Mergers and acquisitions among healthcare providers, while staying steady in number, are growing in size and scope. Increasingly, chief supply chain officers must anticipate change and improve their approach to demonstrate and communicate value in the M&A process.
Lower-maturity integrated delivery networks (IDNs) often underinvest in the strategy and preparation, due diligence and integration planning phases of the mergers and acquisition (M&A) life cycle, leading to longer implementation times and unrealized value expected from the M&A event.
It is likely that more consolidation of health systems will occur in the next decade. For a chance to lead the supply chain for the combined entity, the time to demonstrate leadership is now.
Senior management expectations are changing for M&A execution from more than two years to less than a year, putting pressure on chief supply chain officers (CSCOs) to compress the process.
To demonstrate and communicate the value during M&A events, healthcare provider CSCOs responsible for supply chain strategy should:
Build foundational capabilities and develop senior leadership relationships to enable supply chain to be represented upfront on the M&A strategy and preparation team to deliver maximum value.
Validate deal assumptions and value objectives by performing due diligence early in the process.
Prepare an M&A integration plan as early as possible — include and prioritize common governance into the integration activities. Ask how the newly acquired supply chain will be incorporated, to get business buy-in.
Create a supply chain implementation team to move quickly and confidently once a merger is announced. Keep the core building blocks of common ERP, distribution GPO relationships and fundamental analytics in place to deliver the committed value to the organization.
In its quarterly mergers and acquisition activity report, Kaufman Hall found that the “average seller size by revenue for the quarter was $736 million, which is more than double the $346 million average for 2020,” notes Fierce Healthcare, who also concluded that the last quarter was a “megamerger.”(See Figure 1.)
Large-scale mergers and acquisitions (M&As) are a fact of life for an IDN CSCO today. Healthcare providers are seeking the cost advantages of scale in a more competitive, lower-revenue environment. In the face of changing reimbursement and population health models, many healthcare providers are acquiring complementary IDNs, individual hospitals and clinics to increase revenue and market share, cut costs, connect patient care and, ultimately, survive as a system.
Some leading IDNs with a track record of acquisitions are completing deals within nine months, compared to two years or longer in the recent past. CFOs expect supply chain to deliver this value fast. Research shows that hospitals saved only about 1.5% annually on typical expenses in the healthcare supply chain after a hospital merger.However, most leaders expect same-sized organizations’ M&A to yield 3% to 8% supply chain savings. Our research, on the contrary, shows that the expected savings are only possible if organizations are merging in a single IDN and are not of the same size.
IDNs in an M&A scenario have a great opportunity to standardize care, leverage volume, share best practices and lower costs through successfully integrating supply chain operations. IDNs that choose to grow through M&As can build on their value-based delivery systems. Our benchmark data indicates that the supply chain represents over 37% of the operating costs at an IDN; as such, it also represents a large area of contribution to M&A deal value through cost savings and process improvements. M&As at IDNs include affiliations and financial M&As, and every M&A deal is different. In this research, we provide four-stage best practices for CSCOs to communicate the value of a successful IDN M&A (see Figure 2).
A strong and well-defined supply chain operation is the best platform from which to deliver value and win in M&As. Before any M&A activity occurs, CSCOs need to build internal capabilities across data governance, logistics, sourcing and clinical alignment. Key capabilities include:
Single instance of ERP
Integrated electronic health records
Alignment between supply chain and IDN strategy
Strong governance to make decisions about the alignment with clinical pathways
Total cost of care and a nonacute supply chain capability
With these capabilities in place, supply chain will be able to create a roadmap for integrating the newly acquired entity. That roadmap should spell out supply chain’s goals and how they match with the typical IDN’s strategy of delivering best-in-class healthcare for the population it serves at sustainable profit levels. For example, a leading healthcare system that has made significant acquisitions spells out its procedures in terms of sourcing, distributors, storerooms, food service and other areas. CSCOs must ensure they have best-in-class value drivers they can bring to the newly merged entity, as well as clear processes for integrating them. They can also use Gartner’s Supply Chain Score to help in strategic planning, functional transformation and resource allocation (see ).
CSCOs have traditionally viewed their role as being good operators. To deliver value in M&As, however, they need to view the job differently and become more like a CEO or orchestrator of the supply chain rather than a functional leader. Most supply chain leaders don’t have a seat on the senior leadership team, but rather report to the CFO or COO. CSCOs must find ways to communicate the needs and value of supply chain, and form relationships so the IDN senior leadership understands the capabilities of supply chain and has confidence in the team.
By ensuring foundational capabilities and strong relationships with the entire IDN senior management team, CSCOs can minimize the risk that the acquiring IDN will choose the other supply chain leader and team. At least half of the job involves managing up, communicating the supply chain value to the organization and relentlessly advocating for improved resources/talent in order to provide the foundation for a successful integration of another IDN. (See .)
CSCOs at healthcare providers have a perpetual challenge in internally marketing the value they know they drive for the organization. M&A activity is no different. Supply chain can drive significant value in the short term and long term through standardization, improved logistics synergies, price parity and leveraging increased volume and market importance to suppliers. Setting expectations about supply chain’s contributions with incomplete information is just part of the challenge.
Every IDN supply chain leader we talked with about M&As said the same thing: “Senior management looks to us too late in the M&A process and then wants a quick assessment of what supply chain can deliver in reducing costs.” The main message we received was that early involvement enables the supply chain to establish reasonable expectations and resist the pressure to overcommit. Once the integration phase of M&As begins, the union of the organizations dominates the focus of every IDN immersed in them, so keeping surprises to a minimum (with leeway from lower expectations) can be helpful. Either way, a steady cadence of communication and good analytics will support CSCOs’ goals.
Expectations should be managed on two primary fronts: timing and, more importantly, the value derived. Timing is challenging, and most mergers have supply chain initiatives that can take a few years to resolve for geographical or contractual reasons. After the transaction, it is acceptable to run the operations in parallel for a set time period in order to allow both sides to learn, evaluate and deliver the value. Gartner interviews, coupled with dozens of inquiries on healthcare M&As, suggest that aligning the organizations, choosing key suppliers and making most personnel decisions should be completed in 12 to 18 months for most acquisitions.
Determining and communicating how much value supply chain will drive in a merger is a huge challenge. In many cases, the larger, more active IDNs have compressed their time to value to less than nine months. However, the value driven in mergers of two mature organizations is typically less than a large, established IDN acquiring an individual hospital or small IDN. CSCOs can use the M&A maturity alignment evaluation sheet below to determine the value they can drive out of a merger (see Table 1).
M&A leaders engage early with the acquiree to build relationships and trust with key clinical and management leaders. This does not mean the acquisition is a democracy. Your organization is the leader, and showing a clear process demonstrates your operating control of the merger. For that reason, CSCOs should form a dedicated supply chain implementation team (SCIT) (also known as the supply chain M&A team or supply chain integration team) to manage the supply chain M&A process from end to end.
Key individuals from any area of the organization who have a stake in supply chain outcomes should be part of the SCIT, including subject matter experts who can contribute to specific aspects of transition. Typical members include:
Representatives from finance, human resources, sourcing, logistics, analytics and clinical
A dedicated SCIT leader who owns the project
A supply chain executive sponsor
This team will manage end-to-end supply chain integration for the duration of the event. To ensure a smoother transition, have this team ready in advance and provide it with a framework to develop and deliver critical transition messages rapidly. Not all action items or deliverables will necessarily need the entire team’s involvement, but actions should be documented and communicated to all members during the transition.
One of SCIT’s main deliverables is to create a supply chain M&A roadmap to guide the team through due diligence activities where supply chain leadership is needed: integration planning and execution of the new organization, and postintegration assessment and improvement. This roadmap provides a framework for making and documenting any major process and organizational decisions upfront, rather than ad hoc and informally.
A formal roadmap must address these critical areas:
Key personnel: Identify the key people who compose the supply chain team, organized by their roles and responsibilities during each stage of the M&A. Include corresponding resources from the acquired organization in later phases (post-M&A announcement), and information on who makes final decisions on key issues.
Organizational details: Create a roadmap, targeted at the newly acquired organization, that explains your supply chain organization’s mission, goals, structure, role and division descriptions, and best practices. These initiatives will help to ease the transition for the acquiree, and should include support for your best practices and evidence that desired outcomes were achieved.
Supply chain value: Describe examples of how your supply chain has brought value to the organization, including measurements that show savings. These descriptions should include category management, supply chain roles and services, organizational structure, alignment among supply chain functions, audit compliance, risk management and related controls.
M&A integration is time-intensive and resource-intensive. It is difficult from both organizations’ perspectives, but can be particularly traumatic for the acquired entity. The process is even harder if it is disorganized. However, integration that follows the SCIT roadmap and moves in phases is more likely to be smooth for all parties, which goes a long way toward building better relationships and trust with new employees.
Mayo Clinic is a leader in the phased approach, providing a playbook for M&As that is best in class from due diligence through integration. Most leading organizations take a similar path. Phases 2 through 4 are based on significant input from Mayo Clinic’s more detailed framework, with additional concepts from other IDNs we talked to as well as Gartner’s own research framework.
This stage involves developing a full understanding of the advantages of acquiring an organization by identifying areas of potential value and differences in strategy and processes, as well as conducting due diligence activities.
In line with Gartner’s research on manufacturer due diligence (see ), there are three core activities in this phase:
Preparing by establishing deal value drivers
Evaluating the fit of the acquisition target to validate deal value assumptions and objectives
Delivering findings to the deal team
Overall, the objective of due diligence is to assess areas as they relate to the healthcare supply chain. Specifically, and as available, include the following information when performing due diligence:
Spend analysis data, including vendors, items, contract listings and pharmaceutical contracts, particularly to identify opportunities for conversion
Distribution, logistics and inventory management, processes related to receiving, delivery, inventory management and replenishment, and the freight program
Supply chain organization and personnel, including a gap assessment of capabilities and resources, interviews to understand organizational culture and expectations, strategic planning and direction, organizational structure, roles, budget, metrics and capabilities
Procurement and disbursement processes, including resources, automation, systems and applications, authorizations, online capabilities, processes, technology and invoicing
Sourcing and contracting processes and contracts, including group purchasing organization (GPO) and distributor relationships, signing authority, contractual terms and conditions, supplies and capital equipment, IT agreements and outsourced services, supplier issues/disputes and value analysis
Pharmacy operations and supply chain role in formulary management, including GPO affiliations, annual spending, automation, systems and class-of-trade challenges
Core actions in this phase should include:
Visiting with supply chain and other support personnel at the acquiree to review workflows, processes, policies and procedures, and facilities. Visits may include top resources in procurement/disbursement, supply chain management, supply chain organization, sourcing and contracting, data analytics, inventory and logistics.
Assessing the acquiree’s facilities to determine whether they should continue or be folded into a centralized process.
Identifying the strengths and challenges of the acquired organization, as well as its supply chain best practices.
The hardest work in a successful acquisition is integrating, consolidating and standardizing supply chain capabilities and processes. When working in this phase, the SCIT should focus on commonalities between the organizations. This is another opportunity to locate best practices in the acquired organization to integrate into your organization. Between the completion of due diligence and the date the deal closes, the core M&A team has limited access to the target company, and is in a learning mode to understand how the target company operates. It does this to:
This is the time to further define the size of the synergies, opportunities and risks associated with the merger or acquisition, and to develop a plan that will contribute to the deal objectives. (See .)
In IDN mergers, the SCIT should lead by dedicating resources to analyze supply chain processes and products for ways to streamline them for maximum value. Standardization should be geared toward reducing variability in products and services, reducing cost, and reviewing for best practices in patient care efficacy and safety. Analyzing the value of processes, suppliers or products should be based on data, not preference.
In this phase, the team should also decide which supplier relationships to maintain. First, it should look for price parity at manufacturers and service providers, and then move to bigger relationships, such as group purchasing organizations, distributors and IT platforms. Consolidation should address areas of core processes and systems, financial (audit and control), consolidated shared services functions, standardizing and converting master data, and consolidating ongoing technology projects or implementations.
Integrating human resources is trickier, and consistent communication is crucial to managing the transition over time. Everyone is likely a bit overwhelmed by the M&A activity, so it may take several times for messages to get across.
Mentoring new employees and continual training in policy and process differences will help the acquirer in transition. Up to this point, team meetings and other activities should help your team understand the organizational culture that new employees are used to, and identify how it’s different. Make sure there is someone on the SCIT with the ability to predict where difficulties might arise because of differences in culture. Consider cross-pollinating managers and directors you are retaining to reduce the us-versus-them mentality, and set the foundation for the new combined entity.
An important piece of this phase is sharing your roadmap with the acquired organization. Sharing this information provides an opportunity to build rapport, educate the acquiree on your organization’s capabilities and share projections for how the combination can help the acquiree attain its business goals. The acquiree should be aware of your planned phased process for integration, and know what to expect in each phase and who to contact for questions. You will work with the acquiree to locate best practices in its organization that will benefit the merged organization, and locate overlaps, gaps in service and potential areas where risk is not addressed.
During the integration phase, the SCIT should meet at least weekly with key supply chain staff at the acquiree to:
Identify mutual goals and success factors.
Align the acquiree supply chain’s goals and strategies with your organization’s, and establish governance. Begin to align operations, audit processes and controls.
Consolidate, align and adopt key business processes. Align contracting, value analysis, vendor management and recall strategies and processes. Evaluate technology needs and issues in IT infrastructure, accounting and supply chain management.
Identify a clear leader of supply chain in this phase. This provides coverage for any unforeseen transitions of executives, and resolves any gaps in decision making.
After the integration phase, the acquisition is likely complete, but real work remains to finalize the transition. Most of this work will be woven into the fabric of constant improvement, but over a larger organization. These areas will be in a few outliers like medical devices, specialized services and systems. To bring the most value, the standardization of products and services must be thorough. Difficult decisions must be made and staff trained on the new processes. Navigating physician relationships and balancing the promises made by the IDN deal team during the acquisition courting process provide an ongoing challenge in the integration execution phase (see ). Supply chain is on the delivery end in balancing quality of care, staff satisfaction, service and cost in M&As.
The main areas to deliver value from supply chain M&As are:
Complete standardization of products, systems and processes
Ongoing improvement in cost through the use of advanced analytics on cost and utilization
Reduction of legacy agreements with longer expiration tails
Communication of the delivery of goals and value to set up for the ongoing strategy and preparation phase
As more IDNs merge, leaders are bringing clarity of supply chain’s role and value. M&A capabilities need to be seen as a core competency. The framework in this research is designed to provide direction on how to structure for success.
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