Scenario Planning or SWOT Analysis

Scenario planning and SWOT analysis should be viewed as complementary with each process informing the other. The environmental assessment attempts to define the current state of reality and the organization’s place therein. It is oriented in the past because that is the data that’s most readily available. When combined with an assessment of the organization’s strengths and weaknesses, it allows the planner to make certain assumptions about opportunities and threats and, more importantly, about the ability of the organization to capitalize on the former and proactively prepare a response to the latter. SWOT works best when the trend lines actually predict the future. It does not work so well when faced with disruptive innovation, regulatory upheaval, or unexpected competitive actions.

Scenario planning processes open the mind to alternative futures not predicted by trend lines. It enables the planning team to reassess assumptions about strengths and weakness by asking how the organization would actually deal with the unexpected. Management strengths in a stable environment may well be weaknesses in a scenario characterized by instability and change. Scenario planning also allows the planner to reassess opportunities and threats. What if personalized, genomic-driven medicine becomes the standard in the next ten years, for instance? If management believes a scenario is reasonably likely to occur, it can make an informed choice to allocate resources today in order to prepare for that eventuality tomorrow.

It is highly unlikely that any of the scenarios considered will come to pass exactly as planned, but that’s OK. The process itself is where the benefit is derived, by giving the planning team different ways of looking at the organization and its future.

A Rating Agency Perspective

A senior analyst at A.M. Best Company, Joe Zazzera, recently prescribed four "return-to-basics" strategies for hospitals and healthcare systems to minimize risk in the current environment: (1) take a hard look at your market and reevaluate your strategic alternatives, (2) link your plan to your capital budget, (3) include making a profit in your mission statement, (4) develop clear communication with stakeholders including, of course, the rating agencies. The simplicity of this prescription belies its difficulties. Let's start with the first one.

Every strategic planning process starts with an environmental assessment. They summarize the demographics of the market, project demographic changes, review the competition, consider the regulatory climate, etc. Most include a capabilities assessment purporting to be an objective look at internal resources and an evaluation of their sufficiency to the tasks at hand. The environmental assessment may be only a few pages, but most that I have seen would fill volumes with charts and tables included.

With all this work, what could go wrong? Three things, starting with incomplete or inaccurate data. What do I really learn if I'm told that the demographics in my primary service area is expected to grow 0.7% in the next few years or that this population is aging? At best, these are just bits of information in an environmental assessment that will always be incomplete due to lack of availability and timeliness of accurate data; at worst, it leads to projections that growth will occur in Medicare patients simply because there's going to be more of them around. Every bit of information gathered should lead to more questions. In this case, what is the growth pattern by meaningful age groupings, in what zipcodes do they live, what is their employment and insurance coverage profile, what are the residency turnover numbers, will the school systems attract younger people to your primary service area, what is the economic development plans for the area, etc.? You get the idea. The more questions you ask, the more variables there are to consider, and the more complex the real environment reveals itself to be. Incomplete assessments lead to kneejerk responses. More complete assessment should lead to better and perhaps more nuanced responses; but that is no assurance they will be the right ones.

The second thing that can go wrong is misinterpretation of the data. We know that people look at the same information and draw completely different conclusions all the time. That is easiest to see in the self-assessment component of the plan. Recent research has suggested that employee assessments do far more harm than good. It is impossible to remove bias from them. The relationship between evaluator and evaluatee colors even the best of intentions at objectivity. Whether its the CEO or some other C-suite executive writing the plan, bias inevitably leads to over and under assesments of true capabilities.

And the third? These assessments are done at a point in time. Omniscience once, were it achievable, is not enough. You need it everyday so you can measure the impact of your actions on others and others' actions on your plan. Unfortunately, there is always lead times between plan and plan implementation, and they are often quite long. A lot of trucks can drive through that gap, particularly where construction or fundamental relational changes are required. In the press of day-to-day operational management, how many teams address the impact of environmental change on strategies in any systematic and routine way? Do rating agencies really expect omniscience today and every day? Perhaps they do.

Complexity Creeps Up On You

Joseph Tainter, author of "The Collapse of Complex Societies," was recently quoted in the New York Times as saying, "Complexity creeps up on you." Drawing from his research of ancient civilizations, including the Roman Empire, Tainter concludes that leaders generally make reasonable decisions based on the facts known to them at the time. However, it is simply not possible to predict how actions today will play out in complex environments. There are simply too many variables. As the effects of actions cascade through multiple layers of human and environmental systems, what seemed unthinkable yesterday becomes the new reality today.

Which gets me to our healthcare system. The Healthcare Reform Bill may well be the straw that finally breaks a system that is alrady near collapse from its own complexity. A more complex system is hard to imagine. Doctors, patients, hospitals, specialty providers, nursing homes, home health and hospice, insurance companies, Medicare, state-run Medicaid, regulatory agencies, patient advocacy organizations, legislators, medical malpractice insurers, media organizations, special interest groups, pharma companies, medical device and equipment manufacturers, and more, all interact in a complex system threatened by out-of-control cost increases and demands for higher quality and transparency. Accountable care organizations may well be the answer to at least some of the current problems, but their impact on this complex system cannot be foreseen by mortal man.

One thing is clear. Participants in this system cannot assume any future based on trend lines drawn from the past. Every assumption needs to be challenged and business models need to be rebuilt from the ground up. In other words, we should all be feeling we're not in Kansas anymore.

Everything Old Is New Again

A couple of decades ago, I was deeply involved in the formation and management of Physician Hospital Organizations (PHO's). At the time, we just knew payers were going to start encouraging providers to come together and accept capitated risk. We flew around the country to see how early adopters were managing these things called capitated contracts. Hours were spent with consultants, attorneys, physicians, and hospital administrators in setting up legal, management, and IT systems to make it all work. Tentatively, some of us put our toe in the water and signed risk contracts. The lucky ones broke even. The really lucky ones waited for the right opportunities to come along, but, fortunately, they never did. Over time, capitation contracts with PHO's fell out of favor in most parts of the country as tightly managed HMO's gave way to ever deeper discounted contracts with insurers seeking non-exclusive, broad networks of providers.

As we now look at where healthcare reform is taking us, what seemed inevitable 15-20 years ago is finally coming back with a vengeance. Integrated provider groups will soon be called upon to share risk and split the pie. Before we start reinventing the wheel, we need to take a lookback at what was learned so long ago. First and foremost is doctors and hospitals must be willing and able to share clinical data and actively manage care. Back then the systems weren't in place (who had EHR's?) and neither was the will. There was huge mistrust coloring all discussions of money and power back then. What is the fairest way to share the dollars and how can these discussions even begin to take place in an environment that doesn't start out hostile and end up worse?

The accelerated movement of specialists employment by hospitals, though lamentable for many reasons, gives us hope that this time around will be different. Economic interests are much better aligned now than they were then. But, the conversations are going to be difficult and the systems complex. Let's don't wait to get started.

The 4 P's of Marketing (or is it 4 R's?)

Product, place, promotion, and price. I guess that just about covers it all, or does it? Of course, then someone has to add people, packaging, physical evidence, process, philosophy, partners, and even purple cows. Mnemonic devices are a way of organizing our thinking, but should not be confused with the way the world actually works.

Marketing is all about relationships, so I humbly suggest replacing the 4 P's (or 10) with 1 R. I know it's not too catchy, but it is how marketing should be approached by everyone engaged in it (and that's about everyone). OK, 1 R may not be enough. Let's add reciprocity. In this particular world, relationships are built on the principle that what I give to you will be rewarded in a more or less equivalent manner. I am not going to give information, money, a recommendation, or much of anything else to someone that I do not expect to reciprocate with something of like value.

Not enough still? How about research? I cannot know what you value and how you value it unless I do the market research to tell me. Maybe you have absolutely no need for the widget that I spent the last year inventing or, if you do perceive a need, maybe it's only worth a buck to me to get it. Good information to know before you start trying to build your relationships.

Of course, if I really hope to replace the 4 P's, I've got to come up with 4 R's. How about respect? The attitude you bring to the marketplace is not easily hidden by creative smokescreens. If I truly respect my customers and prospects...or not, it will shine through.

There, I did it, another mnemonic device that is a way of looking at the business of marketing. Of course, it's only that, but I like it better.

Strategic Planning: Not Just for the Big Guys

We will be making a presentation entitled Strategic Planning: Not Just for the Big Guys at Money Smart Day at the Fed on April 23, 2009. This interactive session for small business leaders will provide a practical framework for the critical task of strategic business planning, which includes performing situational analysis (where are we now), strategy formulation (where are we going), and implementation planning (how do we get there). Topics will include market analysis, customer value propositions, resource allocation, and financial projections.

This one-hour presentation starts at 11:00 at the Federal Reserve Bank at 27th and Main in Kansas City. If you are interested in attending, please register by April 17. Registration is now open at http://www.kansascityfed.org/kcmoneysmart/fedday/.

Loss Leaders

A recent exchange on a professional network got me thinking again about loss leaders. The exchange was started by someone asking for studies that measured lifetime value (my term, not theirs) of maternity patients to a hospital's bottom line. It was clear that someone was being challenged about the lack of profitability from maternity cases when measured as a standalone service. The person was rightly seeking objective support for the argument that these patients left the hospital feeling good about their experience, which directly led them to seek care for themselves and their families when future medical needs arise. Hence, while the maternity services may not appear to be profitable, the long view would suggest otherwise. Sometimes, this is called looking for downstream revenue.

The exchange was lively, to say the least, but no published studies were cited and no definitive conclusions were reached. However, one respondent did reference an internal study, which failed to prove the case. In this study, services in one medical specialty did not necessarily lead to services in another. Consumers are much more active in their selection of providers and base their decisions on study and their physician's recommendations far more than favorable personal experience in one service segment. Another respondent suggested that the lag time between a mother's delivery and her need for hospital services to treat serious medical conditions was so great that she would not put much credence in an experience that may have occurred decades ago.

We often talk about loss leaders, particularly in the not-for-profit arena. Sometimes this talk is just an excuse for failure to tackle systemic causes of poor financial performance. Often it is a genuine philosophical position rooted in the belief that a hospital must provide comprehensive services to all patients, regardless of financial return.

Regardless of mindset, our radar should always go up when people start talking about loss leaders. Good data does need to be collected in an attempt to place a long-term value on patient categories. However, we must always remember that these categories are subjective. Do we draw the circle around medical specialty, deparmental responsibility, or service line? In the case above, perhaps we lose money on maternity but make an acceptable return on women's services of which maternity is but one component. Regardless of how we draw the circle, every service needs to be evaluated at the management responsibility level to make sure it is operating as efficiently as it can given service goals and requirements, and those goals and requirements need to be routinely re-evaluated in the context of the organization's strategic plan.