergers, Acquisitions & Affiliations To Address ‘Urgent’ Cashflow Needs
- July 2: Executive Portfolio Management In Time Of A Market Shift – What Programs To Keep & Which To Close?
- August 6: Getting Paid – More – For What You Do – Tactical Approaches Of Increasing Fees & Rates From Payers & Moving To New Reimbursement Models With Payers
- August 13: Planning For Revenue Expansion By Expanding Your Service Area – From Market Analysis To Launch
And for a much-needed leadership experience with your team, also mark your calendar for The 2020 OPEN MINDS Executive Leadership Retreat, including the session “The Mission/Margin Balancing Act” featuring Toni Pergolin, President & Chief Executive Officer, Bancroft NeuroHealth on September 16.