By Scott Becker and Nancy Temple
This article provides insight into four different concepts to strategically attack and manage operations in a surgery center. The four cornerstones are derived from a Harvard Business Review article, "The Four Principles of Enduring Success." The author, Christian Stadler, studied successful European corporations to determine why they have consistently performed well as compared to peers in their industry. His study identified four characteristics of the best companies:
- Exploit your existing strengths and assets before you explore new business lines,
- diversify your assets,
- remember your mistakes, and
- make big changes slowly and conservatively.
Stadler noted that "[t]he outstanding companies in our sample survived and prevailed during the Great Depression, two world wars, and two energy crises, not to mention the advent of the telephone, the television, and the computer." This article examines those four principles as they apply to the surgery center industry.
1. Exploit before you explore. A surgery center or other business should first endeavor to understand its own strengths in its business and build on those strengths. Exploring or seeking out new assets or service lines can be expensive and can be a risky process. Great companies are good at growing by enhancing or taking advantage of their existing strengths. As Stadler found:
Though they did not neglect exploration, as a strategy the gold medalists consistently chose to pursue exploitation efforts over exploration initiatives. ... In other words, great companies don't innovate their way to growth -- they grow by efficiently exploiting the fullest potential of existing innovations.
ASCs can readily apply this principle. For example, before building a second facility, it might make much greater efforts to maximize the volumes at its existing facility. Further, management might ask does the center have great staff or is it particularly strong in certain types of procedures? If a center has advantages in providing certain types of procedures, before seeking to add new service lines or types of procedures, it should ascertain whether it is fully profiting and fully exploiting success in those particular areas. Are there more procedures that could be done by the same physicians at the center? Can you cut costs on the cases that you are performing at the center? Are there additional physicians in the same specialties that are available for recruitment? In essence, before you conduct research and development to seek out the next new business idea or the next type of procedure, a surgery center should first explore how to further profit from its existing physicians and the types of procedures it is currently performing.
Successful surgery centers have exploited their existing assets before expending resources to explore for new innovations. According to Michael Weaver, vice president of acquisitions and development for Symbion, a national outpatient surgery center and hospital-physician joint-venture company based in Nashville, Tenn., this principle was successfully applied when Symbion acquired a surgery center in the St. Louis area in several years ago. Relying on the same core base of physicians, Symbion closed that particular center and relocated it to a preferable site to maximize profits. Symbion also noted that the physicians at the center had strong, positive relationships with other physicians in the area, so Symbion capitalized on those relationships by developing a new spine center using the services of the original physicians' friends and colleagues.
Larry D. Taylor, president, CEO, founder and developer of Practice Partners, a privately held business based in Alabama providing management and operational services to surgery centers across the country, notes that the industry's resyndication process of the physician partnership groups is an example of surgery centers building off of their existing physician assets instead of exploring for new ones. Mr. Taylor further emphasizes that the ability of his company to manage and process quickly all of the details required for syndications regulatory licensing and accreditation has saved substantial sums and time for its clients, an example of Practice Partners maximizing its assets to process that information and provide prompt profit enhancing services for centers.
Similarly, Woodrum/ASD identifies its core assets as managing and operating surgery centers. When the surgery center market changed in the mid-1990s and shifted to hospital-physician joint ventures, the principals of Woodrum ASD sold their prior surgery center business in which they were the primary owners and started a new national surgery center management business in which they were minority owners. As Joseph Zasa, JD, a partner and the CEO of Woodrum/ASD explains, Woodrum/ASD did not start from scratch; it hired many qualified people from the partners' prior business experience and used the prior knowledge about operating surgery centers and refined those systems, focusing on the same market but improving upon those systems based upon past industry experience.
Perhaps the epitome of the exploitation of existing assets is Surgical Care Affiliates, which was created as a stand-alone business when HealthSouth's Surgery Division was acquired in 2007. As SCA's CEO and President Mike Snow explains, SCA's entire investment model was built around using an existing portfolio and applying management expertise in an effort to improve results. In essence, before entering into new businesses, its core goal was to improve and enhance its existing portfolio of ASCs.
2. Diversify. Successful companies diversify their business portfolio. While these companies focus on their core strengths and are not conglomerates, they diversify their exposure to economic downturns by branching into related businesses and by spreading their business geographically. Historically, companies that focus on a single business tend to be relatively short-lived because once the cycle for that particular business has matured, it typically must merge or be sold to avoid closure. Good companies avoid this risk by evolving their core strengths into a diversified portfolio.
Moreover, successful companies diversify risk by maintaining a broad range of vendors and customers to avoid dependence on any single relationship. Diversification is therefore relevant to both the revenue and supply sides of the surgery center business. Mr. Taylor notes that Practice Partners' use of new and refurbished equipment adds value and reduces costs. Mr. Zasa preaches diversification, or different "pipelines" so as not to put all of Woodrum/ASD's eggs in one basket, operating approximately twenty-five centers across the country. Similarly, SCA's Mike Snow reports that they "look at the portfolio like a pipe" and try to continually fill the pipe. Mr. Weaver notes that the recent CMS changes in reimbursement are an example of an economic change that the diversified Symbion was well equipped to handle, and even positively impacted Symbion, due to its diversified centers across multiple specialties.
As you look at your portfolio of business, consider whether there is the ability to develop adjacent lines of business or alternative suppliers. As an example, if a center is heavily dependent upon two physicians, in addition to striving to develop a strong relationship with those physicians and their business, a center likely should try and recruit additional physicians to reduce its reliance upon just two physicians. Further, if all of a surgery center's business is in one specialty, it makes sense not only to exploit further that line of business but also to identify additional lines of business for that center.
The same principle applies for a surgery center's supply side. It is important to support existing employees who are indispensable by recruiting more employees to have some redundancy and strength. Additionally, if a center spends a significant amount on one type of medical device or on one type of implant or product, it makes sense to nurture multiple supply sources, particularly if there are any challenges in accessing the product.
3. Remember your mistakes. The best operators in almost any business have an uncanny ability not to repeat the same mistake twice. It is often said that making a mistake is fine - indeed, in order to grow and learn, companies need to make mistakes. However, making the same mistake over and over again can doom a business, and the best companies learn from and exploit their mistakes. Stadler noted in his study that the great companies had a practice of telling and retelling stories about their mistakes as a teaching technique and not to forget their mistakes so as to learn their lesson.
Indeed, Joe Zasa claims that the "best thing that ever happened to us [Woodrum/ASD]" could be characterized as a "mistake." When Woodrum/ASD lost the renewal of a contract, it realized that was not demonstrating to the physicians the value that Woodrum/ASD put into each of its centers. Once they worked more closely with the center staff and formalized the systems to show the value added, Woodrum/ASD went from good to great results, expanding its centers by threefold.
Here, this concept is notable in the overall surgery center industry. Initially, years ago, surgery centers were often developed without incorporating "noncompete covenants." After the initial excitement of recruiting a number of physicians to invest in a surgery center, as the business evolved and the surgery center became successful, the most successful physicians often left the center to develop their own surgery center. Now surgery center developers recognize that they need to incorporate covenants not to compete in all surgery center transactions.
Second, center developers often make the mistake of being committed to a particular physician based on that physician's statistical credentials, without considering the physician's reputation or ability to work with patients, center owners and others. When surgery centers enter into transactions with such difficult professionals, performance often is poor. This can be because he or she has an unprofessional attitude towards others or because he or she can choose not to bring cases to the surgery center. The mistake is not to fall in love with a physician simply based on paper statistics. The physician must be qualified in all aspects, including the ability to work with others, and should not be just a high-volume producer of cases.
There are many types of mistakes that can be made in operating a surgery center, as in operating any business. The goal is to remember such mistakes so that they are not made again. In essence, one of the terrific executives we work with, Tom Mallon, the CEO of Regent Surgical Health, often says to his colleagues, "Please make new mistakes -- don't make the same old mistakes." Mike Weaver of Symbion chimes in that, "if you are not trying hard, you would not be making a few mistakes."
4. Don't make big changes quickly. This cornerstone dictates that companies should approach change conservatively. Change is important and necessary to grow but how great companies manage change is critical to their level of success. Stadler's study found that "[g]reat companies ... go through radical change only at very selective moments in their history ... They use their core values and principles as guidelines and approach change in a culturally sensitive manner that requires patience to work through."
In many surgery centers and similar service providers, situations have occurred where the leadership of the center or business has great clarity as to where they want to lead the organization. However, some leaders fail to take into account their entire constituency and attempt to move the organization through change far too rapidly or abruptly for many of their colleagues to follow. One particular example typically arises in the amendment of operating agreements of shareholder groups. In attempting to impose stricter or more precise rules, e.g., adopting clearer and imposing higher hurdles for redemption events or redemption pricing or adopting stricter noncompete covenants, leaders may attempt to push the remainder of the shareholder group very quickly to accept such changes. Physician shareholders, rather than understanding the potential overall benefit to the center and thus to themselves, may perceive any such proposed change as an event that causes them to "punch out of" or exit the venture entirely. They react prematurely to the proposed change, which may be perceived as being too drastic, and seek to leave the venture and be redeemed. Rather than announcing and demanding immediate acceptance to such changes to an operating agreement, in many situations it may make more sense to conduct individual discussions with the physicians to explain the purpose of the proposed changes and to gauge the reaction to such changes. In essence, leaders may want to approach such changes slowly.
Larry Taylor echoes this approach as the leader of Practice Partners by emphasizing that change should be "thoughtful" and all of the consequences of a proposed change should be well thought out, including the impact to a clinical outcome and physician acceptance. For example, Mr. Taylor notes that a change in a vendor, equipment or process will be ineffective if it does not improve the clinical outcome and if physicians do not accept and implement the change.
The same concept of making changes conservatively often applies to large expansions of businesses or acquisitions. A typical surgery center may work extremely well with ten to fifteen committed investors, but when merged with another center that results in a shareholder base of twenty to thirty investors. This may diffuse responsibility and will often substantially increase overhead. These immediate impacts can be devastating to a surgery center if those changes are not managed appropriately. In short, while it is critical not to be stagnant, simultaneously, it is critical not to make big changes without proper efforts to assure that the business is secure and that the key people that will be involved in the changes have fully bought into the concept.
Mike Snow of SCA comments, however, that SCA distinguishes between strategic changes and tactical changes, such as outsourcing non-core business functions, improving the financial close process and focusing on supply chain initiatives to improve results. SCA strives to implement aggressively the tactical changes to achieve prompt results.
Overall, Professor Stadler "observed that companies have to work very, very hard to adhere to the four principles in the face of the constant temptation to diverge from them." The Four Principles of Enduring Success, at p. 2. In short, these four cornerstones strategically applied consistently to surgery centers can help centers go from good to great results.
This article also relied on insights provided by the following industry leaders, Joe Zasa, CEO Woodrum ASD, Larry Taylor, President and CEO, Practice Partners, Mike Weaver, Senior Vice President, Symbion, Mike Snow, CEO, SCA, Tom Mallon CEO, Regent Surgical Hospital.