As management guru Peter Drucker knew, any organization that disconnects strategy from organizational culture is setting itself up for failure. That goes double for mergers.
Last October, HFMA and Deloitte Center for Health Solutions published research that put more than 750 hospital acquisitions or mergers under the microscope, analyzing both their financial outcomes and their success factors. Their conclusion: On average, acquired hospitals experienced a two-year post-transaction decline in operating margins, revenue, and expenses. So early success is not likely. By interviewing finance executives involved in the mergers, researchers identified strategies and business practices that correlated with achievement of higher operating margins, post-merger. Although early success depends on the scope and type of investments needed to bring acquired organizations up to speed, focus on organizational culture is also key.
Various market and economic pressures have driven an increase in hospital merger activity in recent years. A couple months after the HFMA/Deloitte research was published, the consulting firm Kaufman Hall characterized the 115 merger announcements in 2017 as “unprecedented” and “transformative” in a report entitled 2017 in Review: The Year M & A Shook the Healthcare Landscape. Media coverage of mergers this year has continued along similar lines.
Based on our research, which delved into all hospital merger transactions over a seven-year period, I believe anyone caught up in the current wave of merger mania should heed the advice of legendary UCLA basketball coach John Wooden: “Be quick, but don’t hurry.” That may seem counterintuitive; the forces of change won’t wait for organizations to get their acts together. But here’s the thing: A failed merger is worse than no merger at all. And with mergers, there are no shortcuts. Executives interviewed for our research stressed that investing time—particularly early in premerger conversations—is essential. They also emphasized the need to understand each organization’s unique culture, noting that failing to identify cultural differences can make it difficult to meet strategic goals after a merger.
I can attest to that from personal experience. Back in the 1990s, I was part of a merger in Lansing, Mich. Our consultant told us that the two hospitals’ cultures were very closely aligned. As we came to realize, that could not have been further from the truth. We had different leadership styles, decision-making processes, and approaches to managing employees. After the merger, both hospital presidents were listed in one box on the organizational chart under the “office of the president,” without clearly delineating areas of responsibility. Needless to say, it was a mess. And the blending of organizational cultures, while always difficult, was even harder because we did not focus on it with intent.
The executives interviewed for the HFMA/Deloitte research said it’s important to test assumptions about cultural compatibility early on. They advised surfacing sensitive topics rather than avoiding them out of concern they might derail the transaction. Better sooner than later, when the transaction will be costly and difficult to unwind. Even when a merger sticks, failing to appreciate the importance of blending cultures and aligning clinical and functional leadership can set an organization back for years. And no one has time for that.
From the President’s Desk
Joe Fifer expands on his ideas in his March column.
Follow Joe Fifer on Twitter: @HFMAFifer