Trained to look for innovation opportunities, the finance team at Memorial Hospital of South Bend, Ind., acted boldly during the 2008 financial crisis—and strengthened its balance sheet by $22 million in just six days.

 

When the Wall Street crisis hit in 2008, Memorial Hospital of South Bend was just as vulnerable to the frozen credit markets and the plummeting stock market as any other organization. But vice president and CFO Jeff Costello did what he was trained to do. “In our view, every crisis creates opportunities,” he says. 

As the financial catastrophe was unfolding on Oct. 2, 2008, Costello called Memorial’s financial advisors to find what opportunity might present itself. One of the advisors mentioned that floating rate notes (FRNs)—tax-exempt bonds with variable interest rates—were trading at deep discounts, and Costello saw his opening. 

Memorial had $80 million outstanding in FRNs. In the next six days, Memorial used its cash on hand to buy $52 million of the bond issue from a panicked mutual fund at 57 percent of face value. That created a $22 million gain for the hospital’s balance sheet. 

Several months later, the owner of the remaining FRNs needed to sell. Memorial repurchased those bonds at a 51 percent discount. The total win for Memorial’s balance sheet was $35.4 million—at a time when many hospitals were hunkered down waiting for the financial storm to pass. 

“We knew this was going to have a very short-term negative implication to the balance sheet from a liquidity perspective because we were going to use cash to buy back our debt, but we knew it had huge upside potential from a long-term perspective,” Costello says.


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Innovative Thinking

Memorial Hospital—now part of the Beacon Health System—was positioned to act boldly in a time of crisis because its organizationwide culture supports and rewards innovation. Staff members throughout the organization are trained in the Innovation: WOW! Projects methodology developed by management consultant Tom Peters, author of In Search of Excellence.

Through that training, Costello and his colleagues have learned how to create and implement projects with the goal of always taking Memorial to the next level of performance excellence. The value of innovation is instilled in the hospital’s culture, spurring leaders to act rather than to be paralyzed during times of adversity.

“I knew that we didn’t have a lot of time to evaluate this opportunity,” Costello says. “So I literally dropped what we were doing and said, ‘Let’s focus on this and see if we can make this happen.’”

Although the project lasted only a few days, it included four distinct phases of the WOW! methodology:

Create the project. The “create” phase is when an idea coalesces to make an organization stronger in a new way, says Matthew Krathwohl, executive director of innovation for the Beacon Health System.

By analyzing how the financial crisis affected the world outside Memorial, Costello was able to see an opportunity that was mutually beneficial to the hospital and its bondholder.

Sell the project. To pursue the idea, Costello needed the support of his hospital colleagues; outside experts, including legal counsel, bond counsel, and investment bankers; and the hospital’s board of directors.  An essential tool for the “sell” phase is an elevator speech that quickly communicates the idea. “In a concise way, he had to present this compelling vision that would be mutually beneficial to all parties involved,” Krathwohl says.

Execute the project. With the necessary support in place, the bond buyback program became a series of steps (e.g., negotiating the terms, preparing the contract) implemented on a fast track.

Move on. “The last phase of the Tom Peters’ methodology is to ‘celebrate and move on’—whether that means having a department pizza party or, as we have done here, making sure that certain projects receive recognition during a board meeting,” Krathwohl says. Part of the “move on” phase is to capture lessons learned from the successful project that could be used in future endeavors.

Indeed, Costello used those lessons six months later when the holder of the rest of Memorial’s FRNs wanted to sell. The project team was reassembled to replicate the process, leading to another $13.4 million improvement in Memorial’s balance sheet.

Out-of-the-Box Approaches

Costello believes the WOW! methodology is one of many approaches to project management that can be successful. But he credits staffwide training that fosters “out of the box” thinking with creating an organizational culture that encourages innovation.  

“I think it is about being proactive, being creative, thinking opportunistically, and executing on whatever it is you’re working on,” he says. “Those are the keys to success.” 


Lola Butcher is a freelance writer and editor based in Missouri. 

Interviewed for this article:

Jeffrey Costello is CFO, Beacon Health System, South Bend, Ind. 

Matthew Krathwohl is executive director of innovation, Beacon Health System, South Bend, Ind. 

Discussion Starters

  • How does your health system encourage innovation?
  • Please share an example of financial innovation from your hospital or health system.

Publication Date: Tuesday, May 14, 2013