The coming alliance revolution in health care

After being reeled by two decades of government intervention and attacks by lawyers, the medical profession is again having its destiny determined by outside forces. Now, more than ever, the medical community is at a critical cross-roads. Moreover, health care is a scientific profession, and consequently is prone to the constant upheavals that occur in all scientific fields.

Driving Forces & Shifting Tides

Shifts such as these should not be seen as tragedies or problems, but instead as a natural set of forces. Health care is being shifted by a "second wave" of forces that follows on the heels of the first wave, which began striking the business sector about a decade ago. The requirements of the shift in the health care profession today are not unlike the situations that faced many industries in the past decade.

The first commercial industries to experience a shift of a magnitude similar to that health care is now experiencing were steel and autos. Steel was faced by the combined forces of price competition and higher productivity levels of foreign competitors. Big steel responded so poorly that it is today a mere shell of itself. The truly profitable segments of the steel industry today are those that became smaller and more flexible and concentrated on adding value to the customer. Big steel, which had been vertically integrated and tied to inflexible labor contracts, often closed its doors rather than adapt to changing conditions. Those that survived sold off their vertically integrated facilities and concentrated on their core competency, making steel. The last vestiges of the turn-of-the-century attachment to controlling all the resource inputs, including iron mines and railroads that transported the ore to the steel mill were replaced by the mini-mills--fast, flexible, customer-oriented, and turning out tailor-made products.

This same attachment to vertical integration has hamstrung General Motors and contributed significantly to its extremely poor financial performance. In the false hope of controlling its destiny by "owning" its subsidiaries and dictating to its suppliers, it traded off needed flexibility for the rigidity of control. Its more profitable competitors, such as Ford and Honda, focused on accentuating core competencies and outsourcing production of nonessential components through alliances with suppliers.

Similarly, Sears Roebuck fell into severe financial difficulty and lost market share to the more nimble and customer oriented Wal-Mart. One of Wal-Marts less publicized strategies that helped catapult it to success was the formation of over 4,000 alliances with suppliers, which reduced costs and improved quality and delivery of products.

IBM, the once powerful titan of the computer world, didn't see the shift away from vertical integration and centralized control of computing in its industry in the mid-1980s and was caught flat-looted with extremely high overhead costs and long product development cycles. It now understands the costs of bondage to old ways that were once successful but, now, like a silent thief, steal its energy, limiting vision and growth.

On the other hand, the explosive growth of retail franchises during the past three decades has harnessed the entrepreneurial energy of millions of individuals worldwide, marking another step in the commercial sector's shift way from the command and control style of vertical integration and toward a more agile, networked, integrated-systems orientation.

Pharmaceutical companies, and chemical companies before them, have had a heritage of networked alliances all over the globe. When major competitive pressures struck these industries, the strategic alliance was often the answer, enabling sharing of production facilities, joint research and development, and joint marketing programs. The pharmaceutical division of DuPont is an excellent example. DuPont, after making an initial foray outside its field of competence (chemicals) into pharmaceuticals, recognized that it ventured too far afield. Wisely, DuPont sought a partner, forging a powerful alliance with Merck. The structure of this collaboration is a joint venture, in which Merck purchased a 50 percent interest in the DuPont division. Given the venture's sales of $1.2 billion, it may seem strange that neither company owns a controlling interest. But, according to James Wells, Director of Business Development for the alliance, the two partners wanted each of them to be fully engaged in providing guidance and support. If either party had majority control, the other would not have a high level of commitment.

The board of directors of this highly successful venture purposely refrains from taking "votes." The members know that it is more important to build a strong consensus, to be creative, and to consistently seek solutions that will provide a "win" for both DuPont and Merck.

All these stories illustrate how the commercial sector, in industry after industry, has had to adapt to fundamental shifts during the past several years. Had health care been exposed to extensive foreign competitive pressures, the shift probably would have occurred at least a decade ago.

Vertical integration is based on the fundamental assumption that greater and broader control of resource inputs will result in higher levels of success. While this belief tends to have some utility in very stable industries where the rate of change is slow, it is a pathway to disaster in more uncertain environments with high competition and rapidly changing technology. History has shown that vertical integration only works to the extent that companies control the internal functions relating directly to their core competencies. Try to control too much in the integration process, and the result will be the creation of rigid, bureaucratic institutions highly susceptible to competitive incursions and too inflexible to adapt until it is too late.

Reflections on the Era of Acquisitions

During the 1980s, the abundance of money made it very seductive for many companies to go on buying sprees, acquiring companies for their harem with the lust of a hungry horde of pirates. Now the facts are in: 80 percent of the acquisitions from the 1980s have been deemed failures. When the autopsy reports are examined, the bulk of the failures were caused by indigestion, resulting from an inability to integrate the acquisition into the culture of the acquirer.

This cultural conflict is illustrated by one acquisition made by Digital Equipment Corporation of a small high-tech firm composed of 34 top-level engineers. While Digital is not known as an overbearing company, the cultural integration issues were too much for the entrepreneurial engineers to bear, and, within six months, more than 80 percent of the key personnel had quit. Unquestionably, the dealmakers at Digital saw this acquisition as a transaction--no more than buying a piece of machinery-not as the formation of a synergistic, highly integrated relationship.

The Tender Issue of Control

The history of alliance formation during the past 10 years has repeatedly shown the seductive allure of the assumption that the ability to control will eventually lead to success. This desire to control leads to many poor decisions: the belief that success will emanate from a well-drawn legal agreement, from having a majority of the votes on the board of directors, or from having control of the pursestrings. While these controls may prevent a disaster from striking, they do not contribute to empowerment of an organization to achieve its goals.

In the medical care field, the working principles of the alliance between the Palo Alto Medical Foundation and Sutter Health are very similar to those of other successful alliances. Sutter provided $50 million for a new facility and satellite, which will enable the Palo Alto Medical Foundation to expand the group practice into managed care.

Robert W. Jamplis, MD, an ardent believer in the "art of medicine" and President and CEO of the Palo Alto Medical Foundation thinks that doctors, as solo practitioners, have long been entrepreneurs. They are now being asked to join teams and integrate their businesses with the practices of others. They fear they may lose control. However, Dr. Jamplis has found that, over the course of the alliance, doctors have not lost control-the alignment of interests with the doctor partners and the outside board members has kept people energized and inspired. "We've learned that the best form of control is to build a consensus. In the past decade, we've never had a 'vote.' Everything is consensus--all the time. This builds teamwork, unity, and trust among the partners," he says.

Dr. Jamplis knows that pushing decisions before people have reached a mutual conclusion would divide the group and cause power struggles in which there would be winners and losers, hence the need for control. As Dr. Jamplis advises: "Let people have control by expressing their good judgment, not by using the voting mechanism to accentuate differences."

Strategic Alignment

Aligning people strategically and philosophically is essential in the management of alliances. In this way, the classic win/win condition can prevail. As Dr. Jamplis says, "We've had negotiations with organizations that took the position: 'What's mine is mine, and what's yours is negotiable.' We decided to walk away from those situations."

In the Palo Alto-Sutter alliance, Sutter's philosophy was to focus on outpatient services and lots of local autonomy. "We thought this was a much closer match for us than for other partners, who were interested in filling beds," Dr. Jamplis says.

A Shift in Thinking

Like the leaders of so many organizations in other industries, Dr. Jamplis has changed his perspective on how he views the foundation's role. "In the past, we thought of the patient as a profit center, from whom we would derive sales, therefore profits. Now we think of patients as a cost center, and it is our job to attain superior customer satisfaction by giving high-quality care with fewer resources. This is no longer a fee for service, but a service for a fee." Such an approach requires not only quality improvement, but also a new way of looking at the whole issue of how the pieces of the health care puzzle come together. It is just this kind of shift in thinking that sets the stage for breakthroughs in establishing new relationships to create superior value for the patient.

Alliance Development in Health Care

Alliances in the health care industry are still at a relatively early stage of sophistication compared to those in other industries. Many of the alliances are tactical in nature, established to control costs, save time, or create conveniences. Others begin to stretch the envelope of thinking to create new value by recombining service elements into new, innovative delivery systems. Some of the current forms include:

* Hospital Alliances, where the members seek to gain economies of scale to contain costs, to recruit doctors and nurses, to spread the costs of overhead and new equipment, and to better utilize existing beds.

* Service Consortiums, in which resources are pooled to provide insurance, laboratory testing, or joint mass-purchasing programs.

* Risk Sharing Alliances, composed of members who are researching new technologies, sharing the cost of clinical trials, or developing new products and procedures.

* Value Creation Ventures, which fundamentally change the relationship between buyers and providers. Often, these are truly strategic, with a long-term view of providing new services in a new way and operating by a new set of rules. Joint revenue sharing agreements, new health management systems, and new delivery systems are some examples.

The real issue for the future hinges on how can we look at the relationships among providers, suppliers, insurers, business and government customers, and, of course, patients to create alliances that will result in a more integrated, effective system of health care. We must be asking the critical questions: How can we create a win/win situation for patients as well as for providers? How can we provide more value for less money? How can we make more effective use of resources ?

Control Your Destiny

The biggest challenge today is that the rate of acceleration of change in the world does not match the ability of organizations to adapt. Alliances are used extensively as mechanisms for making these adaptations.

In any industry, the first generation of alliances tends to be aimed at combining complementary strengthsfor example, a group practice with cardiologists, surgeons, and interrests. While these alliances will continue, beyond this first stage will be another realm that defines a new field of possibilities. Second generation alliances will be far more creative forms. For example, global alliances will form that combine research worldwide and share databases on cancer and genetic disorders, to name a few. Other collaborations will link surgeons in remote regions with foreign specialists through optical data links. Consultations will occur in which teams of specialists will be connected by interactive fiber optic video conferencing, and even for in-office examinations. Benchmarking of best practices will be done on a global foundation.

As various hybridizations of technology generate new opportunities, alliances will form that join bio-tech, telecommunications, imaging, and computer technologies. When x-ray technology becomes more digitized, computer analysis will create far better diagnostic techniques that tap into integrated data patterns, allowing interactive comparison of x-rays, lab reports, genetic testing, and life-style data--all done through alliances.

There will be a fundamental shift from doing things quicker, faster, cheaper, and more reliably, to the delivery of new forms, new contents, and new processes. Systems integration will be the watchword.

Embracing the New World of Alliances

It is our natural tendency to fear change and to distrust the uncertainties of the future. However, not all changes are for the worst, particularly for those who make a commitment to a future filled with the architecture of alliances. For those who hold this vision, three very important changes will occur as alliances grow.

First, the relationships between organizations will take on a higher order of magnitude, moving from tactical/operational issues to strategic issues and embracing long-term visions, new measurement systems of health and profitability, innovation in new methods and technologies in diagnostics and healing, creation of competitive advantages in the profitable delivery of services, and capturing of the loyalty of the customer.

Second, personal relationships in health care delivery will become far less hierarchical (and hence adversarial) and far more coordinative (and hence cooperative). The emphasis will shift away from defined transactions and one-way communications and toward integrative interactions both within health care institutions and with what is now viewed as the outside environment (i.e., suppliers, diagnostic laboratories, instrumentation companies, government, etc.).

Third, the adversarial climate that currently pervades health care will begin to diminish. Litigation will not be of the same intensity, and government regulation will be softened by an increasing emphasis on incentives for creating value.

For those who are willing to accept these changes, life as a health care professional will take on a new lightness. And what's considered wrong with "the system" will be gradually replaced by a new set of dimensions aimed at what's possible. Clearly, this is a shift in mindset, as well as in everyday reality. As our mindset shifts, the likelihood of real breakthroughs becomes an enhanced reality.

Conclusion

The high ground will go not to those who futilely fight the future but to those dedicated visionaries who seize the strategic advantage, embracing the cooperative nature of alliances, recognizing how collaborative efforts and synergistic integration will yield not only better health care, but also greater personal satisfaction for those who have chosen this profession.

Best Alliance Practice: Success and Failure Factors

The most important reasons for success or failure in alliances have been well documented over the past decade. This list highlights 10 such factors.

Success

* Excellent strategy fit (strategic alignment and offsetting strengths and weaknesses)

* Maintenance of excellent chemistry

* Selection of right partner with compatible culture

* Creation of best value in customers' eyes

* Commitment to long-term win-win situation

Failure

* Low commitment (no champion, no executive support)

* Poor operational planning/integration

* Strategic weakness (diverging strategies/ underdeveloped value-added proposition, unclear strategic return on investment

* Rigidity/poor adaptability

* Focus on internal alliance issues, not on customer/mission

Best Practice: Alliances Require Champions

It is an inviolate law that an alliance will require from each sponsor a champion who intensely believes in the future of the alliance, has the unequivocal confidence of and access to top management of both sponsors, a vision for the alliance, technological competencies respected by others committed to success, and clear access to and the confidence of his or her own CEO.

Champions are, by definition, passionate individuals who have a clear vision of the prospective outcome and are willing to put their careers on the line to see their dreams come through. Many companies will not proceed without a champion for the venture.

Winning in Today's Competitive Environment

In todays world, if an organization isn't growing, more likely than not the competition is. In the rapidly changing world of technological innovation, hypercompetitiveness, unbridled litigation, and shifting allegiances, maintaining a vision for the future, while at the same time adapting to a changing environment, is more than just a challenge; it is a necessity.

Given the proliferation of rapidly changing technologies, new systems, vicious competition, and difficulties in foreseeing every future possibility, establishing a position of leadership in the health care industry and winning in a rapidly changing and highly uncertain environment requires a commitment to creating value for the customer. This value is generated not solely from being technologically state-of-the-art, but also by gaining synergist integration of the best services, diagnostics, management systems, information analysis, and trained professionals. Such integration requires reforming existing relationships with alliance partners and customers.

The Best Partners

CEOs in successful alliances indicate time and again the importance of selecting the right partner. Companies with identical strengths have a high likelihood of disagreement over the value of their contributions to the venture, while partners with identical weaknesses will suffer from a critical lack of essential resources. Two companies forming a marketing alliance can have strong marketing capability in the broad sense, but they should have differing (but complementary) product lines, customer niches, or geographic distribution channels.

The best partners will have what you don't have, and vice versa. Be sure you do not neglect the converse of the strengths and weaknesses formula: Ideally your partner should not be strong where you are strong and weak where you are weak. Proper construction of the synergistic relationship will build mutual respect and trust and prevent bickering, second-guessing, and devastated expectations at a later date.

However, the realities are that no one prospect will probably be an ideal match, there will be areas where a complementary strength is missing, or there is an overlap in the channel offering. It will be essential for you to identify the missing strengths and, with the alliance partner, to determine how to add what's missing. Similarly, for those areas where there is overlap of product or service offerings, territories, or customer relationships, seek ways to leverage the alliance's joint capabilities rather than argue over who will dominate in these overlaps. Designing and building an alliance is a process that commences with a clear strategic vision of objectives and results; it is closely related to the specific value that can be provided by the alliance to the customer. This value will require a clear idea of how the alliance will function in terms of what it will supply, the technology used, the product/service mix, and the sales marketing approach. From this vision, an organizational design will be created that will take a specific form or structure.

Architecture of an Alliance

Three-Dimensional Fit: For an alliance to be successful, there must be a "three-dimensional fit" at the strategic level, at the operational level, and at the level of "chemistry." The latter dimension is a measure of the quality of the human interactions; in particular, can the principal players trust each other.

Chemistry fit marks a major departure from the past, where interactions between organizations tended to be "transactional," operating at a distance with a low degree of trust (i.e., buyer-seller, vendor-purchaser, etc.). In the new world of alliances, interactions tend to be more "relational," functioning closely, with high levels of communication, creativity, and synergy (i.e., joint development programs, project teams for new systems designs, etc.).

Strategic Synergy: Without question, the focal point of the strategic "fit" picture is synergy; a cooperative venture cannot survive without it. Strategic synergy ensures that the .weaknesses of one company are offset by complementary strengths of the other. In other words, while the strategic directions of both companies should be similar, the operational strengths and weaknesses should be dissimilar, thereby creating a unified whole that is stronger than the sum of the parts--"1+1=3."

Alliances are formed because of weaknesses offset by strengths. Real synergy requires that a company cannot achieve alone what the venture could achieve. Long-term goals should be substantially in alignment; otherwise the alliance will take on a tactical and operational flavor, giving it a high likelihood for a short lifespan.

Creating Control Systems: During informal surveys conducted with over 1,500 executives, the greatest fear cited about alliances is the perceived lack of control over a perspective alliance partner.

Eight Characteristics of a Well-Structured Allance

A well-conceived cooperative venture, whether the partner is domestic or foreign, will have a set of common essential characteristics that are fundamental building blocks of all alliance architecture. Elimination of any one of these factors will reduce the likelihood of a successful venture.

#1 Critical Driving Forces: Every company is defined by its relationship to itself, its customers, and its competition. Critical forces compel the company to act, react, or not act at all. In an effective alliance, the driving forces--strategic and operational--for the partners are complementary.

#2 Strategic Synergy: Complementary strengths--strategic synergy. The two partners should have more strength when combined than they would have independently. Mutual advantage must exist.

#3 Great Chemistry: Your company must have the managerial ability to cooperate efficiently with another company, and it must have an equally cooperative spirit. Chemistry is the result of positive, team-oriented, trustfilled relationships between key sponsors.

#4 Win-Win: The operations, risks, and rewards must be fairly apportioned. Partners must be willing to address new risks, be committed to flexibility and creativity, and be ready to transform the alliance structure.

#5 Operational Integration: The style of operations and the methods of management should be compatible. Companies with similar goals, rewards, methods of operations, and corporate cultures tend to make better partners.

#6 Growth Opportunity: The alliance should create opportunities for positioning your company in a leadership or growth condition to sell a new product or service or te secure access te technology or raw material; one of the partners should be uniquely positioned with the "know-how" and reputation to take advantage of that opportunity. This typically will create an excellent reward/risk ratio. With a partner, the likelihood of success must be significantly higher. If the chance of success in achieving growth is only marginally higher, and the risk only slightly less, an alliance may not be worth the additional complexity it requires.

#7 Sharp Focus: Excellent clarity of purpose is one of the most frequently cited reasons for the success of an alliance. Ventures with specific, concrete objectives, timetables, lines of responsibility, and measurable results are best suited for potential success.

#8 Commitment and Support: Leadership is essential. Without tep-level support, middle managers devote energies to other priorities. There must be a corporate "meeting of the minds" at the CEO level to ensure the proper attitude filters to the lower managers. Middle management's support is vital, because "people support what they help create." Further, support must be backed up by the commitment of resources to get the job done.

Robert Porter Lynch is President, Warren Compnay, Providence, R.I. and a member of the ACPE faculty.

COPYRIGHT 1993 American College of Physician Executives
COPYRIGHT 2004 Gale Group