Case Studies
Administrative Consolidation

Neighborhood Healthcare

An Interview with Lisa Daigle, Chief Financial Officer

In Spring 2001, Strategic Solutions interviewed Lisa Daigle, the Chief Financial Officer (CFO) of Escondido Community Health Center. Lisa discussed the administrative consolidation of Escondido with East County Community Clinic that was initiated in May of 1999. The organizations are located in San Diego County in Southern California.

A review of the highlights of this effort — specifically with respect to the integration process — reveals many of the same success factors and challenges that characterize mergers. Additionally, the negotiation and integration process surfaced critical issues and concerns that should be addressed in any strategic restructuring effort. By raising and dealing with these issues early in the process, more informed decisions can be reached regarding what type of strategic restructuring will be best. As a result, integration will be smoother and more successful in the long run than it might otherwise be.

In our discussion of this case, we present the factors that helped to assure its success, the challenges that arose, and the variables that led these two organizations to choose administrative consolidation over other types of strategic restructuring. Direct quotes from Lisa are included in italics.

Background

The decision to consolidate key administrative functions of these two health clinics — both of which primarily served underinsured populations — was prompted by several events that converged to seriously threaten the viability of East County Community Clinic. East County was experiencing substantial losses and lacked staff with the necessary financial expertise to turn the situation around. The clinic had lost several key staff members (including its Executive Director (ED) and medical director) during a very tight labor market, which made it difficult to recruit, hire, and retain skilled staff, particularly given the clinic’s inability to offer competitive compensation. The potential pool of job candidates was further narrowed by the requirement that applicants have expertise specific to community clinics (a relatively rare commodity).

With East County in need of an ED, Medical Director, and CFO, but unable to afford all three positions full-time, the organization’s Board of Directors approached the Escondido Community Health Center with the potential for a shared staff arrangement. This request was prompted by East County’s familiarity with Escondido’s ED (Tracy Ream) who had an excellent reputation in the area, as well as their experience with Escondido’s CFO (Lisa Daigle) who served as a recent consultant to East County, helping them assess their financial situation.

Interestingly, Escondido itself had gone through a similar financial crisis several years before. Lisa and the current ED and Medical Director (MD) had all been on staff at the time, and they had successfully turned Escondido’s financial situation around. Through this process, they had developed deep trust and respect for each other, as well as confidence in their ability to tackle this type of problem. Lisa explained: “When I first came to Escondido, they were in a similar situation. They were experiencing losses. The ED, MD, and I worked together to make the tough but necessary changes to bring the organization back into the black. This experience has made us stronger, and we make a better team today for having gone through this.”

At the time East County approached them, Escondido was relatively stable financially, but this was not without constant struggle. In addition, Lisa was directly supervising too many staff at Escondido and was feeling the need to expand the department and bring departmental salaries in line with market rates. The possibility of sharing resources was, therefore, attractive to Escondido’s leadership, as well.

After much discussion, in which Escondido’s management team played a significant role, the two clinics entered into a management services agreement to consolidate several key administrative functions. These included sharing Escondido’s ED, who split her time 50:50 between the two organizations. “Tracy goes to East County very early each morning and spends the afternoon and early evening in Escondido – so each clinic basically gets a full-time executive director. I don’t think many executive directors would be able to do it. I don’t know that it would work in every situation, but it has worked for us. In addition, there are several shared meetings in which the ED represents both organizations. This, coupled with the ED’s knowledge base and contacts, has brought definite efficiencies to the organizations.”

Lisa and her staff took over the financial services for both clinics. Getting the financial situation at East County turned around was one of the most challenging aspects of the consolidation, but the outcomes have been positive. “East County was outsourcing both the bookkeeping and the patient billing functions. The outsourcing was not meeting East’s needs and was a key contributor to their fiscal losses. We terminated those contracts and brought these functions, as well as many other fiscal activities, in-house. We were able to take on twice the work with a 40% increase in staff. East County would have had to pay a lot more if they were to do it on their own, because they would have had to hire a CFO and a full financial department to set up the accounting and billing systems from scratch.”

While the initial intent was to share the medical director, this was quickly determined to be an inadequate solution. “We found that it didn’t make a lot of sense for the Medical Director to split his time due to the physical distance between the two organizations. Plus, we were able to identify a physician at East County who had taken a key leadership role and was willing to fulfill the MD role at East County. Our Medical Director thus took on more of a consultative role and worked with the East County Medical Director on an as-needed basis”.

By all key measures — board approval, management satisfaction, financial stability, and recruitment and retention of qualified and competent staff — the administrative consolidation has been a success. Below, we examine the factors that contributed to this success, and the challenges that arose and how these were handled.

Success Factors

As Lisa described the implementation of this administrative consolidation and its outcomes, several key success factors emerged:

Leadership of the executive director

“It’s been successful for a variety of reasons, but from an executive standpoint, it’s largely because of the uniqueness of the Executive Director. I think each board would prefer to have her exclusively, but realize this is for the combined benefit of both organizations, and they remain happy with her performance.”

Management team’s leadership, experience, competence, and investment in the process

Lisa talked about Escondido’s management team, consisting of herself (the CFO), the ED, and the medical director: “We had a unique leadership team. It was evident to people when we would report at the board meetings that we were a leadership team that had been through it before and worked together well.” While often only the boards and the EDs are involved in the strategic restructuring negotiations, there was clear involvement of the entire management team. “We were very much involved in this decision. We brought the idea forward to Escondido’s board after it was well thought out but before we presented our plan to East County’s board.”

Board support

Lisa stressed the importance of having a good relationship with, and the support of, the board. Often the board leadership is very involved in strategic restructuring efforts. However, reflecting their confidence in the management team’s competencies, Escondido’s board took an arm’s length approach, delegating the integration to the team. The East County board was more involved. Each board met monthly. When requested, the management team provided a brief progress report to Escondido’s board. At the East County board meetings, management gave a monthly financial report and an update on the turnaround plan. Still, the board did not micro-manage the effort. “They’ve been with us every step of the way; not every little step, but they knew there needed to be changes and they supported us while we made them

Planning and research

The management team kept the board informed of the integration by developing plans and reporting on their progress towards objectives. These plans incorporated research to support the team’s recommendations, allowing the board to quickly understand the issues and providing benchmarks for evaluating the integration. Additionally, because the team “did its homework” before presenting their recommendations, they gained the board’s confidence in their ability to manage the integration. Discussing a major decision, Lisa commented: “We didn’t just go in and make changes. We completed a turnaround plan and presented it to the board and received their approval.” Describing a decision regarding the salary structure, she stated: “After reviewing the salary structure, we determined it needed substantial revisions. We provided the board with a list of all the positions, a recent salary survey completed for community clinics in San Diego County, and a recommendation as to what each salary range should be. The board approved the structure, and then we went in and adjusted the salaries accordingly.”

Expertise

The integration of financial systems and functions was expedited by Escondido’s expertise. “From a fiscal standpoint, you have to have good systems in place, which we do. You wouldn’t want to take a clinic with a finance department that was just so-so and then have them responsible for two companies. That would drive it into the ground.”

Flexibility of approach

Every strategic restructuring is unique. Even though there are certain approaches that work better than others, it’s always important to be sensitive to the particular situation and to be flexible. “It was tough for us because we felt that we had things set up the right way in Escondido. So in the beginning, we would say ‘Well, in Escondido this is how it’s done.’ But, we learned that the staff in East County didn’t want to be just like Escondido. They wanted their autonomy and didn’t want to feel that Escondido’s policies were being forced on them. We realized this and made sure we solicited their input. This concern and general feeling of not wanting to be like Escondido went away eventually, and is no longer a problem.”

Honoring cultural differences

We typically hear that the integration of cultures is one of the biggest challenges in a strategic restructuring effort. This approach, though, assumes that cultures must be integrated, which is not always the case with a consolidation that is focused on administrative functions.

When Lisa was asked what they did to integrate cultures, she commented: “We did not and we probably should have.” However, her subsequent comments reveal that one of the success factors in Escondido’s approach was the fact that they didn’t force cultural integration. This is another reflection of their flexibility. “They’re both community clinics. They both serve the underinsured. But the clinics themselves really have different populations that they serve. I can’t think of anything consciously that we did, other than to understand that they had a different structure within the organization . . . just to understand that it was okay to be different, and not to force the Escondido culture on them.”

Communication

Although Lisa didn’t explicitly mention communication as a success factor, the open and frequent communication that characterized the implementation clearly contributed to its success. The daily presence of the management team at the East County site, monthly meetings of both boards, and regular written reports facilitated communication. The leadership team itself modeled positive communications. Further, the team involved their staffs and, as a result, encouraged staff commitment and investment in the process. “I sat down with my staff before we did this and talked to them about it. I gave them examples of how we could re-organize the department, and asked for their input.”

Taking the time to do things right

Strategic restructuring, whatever shape it takes, requires significant investment of staff time. It is important to recognize this and assure that staff, particularly the integration team members, are given the time to do things right. “It is important that your team works through solutions and is on the same page, particularly when changes need to be implemented.”

Similarity of organizational focus

While it’s not always the case, this particular strategic restructuring also had an advantage of being an integration of very similar operations. “They are similar businesses with similar funders, vendors, and similar issues. That was the key. Community clinics have funding sources that are very unique. We are experts in this business and that was why the consolidation appealed to us.”

Commitment

Strategic restructuring is a major investment of time and resources — one that should only be undertaken if there is commitment to see it through. “I went into this arrangement with the understanding that all parties were thinking about this as a long-term arrangement. It would not have been worth it to restructure my department and go through the process of setting up all of East County’s systems for a one or two-year timeframe. It would be extremely difficult, if not impossible, to go back now.”

Challenges

The success factors above enabled the two organizations to meet the challenges that they were confronted with during implementation of their consolidation:

Recruiting and retaining qualified staff

“From a financial standpoint, the biggest challenge has been finding a good staff accountant. We actually ended up grooming somebody in house and paying for his schooling in accounting because we thought he offered potential.” This approach allowed Lisa to address her concerns regarding staff retention by offering a professional development opportunity to a competent staff member, while also addressing the difficulty of recruiting staff in an extremely tight labor market. This also demonstrates the management team’s ability to find creative solutions to problems.

Financial issues

Strategic restructuring is often undertaken in response to financial difficulties. While restructuring offers a better option than going out of business, a negative balance sheet is not easily made positive. “Turning things around financially has been difficult on many levels. It has meant analysis, analysis, and more analysis. It has meant staff cuts, changes in structure and staff duties, and there’s a lot of fallout. We had a lot of people quit.”

Staff resistance

As in any organizational change, there was staff resistance. However, the management team’s professionalism and competence gained them support. Their sensitivity to the cultural differences of the two clinics, demonstrated by their decision to not impose Escondido’s culture on East County when there was no reason to, helped keep this resistance to a minimum.

Contracts, agreements, leases

There were some surprises along the way. “One of the difficult pieces of this is that East County had entered into contracts that were not beneficial to the organization. I don’t know why, but everything seemed to have an expiration date of June 2000.” This included a lease for administrative offices that weren’t needed, especially with staff cuts; a contract with an outside billing service that did not have experience to adequately complete the clinic’s billing; and a contract with a bookkeeping agency, in which the organization’s needs for detailed information were not being met. Lisa offers some sage and hard-earned advice. “Just look very carefully at what existing contracts and leases are in place. Some of this came as a surprise to us, and our hands were tied. There was no money to buy these agencies out, yet the clinic couldn’t survive if they remained in these contracts. We had to go through lawyers to get out of these, and we had to pay fees. It really cost us; it’s amazing that we’re still here to talk about it.”

In Sum …

Despite some challenges, this administrative consolidation has been highly successful.

When we interviewed Lisa for this case study in 2001, the boards were getting ready to sign a renewal agreement for another two years. “We found that it was successful. It’s worked for Escondido because it’s brought in some extra money and allowed us to add staff and increase compensation levels to market rates. And, it’s worked for East County. Although they continue to struggle financially, they are still around to talk about it two years later. They are happy with us, and they want to renew the contract.”

The original agreement had been signed in 1999 with the intent that after two years the boards would consider a merger. However, at that time of our interview, “both boards preferred to continue with the current arrangement rather than talk about merging. They both preferred to stay independent.” And, Lisa offered an important consideration as to why merger isn’t always the best option. While she acknowledged that there are additional efficiencies that would be gained through a merger she stated: “I really didn’t push any kind of a merger because we are reaping the benefits of efficiency, while not missing out on funding opportunities that the community clinics sometimes receive that are on a per organization basis.”

That said, a year later in 2002, the organizations did indeed decide to merge. Escondido Community Health Center and East County Community Clinic joined as one organization, effective August 1, 2002 and are now known as Neighborhood Healthcare. The driving force behind this decision was once again financial. Analysis showed that a combined organization would result in even more overhead efficiency, prompting the two boards to revisit the merger discussion. “The timing was excellent because shortly after the decision, an application for federal funding was strengthened by the commitment of the two organizations to merge. Other than some complications with merging the books and revising reports, the integration has been seamless from the viewpoint of the staff and patients that we serve.”

This underscores the importance of fully evaluating the various options in strategic restructuring, as well as the unique characteristics and situations of the organizations involved, and selecting the option that best meets the needs and objectives of all parties at the time.