The Governance Challenge in Hospital Turnaround and Transformation

Article by Jeff Goldsmith and Scott Ransom, M.D. in The Governance Institute

Hospitals and health systems large and small are experiencing sudden operational headwinds that pose significant threats to their organizations. In confronting these challenges, governing boards face a major leadership dilemma. It may be that the task of a turnaround and significant strategic transformation requires a leadership change. In some circumstances, a different type of CEO may be required to turn the organization around and lead change than the one who can incrementally grow and improve the stabilized enterprise. Confronting this dilemma will require boards to rethink the organization’s leadership strategy as well as their governance model.

Stopping the Bleeding and Leading Strategic Transformation

Before hospital enterprises can address their market’s current challenges, they must stop major bleeding and accomplish clinical and management leadership transitions. This often requires setting stringent short-term (60–90 day) performance improvement goals, as well as arranging the departure of established clinical and operating senior managers who stand in the way of longer-term success.

Boards have at least three choices for how to bring about this transformational leadership:

  1. Initiate a formal search for a turnaround CEO, recognizing that this will likely be a one-to-three-year appointment due to significant short-term conflicts and strained relationships resulting from the turnaround process.
  2. Hire an interim CEO to do the difficult turnaround and transformational work while simultaneously recruiting a permanent long-term CEO through the traditional search process.
  3. Hire a turnaround firm or professionals with a strong transformation portfolio to drive organizational change that reports to the board while simultaneously recruiting the permanent CEO.

Options one and two will often require external assistance to analyze performance data, and help create performance targets and a dashboard to enable the board to evaluate progress and aggressively implement the strategy.

Leadership Requirements for the Task at Hand

Arresting sudden operating losses typically require a CEO with a thick hide, tolerance for interpersonal conflict, and the tenacity to break through organizational barriers that stand in the way of improved performance. It is rare that the senior team that led the organization into trouble can be counted upon to right the ship and steer it in a sustainable direction. Thus, the turnaround CEO may, in this process, need to part company with long-time senior clinical chiefs and managers. These actions involve incurring political costs, which can burden this CEO in building relationships for the longer term.

Having stabilized the organization financially, the turnaround CEO can then turn his or her attention to whether the market supports the organization’s strategic priorities, or whether it needs to reposition itself in payer or physician marketplaces. With the turnaround CEO's help, the board should also evaluate new service offerings and organizational assets (e.g., hospitals, physician practices, IT, long-term care facilities, etc.) to determine if they merit continued investment. Finally, the board should reassess capital spending plans, including IT procurement and implementation plans to ensure that they are sustainable and are likely to generate an adequate return.

Achieving positive financial results, clarifying the organization’s strategic direction, and pruning back operational deadwood carries political costs, which may ultimately handicap the turnaround CEO from leading the organization longer term. The board can cushion some of the blow by formally establishing their expectation that the “change maker” CEO is in place for at most one to three years, at which time they will seek to fill the job with a longer-term CEO who can consolidate gains made in the turnaround. People from clinical, operations, or administration positions who are promoted into senior management to support the turnaround and repositioning can be evaluated for their fitness for permanent appointment, or even promotion based upon exemplary performance.

 

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