The Importance of Leadership in Turnarounds

Health care reform, an  aging population, fewer doctors and nurses, more expensive technology, lower reimbursements, increasing compliance costs and on and on. Healthcare providers will be facing an increasingly difficult environment over the next several years. Many will face the need to conduct a “turnaround” or “workout.”

Here’s the scenario. Over some period of time a hospital’s operating performance has deteriorated. Margins have declined, capital investment has been constrained, liquidity has remained the same or declined, the rating agencies have been lukewarm and, in the words of a former president, a malaise seems to have settled over the hospital.

Then, it happens. Usually pushed by a single event, when viewed in isolation, operating performance seems to fall off of a cliff. Management scrambles around looking for culprits blaming the economy, commercial payers, government reimbursement, pharmaceutical companies, device manufacturers and so on. Key physicians and members of leadership start jumping ship. Management begins calling Hail Mary’s in the form of mergers and acquisitions to save the day.

Invariably, the Board of Directors loses confidence in senior management and the CEO abruptly leaves the organization. What now?

Well, clearly, the answer to that question is, it depends. Clear huh? The truth is that it is rarely clear. Some Boards move quickly to install new management, hopefully with dynamic leadership skills and a compelling vision for the future. Others retain consultants to advise them or even run the company during the transition to new leadership. And others still, seek to complete the Hail Mary by selling the organization to another hospital or a hospital company. The answer may vary, but there are a few dos and don’ts that Boards of Directors should bear in mind. Here they are:

1. Do – Be Quick, but Don’t Hurry. John Wooden’s admonishment to his stellar basketball teams in the 1970s should be followed by Boards facing this situation. It is critical that Boards understand the root causes of the organization’s decline and apply effective solutions. In most cases, Directors are successful professionals and business people and are capable of sorting through the facts and sizing up the problem.
2. Do – Use an advisor or advisors that have a long-term vested interest in the community, not a hired gun from the coast. Those folks exist and are often discounted. College professors, area business leaders, vendors and suppliers, accountants and lawyers, government officials and others can give valuable advice. Many times their input is very revealing.
3. Don’t – turn the organization over carte blanche to a “turnaround firm.”.  By this I mean, if you are going to engage such a firm, make sure you have the proper checks and balances in place. The danger in using these firms seems intuitively obvious. First, incentives are not aligned between the consultant and the organization. The consultant is motivated to achieve  short-term gains to show that they have “turned things around” and will rarely focus on long-term value creation for the community. And, such  firms usually become an unchallenged scorekeeper, to the point that some Boards end up paying them incentive fees for achieving metrics even when bottom line results have not improved (or even declined further). You can imagine that team members would be reluctant to challenge the firms accounting when their own jobs are on the line and the turnaround firm is making the calls on who stays and who goes.
4. Don’t – be afraid to change course if the selected strategy isn’t working. I especially like FDR’s quote from the beginning of his presidency, “The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.” The truth is the reasons for the organization’s decline, are often many, complex and interrelated. The solution isn’t always obvious, yet action of any kind is better than indecision and delay. If it ain’t working, stop what you are doing and try something else.

I began my career with Appalachian Regional Healthcare in Lexington, Kentucky. ARH at the time (1980) had a negative fund balance and the previous year the outside accountants had disclaimed an opinion on the fairness of the financial statements because they believed ARH wasn’t a going concern. The Board of ARH made one change, replacing its CEO with Robert  Johnson, a respected and experienced health system leader. Mr. Johnson made only one change in senior management that I can recall, yet ARH quickly reversed its fortunes entering a period of unprecedented growth and development.

Which is the last do. The fiduciary responsibilities of a tax-exempt hospital’s Board of Directors are many and varied and yet one is clear-cut. That is selecting the right leader for the organization. A selfless leader with a passion and vision for the hospital, a commitment to its community (employees, doctors, patients, etc.), excellent communications skills  and an ability to marshal commitment to a game plan is always the first solution.

And, as ARH’s Board of Trustees demonstrated in 1979, leadership is sometimes the only change needed.

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