My mission statement

The times we are working in now need a great deal of accelerated change and there must be no negotiating that down. So my mission statement for this part of my consultancy career is to be clear that there needs to be and will be a lot of change from the work that I do with individuals and organisations and if organisations don’t want that, then it is probably best to go somewhere else.

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More lessons from the Hinchingbrooke takeover

Filed Under (Hospitals, Private Health Care, Private Sector) by Paul on 15-11-2011

Yesterday I drew some political lessons from the Hinchingbrooke takeover. Today I want to draw some lessons from the procedure that has taken so very long to come to a conclusion.

I think it’s pretty certain that over the next few years there will be a variety of different takeovers and mergers of NHS hospitals. When these have been carried out in the past they have been mainly attempts to reduce costs by forcing several organisations to merge. Most of these would not have been mergers or takeovers in any other industry or service. In the NHS mergers have usually brought together 3 failing hospitals to create a single, large, failing hospital.

Last August KPMG published an interesting analysis of NHS mergers with some ideas on how to improve their outcomes.

The Hinchingbrooke takeover was organised in a much more robust and transparent way when compared with normal NHS mergers. In February 2010 I posted on this topic – I think it bears repetition.

“Over the last few months the East of England has been seeking an acquisition partner for (Hinchingbrooke). They had drawn up a list of possible takeover organisations. But last week the last NHS FT prospective partner removed themselves from the list of those who were still bidding to take over Hinchinbroke. That means there are only private sector partners left to carry out this role.

The HSJ speculated why the last NHS FT bidding fell out of the process and said:   

“Cambridge University Hospitals said the onerous bidding process to win the franchise to run the £92m a year hospital would have been a distraction from its core functions.”

And this gets to the core of the problem. First the process we construct to encourage FTs to acquire failing hospitals is incredibly time consuming and costly. We assume that the costs that bidders have to go through, costs in fees and the considerable  opportunity cost for development time, is in fact worth nothing at all and therefore can be elongated for as long as possible at no cost. What Cambridge University Hospital is saying is that they feel they can do better for their Board by rejecting what is a costly distraction.

In fact the way in which the NHS runs such activities as the current acquisitions policy is dragged out in such a way as to put off people who may want to be involved. The fact that no public institution is involved in this bidding process shows that the cost really puts successful organisations off.

But there is another argument here. Given the cost it is interesting that a number of private sector organisations still think it is worthwhile to spend these resources on bidding for an acquisition.

If it is a worthwhile bargain for the private sector why is it not thought to be worthwhile for the public sector?

There are two important reasons why the private sector sees a bargain where the public sector doesn’t.

The first is how they reduce the cost of bidding.

The second is a different understanding of what value is and how it can be driven by an acquisition.

So the bargain works for the private sector because, for them, the inputs are smaller and the outputs are larger.

First the private sector has considerable experience in mergers and acquisitions and knows how to minimise those costs. It knows where the expertise exists to carry out the heavy lifting of bidding for an acquisition and it knows how to gather that together for a bid.

Second – and this is much more fundamental. They have a different set of drivers about the realisation of value in their work. The private sector is organisationally driven by the necessity to maximise shareholder value. If a private sector board consistently fails to move to acquire assets – when the acquisition of those assets would maximise shareholder value – then the shareholders will remove them.

This is not to say that every takeover is a good idea. Not at all. Most private sector takeovers do not add significant value for shareholders. So all of this needs to be done with care. But if in the next year there were three such acquisitions of hospitals, and if on all three occasions shareholder value was increased by that acquisition, then the shareholders of an organisation that had failed to bid would be asking questions of the Board. “Why has our board failed to maximise our value?”

There is no such pressure on an FT board. No one expecting them to be looking round all the time for activities that will maximise the value of the hospital. What FT board are expected to do is to shepherd the trust through difficult times and survive. Boards that fail to do this are punished either by the organisation or by Monitor.

What private sector institutions expect is that their Board will be looking around all the time for opportunities to maximise the value of the organisation. Boards that fail to do this are punished by their shareholders.

If we do not watch out these different drivers for creating value will mean that public sector entrepreneurs are disadvantaged in the battle with private sector entrepreneurs.”

There is an important paradox here. I am sure the Secretary of State would rather have a set of outcomes which involved public sector FTs taking over failing NHS hospitals, but because both this and the previous Governments have been anxious about the whole process they have extended it, and made it so tortuous that only private sector organisations have either the capacity or the stamina to see it through.

Most of the 30 months, and millions of pounds, the takeover process at Hinchingbrooke have taken has been wasted because both the previous and present Governments have been anxious about continuing down the path they had chosen.

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