Many organizations are working through an era of tight capital, reducing the margin for error on investment decisions to just about zero.  And the current market volatility is only adding to the stress level surrounding these decisions.  In this series, we describe how leadership teams can select the “best” projects to fund with limited capital from a large number of potential “game changers.  The previous post introduced the first of four recommended criteria for selecting the best projects to fund.  Some elements of that first criterion, Strategic Alignment, are well established, while others add new perspective to reflect where health care is heading.

This second criterion is also a blend, with the first two elements being well-established and four more to advance your discernment of the “best” projects.

2. Financial Feasibility: Whether familiar or not, nearly all these six elements could apply to just about any capital project, while the last one relates to “Bricks and Mortar” projects.

A. Performance on Standard Valuation Metrics: For any capital investment we recommend examining three key metrics: 1) Internal Rate of Return, 2) Payback Period and 3) Net Present Value (using a Discounted Cash Flow Model).

B. Cost Saving: For replacement projects, how do the operating costs for the proposed project compare with existing costs? Will the new project create operational efficiencies? Are the estimates accurate? Have they been considered in the valuation metrics?

C. Incremental Income: Consider the ways the project will (or won’t) generate truly new income. Moving an existing service line to a new building doesn’t necessarily bring in new revenue. What is an additive? Conversely, is there potential for new downstream revenue by increasing referrals for other needed services? For example, space used for cancer screening can lead to surgeries, chemo infusions, or radiation treatment.

D. Incremental Expenses: It is also critical to examine what new expenses will be incurred. Will a new service line require adding a new physician? Will marketing costs be incurred? Does growing a service line require additional staff, equipment or supplies. Are these readily attainable? Are the supply chains reliable?

E. Reimbursement and Inflation. Another critical consideration to be carefully examined is the impact of reimbursement. Will the project result in any changes in reimbursement (e.g. HOPD vs. ASC rates)? Relatedly, payer mix may change if the project involves a relocation, participation in a new network, or a different marketing plan. Lastly, consideration should be given to inflation which may impact the cost of materials and labor for new construction and specific line items in the operational financial projection.

F. Buildings: Bricks and mortar investments have important additional considerations:

• • Lease? Where possible, leasing or renovating existing space should be considered in addition to building new. The growing commercial real estate glut (resulting from the trend toward remote work) has made leased space more plentiful and affordable.
  • Minimize Non-Revenue Producing Space. With renovations, consider converting administrative or support space to revenue producing space. With new construction, consider if support services like finance or human resources can be maintained in a remote or partially remote capacity.
  • Flexibility by Design. Design flexible space that can easily adapt to a variety of services as the market changes. For example, design office space that can be modified for primary care or wellness offerings (e.g. physical therapy, mental health counseling, or lab), to better meet consumer expectations and community needs.

Are you and your leadership team prepared to get the most out of your capital investments?  Let us know if you have any additional thoughts as this series unfolds, or if we can be of any help applying these ideas in your capital project review, selection, and implementation processes.

Roberta Jelinek and Jeff Schilling

(This is the 3^rd of 7 posts in the series.  For the full article, contact either one of us.)

What’s that old saying…the Chinese word for Crisis (Wei Ji) is a blend of Danger (Wei) and Opportunity (Ji)?  While the truth in this literal translation is debatable at best, the concept has endured since the 1960s, probably because many have found it to hold elements of truth.

The “Dangers” of Tight Capital  Emerging from Covid19, inarguably a major crisis, many organizations found capital scarce, in part because lower margins during the pandemic resulted in lower (or no) funding of capital pools.  While there has been some improvement in margins for the industry as a whole in recent months, they may be slowing to a new normal.¹  And, the improvements have varied significantly across hospitals. Sustained profitability is a delicate balancing act. Funding for capital investments is still limited.

Lower margins usually translate to less capital to allocate to potential projects, and with lower margins, there is less ability to compensate for lower-than-expected returns, so the risks associated with any underperforming or failed projects are much higher. This clearly resonates with the “danger” part of the crisis definition.

The Post-Covid Opportunity  In true fashion regarding the other half of the crisis definition, many health and human service organizations found the Covid19 peak years to be a period of opportunity, in part because it required substantial innovation to respond effectively to the scope and depth of human need.  Responding to the Pandemic accelerated the pace of many innovations (e.g. tele-medicine, working remotely) and initiated others (e.g. supply chain improvements).  Furthermore, the pace of innovation seems to be continuing, inspiring as many proposals for capital investment as ever…maybe more. Many of these innovations require substantial funding, including shifting care to new settings, leveraging technology, and workspace redesign.

The Dilemma of an Era of Tight Capital  When viewed in this way, the Crisis of Covid19 Pandemic indeed meant both danger and opportunity for capital investment. If these conditions persist, at least into the foreseeable future, how do leadership teams select the “best” projects to fund with limited capital from a large number of potential “game changers?” This series explores how to get the most out of capital investments in a period where capital is tight, and risks are high.

Selecting the Best  In the next three posts, we will cover four key characteristics, and a few useful tools, for selecting the capital investments most likely to succeed. Your organization may have already established criteria for evaluating various capital requests. However, in the current environment the focus needs to sharpen on investments that will balance a rapid rate of return with other important considerations.  We will review considerations that help ensure both sustainability and also synergy with the evolving US health care landscape in future posts.

Ensuring Success  Then, in two additional posts, we will cover six important considerations, and the associated steps you can take to help ensure the success of the investments that you choose.  Selecting the capital investment opportunities that best fit your criteria is still no guarantee of success, especially in this transformative period.  Societal pressures, evolving consumer expectations, and technological and clinical advancements result in a dynamic environment.  However, there are ways to foresee, or at least minimize the impact of, potential disruptors, and enhance the resiliency and impact of your project.

Are you and your leadership team prepared to get the most out of your capital investments?  Let us know if you have any additional thoughts as this series unfolds, or if we can be of any help applying these ideas in your capital project review, selection, and implementation processes.

Roberta Jelinek  and Jeff Schilling

(This is the 1^st of 7 posts in the series.  For the full article, contact either one of us.)

¹ April, 2024 edition of Kaufman Hall’s National Hospital Flash Report.

Five years ago this month, I had a chance to do something I had always wanted to do, but never thought I would.  The previous Christmas, my family surprised me with a paid pass to the NASCAR Racing Experience: a chance to drive a real race car on one of the championship series tracks.  Having always been a car racing fan, they knew this would be a very special gift.  So, in May 2019, I headed to Michigan International Speedway (MIS) to live out that dream.  But what I, and my family, didn’t know is that this experience would be very memorable in more ways than one.

Confidence is Good, Right?  Like almost everyone, I suppose, I thought of myself as a pretty good driver.  I’ve seen many races of different types of cars over the years on TV and was fortunate to see some in person, from dirt track races to premier events including the Daytona 500 and the Detroit Grand Prix.  But on top of that, I’ve also studied cars and car racing throughout my life, accumulating knowledge of things like “push” (understeer), downforce, and flattening a curve, so I thought all of this might make me a better than average first timer in a real race car.

A Whole New Ball Game  However, none of this armchair knowledge could have prepared for me for the actual experience of guiding a 700 horsepower race car around 18° banked turns at 150 mph.  Even in the beginner package, you’re driving a fully equipped race-ready NASCAR on a championship series course.  It’s very different than driving your own car to work or the grocery store, and you’ve got about three to four laps to try to adjust.  I quickly found myself making many adjustments.  For example, my sense of timing of when to start turning the wheel as the next curve approached was very “late” at these speeds, at least for the first lap or two.  Suddenly, I felt very humble.

It may sound like this all goes by quickly, and I guess it does.  But like many things that get your adrenalin flowing, time also seems to slow down, making the memories of those few laps very clear.  And with time to reflect over the next few weeks, I started realizing how much I had relied on things already familiar to me.  Three important attributes of high-performance teams were very evident that day, attributes that I learned years earlier in classrooms and online learning courtesy of the Talent Development Team at Trinity Health.  Here’s what I learned again at 151 MPH:

Safety First  This may be surprising when talking about something like car racing, which on the surface seems risky and dangerous.  But from the moment I arrived, everyone I met and everything I did before and during the driving, conveyed a focus on safety...and in a reassuring and educational way, not in a way that made me nervous.  This intense safety focus is also very evident in the quality of equipment, clarity of the mandatory class you attend before getting into the car, and ongoing guidance from the staff. This resonated with me on so many levels of my experience with Trinity Health, as an employee and as a consultant seeing the many ways it is woven into curriculum, process, and culture, but also as a patient in the way care team members interact with me.

Customer Focus  Every staff member I interacted with at the NASCAR Racing Experience struck the perfect balance of serious tone and fun, making the whole experience reassuring and enjoyable.  I don’t think they could have achieved this without first learning what customers would want (and even be delighted with) in this kind of experience, and then always trying to find ways to make it better.  I have seen that same customer (patient) focus over the years at Trinity Health, in their long-standing commitment to seeing the “whole patient” (mind, body, and spirit), and the emphasis on continuous quality and process improvement, all things I learned about as a Talent Development Team member.

Trust  When you are doing something you’ve never done before, something where you have no real comparable experience to lean on, is there anything more valuable than a mentor or guide?  As I took those first laps at MIS, I immediately relied on my “spotter”.  Each driver is assigned to one, and from his viewpoint above the grand stands through radio communication wired into your helmet, my spotter calmly talked me though every shift and turn, let me know if there were any other cars near me, and coached me on how I could improve on the next lap.  With positive reinforcement and helpful guidance, he immediately earned my trust.  I learned many team building skills working with the Trinity Health Talent Development Team over the years, and trust…how to earn it, build it, and give it…has been one of the most enduring of those lessons.

Then and Now  It’s been five years now, but the memories of that experience – the sights, sounds, and exhilaration - are still very clear to me.  And some important lessons, first learned years before in a totally different setting, are clear to me as well.  And today, I think I understand them at a deeper level, and can see more opportunities where they could be applied, than I did before.  I guess that’s what “relearning” can do for you.

Thank You!   Thank you to my family for a once in lifetime experience and the treasured memories that I can add to so many others.  To the people of the NASCAR Racing Experience, thank you for the chance to live out a dream, if only for a few laps, and one of the best customer service experiences I’ve ever had.  And to D'Anne Carpenter, Jill Kotwicki, Renee Therrien, and Geralyn Quick, and the whole team past and present, at Trinity Health Talent Development, thank you for teaching me (the first time) some of the fundamentals of high-performance teams.

As a Strategic Planning Consultant, I am definitely a “trend watcher”, and one of the reasons is to make sure clients are considering any relevance of what I call the “Strategy du Jour” to their Mission, Vision, and Goals.  It seems that there is always at least one strategy (sometimes more than one) that is getting a lot of attention in leadership and management literature.  Back in the first half of the 2010s, one such strategy was innovation.  The idea of becoming “an innovative organization” and making “increased innovation” one of their Goals was becoming very popular.

The Innovation Learning Curve  So as a trend watcher, I was reading a lot about innovation during those years, and some of what I learned was surprising.  I found that there is a lot more involved than one might think with becoming an innovative organization.  Certainly, true innovation can have significant rewards, but the innovation rarely, if ever, comes without significant investment.  The subject of innovation had become so popular, that I assembled what I had learned from the literature and some clients into a presentation, “Innovation: From Start to Sustainability”, that I was honored to make at the Spring, 2017 Conference of the Michigan Society for Healthcare Planning & Marketing.

It’s about the Process  One of the most important things I've found out is that a successful innovation involves much more than the initial spark of an idea.  Moving from idea to a market ready change that will be readily adopted  is a process with four distinct stages (see diagram at right).  Each of these stages has to be consciously and actively managed, or the overall process will be less effective…producing fewer or no real innovations.

Once organizations understand all that is involved in the process of innovation, they also need to be prepared to support the process by meeting three other requirements, each with some important nuances.  These three requirements are:

• The Right Motive
• The Right Organization
• The Right Resources

Back on Top?  I’ve been fascinated by how many people have talked with me about one silver lining in the Covid19 Pandemic.  They described how when they and others from different organizations came together to respond to the crisis, it led to a number of innovations.  Necessity is the mother of invention, as they used to say.   To a person, their hope was that this collaboration, often leading to innovation, might continue in some way.  Indeed, the topic of innovation seems to be very popular again.  Maybe it’s time for a refresh on how to create the best pathway for innovation.  Let me know if I can help with a quick discussion or a full presentation on the topic.

Jeff

In a recent Strategic Planning work session with a client, a Board member asked if the organization was running the risk of “Mission Creep”, which they felt should be avoided.  Also called “Mission Drift”, this is when organizations begin to diversify into services or products that are increasingly different from their original purpose and offerings.  In the US and some other economies, when taken to the extreme in pursuit of more earnings, this sometimes resulted in a conglomerate, a holding corporation with many subsidiaries that are unrelated, or at least seem to be.

Stick to Your Knitting  Critics of Mission Creep warn organizations not to stray too far from their core purpose, and to stick to what they know and do best.  Moving into areas where the organization had no experience or fundamental capabilities, either of it own or though partnership, is certainly a high risk and could have severe consequences.  And there is much to be said about knowing what you do best…and continuing to improve it.

We’re in the Railroad Business  But taken to the extreme, a complete lack of any evolution in purpose and portfolio is also dangerous.  This Mission Obsolescence ignores the reality of a constantly changing world, society, and customer.  It’s true that with customers, some of what they need and want from your organization rarely (or never) changes (e.g. safety, respect).  However some of your customers’ key quality characteristics - the attributes they use to evaluate how good your services or products are – do change over time.  This is inevitable in a world of constant innovation.  History has many examples of organizations and even entire industries that failed, or almost failed, due to mission obsolescence.  Remember learning about how railroads almost completely disappeared because they thought they were in the railroad business, all the while choosing to ignore the rapidly expanding world of transportation (cars, trucks, planes)?

Timing…and Information   So how does your organization find the prosperous “middle ground” between Mission Creep and Mission Obsolescence?  By keeping an ear on what your customers need and want and what’s happening with organizations like yours.  I refer to these as Market and Industry Assessments, respectively, and they are a critical early-stage component of Strategic Planning.  If like many organizations, you develop a new Strategic Plan every three years (or maybe less), make sure the process starts with thorough Market and Industry Assessments.

But don’t stop there.  The beginning of a new calendar year is one of several perfect times to refresh your understanding of what’s going on in your industry.  Why?  Because it is often when associations publish updated “Environmental Assessments” or other annual publications where they report on the latest trends, issues, and emerging best practices of interest to members. It’s also a good time, after the holiday rush starts to subside, to reach out to customers for their latest feedback and perceptions.  Staying tuned to your customers and your industry on an ongoing basis is the best way to avoid Mission Obsolescence and build the rationale for well-timed and well-planned Mission Evolution.

Let me know if I can help with an Assessment refresh, or anything else.

All the best in 2024,

Jeff