Some say it’s shrewd business strategy. Others call it “Merger Mania,” American industry’s penchant in the last twenty years for combining companies and gobbling up others. Under the “Bigger is Better” banner, organizations have rushed with a vengeance to merge with–or acquire–others in the hope of improving prospects for long term survival, boosting profitability and increasing market share.
Hospitals and Health systems are not immune. The list of hospitals considering or consummating mergers began growing in the 1980’s and exploded in the 1990’s and beyond. Increasingly free of government anti-trust intervention, the merging health care organizations rush to reduce staffing and service duplications, achieve economies of scale, and increase profits to invest in new services. The drumbeat of health care reform adds to the frenzy. Larger integrated systems, proponents tout, will be in a better competitive position to secure managed care contracts.
Some of these benefits have, in fact, come about. But what is the price? There is increasing evidence that mergers cost more than anticipated. They don’t lower prices, though they do seem to lower the rate of price increase. Net revenues per patient continue to rise; but that is more often the result of higher margins on ancillary services.
Shrewd strategy, or foolish mania: which is it? What lessons about mergers and acquisitions can the health care industry learn from the experience of other American corporations and industries?
Foremost is this: it doesn’t always work. A recent study sounds a somber warning. One-third of the acquisitions reviewed ended in divestiture. Two-thirds of mergers were business disappointments.
Behind this sobering assessment is another clear lesson. The long-term success of a merger or acquisition depends on employees. Too many organizations in the ’80s blew the potential for successful mergers by neglecting to plan and manage how to bring multiple employee groups and diverse organization cultures together. This is a lesson for the health care industry that’s indeed worth exploring further.
Mergers will succeed if the people make them work. This is especially true in health care, a people-based industry. Consider, for example, just a few questions the merger of two health care organizations raises:
- How will technical and professional groups work together to integrate management information and financial systems?
- How will several professions from different organizational cultures work together to develop compatible or standard protocols for clinical service?
- How will physicians and physician groups focus their referral patterns to increase the proportion of patients who stay in the system?
- How will foundations and fund-raising volunteers enlist community support for the new health care system or network, not just the single community hospital?
- In a managed care or capitated environment, how will health professionals re-orient themselves to promote wellness rather than just curing illness?
These are only a sample of the questions posed by an impending hospital merger. Where can we look for useful answers? Leaders of health care organizations can learn from the successes and failures in other industries. Several guiding principles from successful mergers are clear:
- A merger is not a discrete short-lived project. It begins a long term, on-going organizational change process that must be managed.
- Leaders must devote time and effort to understanding and managing the differences between organizational cultures.
- It is essential to meet the real communication and information needs of the employees–not what managers think they should know.
- The just treatment of those employees forced to leave is a key determinant of the loyalty of those who remain.
- Preventing problems is cheaper and easier than solving them after they occur.
What can leaders in health care organizations do to build on these principles and avoid the pitfalls that have caused disappointment in so many other mergers? They must build a strategic approach to integration on a foundation of employee involvement and active leadership.
Here are some basic elements, learned from the success of others, that key organizational leaders can incorporate into a successful merger strategy.
1. Begin Early.
The financial and legal aspects of a merger are time consuming and critical. By law, leaders are often bound to secrecy. This initial stage of merger requires in-depth research, a high level of confidentiality, and a dependence on outside resources for guidance. Consider the human dimension of the merger in the earliest conversations. A careful human resources audit is as much a part of thorough due diligence investigation as examining the balance sheet. Identifying from the start the differences, strengths and weaknesses in the cultures of the merging organizations is a prerequisite for eventual success.
2. Be visible and accessible.
The merger announcement is the signal for organizational leaders to become active and involved in comprehensive communication efforts. Conduct employee information sessions to talk with employees face to face. These sessions address business reasons for merger, describe the vision of a future organization, outline the process ahead, and answer employee questions openly. Don’t be afraid to say “We don’t know,” if that’s the honest answer.
In times of uncertainty and organizational change, employees scrutinize the visibility and accessibility of the people at the top. From these observations they draw conclusions about the personal commitment of their leaders and the long- term viability of their organization. Leaders must fight the inclination to “hunker in the bunker.” If you are not around for them now, they will not be around for you later.
3. Create a high-level “Integration Team”
Working the people side of a merger is not a duty simply to be relegated to the Human Resources Department. The organization’s top leadership group bears this responsibility. If leaders begin to view the employees as a major capital asset and the critical lever for merger success they will quickly move past the typical notion, “we don’t need to think about the people problems.” Trying to merge the human organization without a high-level integration team simply does not work.
Key functional leaders from both organizations serve on this team. Briefly, their charter is to: (1) examine the merging work cultures to find commonalities; (2) identify barriers to success; (3) determine long-term integration issues; and (4) plan joint action.
This team demonstrates by their own behavior the foundational values and norms of a new and merged work culture. If the people who lead the merged organization can’t work together, they cannot expect others to do so.
4. Involve employees in the merger process.
Employees know a great deal about how the day-to-day operations can best be combined. They know where the inefficiencies in structure and processes exist because they work through and around them daily. They are also acutely aware of the political and emotional issues surrounding a merger. Front-line managers and supervisors are particularly crucial in this respect.
Form collaborative teams to examine redundancies and gaps between the two organizations. Focusing employee energies on the positive benefits can cut through resistance to change. In a hospital merger, for example, membership on the teams would include formal and informal leaders of the doctors, nurses, administrators, and technical staff.
These teams operate as pipelines for information and solutions to move upward while leadership’s broad vision and timelines flow down. Although personal uncertainty won’t be eliminated and objectivity is at times difficult, employees will act and respond energetically to these opportunities to participate. Leadership must provide the resources, time, and training to establish effective team structures.
5. Manage the rumor mill
Rumor mills and grapevines thrive in organizations full of uncertainty and anxiety. They help people handle their personal apprehension and connect fragments of information. Rumors build beliefs out of assumptions and confer status and power on those “in the know.” Because the major characteristic of rumors is anonymity, it is useless to try and track them down. Rumor hot lines do not work, nor do leadership efforts to respond to each new rumor.
There is a cardinal rule: Never underestimate the ability of people in an organization to not understand what is going on, particularly in times of stress. To reduce the destructiveness of rumors, “force feed” information: keep the communication lines open; structure multiple forms for getting information to employees; and answer questions in an honest and timely manner. Employee involvement teams and the integration team can help manage rumors. They can listen to the organization, identify the concern or fear behind popular rumors, and address them.
6. Communicate to suppliers, customers, shareholders and the community
The anxiety experienced by employees spreads to suppliers, customers, stockholders, and the local communities.
Leaders should plan an aggressive campaign to communicate with these constituencies. Successful strategies include: an 800 number hot line to answer customer questions; informational packets sent to shareholders; supplier surveys and meetings to gather information and address concerns; customer focus groups to deal with expectations and questions; and a media campaign to reassure the surrounding community of the potential growth and long-term viability of the organization. Enlist Board members to help carry the message to other key leaders in the community.
7. Reduce conflict and bitterness
Under the best of conditions, conflicts between interest groups are part of an organization’s life. After a merger, emotional trauma breeds even more conflict which undermines progress.
Political fiefdoms erode the confidence of the organization and paralyze people from developing new initiatives and taking appropriate risks to help the new organization succeed. Leaders need to recognize the organizational signs of conflict: “we-they” or “winners-losers” language; the decline of information flowing upward; higher rates of turnover and absenteeism; a lack of accountability for decisions; and gallows humor.
Leaders must respond quickly and firmly to destructive political infighting to help maintain organizational integrity and prevent the loss of productivity. The best leaders expect the best. They provide clear standards of expected performance; they communicate a constant and consistent picture of the future organization and challenge people to move in that direction. At the same time, they are realistic about the impact of the merger on people. They demonstrate personal concern for individuals, but they do not make promises of job security that they cannot keep.
Leaders of successful mergers “walk the talk” and demand that other key leaders do the same. They are clear about values and honest about expectations. Throughout the merger process, they find and use all avenues for communication. Finally, they examine how incentive systems, particularly for executives, need to be changed to support the merger’s performance objectives.
The lessons are simple but not easy. Leaders in merged organizations pay relentless attention to building a new and vital organizational culture. The successful strategy requires strong leadership, endless communication and effective employee involvement in planning and implementation. The process takes time and patience. Simply put: mergers will succeed if people make them work. Pay attention to this lesson and you create energy for high productivity and marketplace dominance. Ignore it and your merger will fail.