There is much the healthcare sector can learn from the financial crisis of 2008. If the industry ventures down a similar path, sourcing partnerships up and down the supply, value, and care chains will be more important than ever before because we will all need each other to survive and prosper again. How supply chains are ultimately configured could make or break companies, or more importantly, depending on how much influence an organization has, the entire U.S. healthcare system. Look only to Lehman Brothers for proof. The actions that led to Lehman Brothers’ bankruptcy—the largest in U.S. history—is widely thought to have started a worldwide crisis. Many saw that storm brewing but were not prepared. Could that happen to one of the many large health insurance carriers? Or even worse, more than one or all of them? Never say never.
I plan to build upon this article at the MPO Summit next month as well as in future columns. In both mediums, I’ll present some critical supply chain tools to help companies manage the hand they’re ultimately dealt.
My Banking DNA
Loyal fans of my MPO columns know I have configured numerous global supply chains in various-sized medical device organizations over a 35-year period. What they may not know is that I briefly worked in banking before switching over to healthcare. A similar maxim to “history repeats itself,” is the popular aphorism about being a product of your upbringing. I was raised by a wise banker whose career spanned four decades, and now that DNA is enabling me to see things more clearly as events unfold (or not) in Washington with healthcare reform. A few years ago, I realized the banking industry was damaged by errant supply chain configurations. That same scenario is now playing out in healthcare.
I grew up as the son of a small-town banker. Back then, banking was undertaken in banks rather than “financial institutions.” My father, a marketing executive, was the driving force behind his bank’s efforts to attract and retain customers. In the early 1980s when I was in college, he wisely advised me not to follow his footsteps, warning that banking would undergo change and upheaval that would shift the focus from the customer to banks’ bottom lines. “In the process of changing that focus,” he said, “banks will lose touch with the customer, leaving them feeling as if they are nothing more than a number. And unlike the show ‘Cheers,’ nobody will know your name.” For a minute, I thought I was living the movie “It’s a Wonderful Life,” where George Bailey’s father warned him to avoid banking due to Old Man Potter and his quest for money. My father died in the middle of the banking industry’s upheaval but he lived long enough to realize the accuracy of his foresight. The old way of banking gave way to a new method whose efficacy is still questionable. The only certainty is that the industry changed. It struggled for a number of years and wound up with a daunting regulatory environment.
Let’s look at some banking history and compare it to the current state of the healthcare industry.
Customer Intimacy/Product Leadership/Operational Excellence
In my June 2016 MPO column, I referenced Michael Treacy and Fred Wiersema’s book “The Discipline of Market Leaders.” I will compare the banking industry’s historical meltdown to that of the current healthcare industry by using Treacy and Wiersema’s lexicon. In their book, the authors hone in on three value disciplines: operational excellence, customer intimacy, and product leadership. Briefly stated, an operationally excellent company focuses on the best price with the least inconvenience to the customer. A customer intimate organization seeks to cultivate relationships with its customers. These companies partner with customers to help them accomplish their mission. Finally, a product leadership organization continually develops the products and the services that support it, taking their offerings to the next level. Treacy and Wiersema do not suggest that decision makers ignore one for the other, but rather possess a minimal competency in all three to excel. The pair, however, notes that organizations cannot (and should not) be all things to all people. Thus, one of these disciplines must ultimately define a company, though minimal competency in each—which I call “hybrid directions and configurations”—is paramount.
NOTE: The following glimpses of banking industry history should not be mistaken for working definitions of Treacy and Wiersema’s value disciplines. Rather, it is my humble attempt to use of a portion of their lexicon to analyze the banking industry’s evolution and compare it to current events impacting healthcare.
Banking 1950-1975: Customer Intimate Supply Chain (The 25-year “CI Period”)
This was the period in which the hometown banker was best friends with customers who wanted to buy a house, buy a car, start a business, or send a child to college. People visited their local banks, met their local bankers, and figured how to move forward. Other than a stray recession or two, banking was in a “user friendly customer intimate” period and life was good. This was also the period in which banks were mostly owned by private investors, resulting in a locally owned industry instead of one owned by Wall Street with few major players.
Banking 1975-2000: Operationally Excellent Supply Chain (The 25-year “OE Period”)
Consolidation was a major driving force during this period, as banks sought out operational excellence and improved results by acquiring locally owned banks and streamlining them. As a result, the focus shifted from customer intimacy to operations in order to please the Wall Street money machine that funded the consolidations and would eventually own the industry.
Most locally owned banks were now beholden to a new master. In theory, this should have been a time of minimal customer inconvenience, operational excellence, and savings based on consolidated economies of scale. In reality, however, this period ended the local banker’s reign and spawned the mega financial institution, where customer intimacy was more times than not unimportant and almost nonexistent. Customers accustomed to personal interactions with a person they knew well now communicated with representatives on the phone (if you could reach a real person) or the internet. ATM use was encouraged; complaints about fees were virtually ignored. The supply chain configuration, meanwhile, was driven by Wall Street’s zeal for financial results. While Wall Street’s high (fiscal) expectations are certainly justifiable, they potentially can backfire and negatively influence supply chains through the actions of only a few obliging mega players. Further, if those mega players get creative in the wrong way, it can have a devastating impact on the industry.
Banking 2000-2008: Product Leadership Supply Chain (The Eight-Year “PL Period”)
Having progressed from locally owned, intimate institutions to Wall Street-driven operational businesses, this period was marked by customer outrage and frustration over banking’s impersonal, detached business models. Consequently, the industry needed new offerings (product leadership) to please or in many cases, win back customers and continue to feed the Wall Street beast. Hence, along came the “two-for”; sub-prime mortgage products that boosted both home ownership and banks’ bottom lines. The management of these new products were actually errant supply chain configurations, as they fit the traditional “supply chain” definition (it doesn’t matter what is being supplied, only that something is indeed supplied). Accordingly, the actions of a few influenced an entire industry and brought the world to the brink of financial collapse.
Banking From 2008: Customer Intimacy Hybrid Supply Chain (The “CI Period”)
Almost a decade after the U.S. government stepped in to save the banking industry, history has begun to repeat itself. Customer intimacy is slowly returning and privately owned banks are gradually reappearing on many street corners (courtesy of capitalism at its best). In addition, financial institutions are offering hybrid models that attempt to provide large economies of scale while also reinstituting private bankers in local branches to regain customer intimacy.
Early indicators suggest this period has a lot of leg room left, but it is definitely working. If history truly plans to repeat itself, the next cycle should entail operational excellence. Hopefully, the industry has learned from the past and will create a hybrid supply chain model that doesn’t throw the baby out with the bath water and trigger another crisis. Now, let’s examine how eerily similar the healthcare industry has behaved over the past 60 years and what storm appears to be forming in the distance.
Healthcare 1950-1975: Customer Intimate Supply Chain (The 25-year “CI Period”)
During this period, the driving focus was on the patient and his/her caregiver(s). A doctor’s word was considered gospel in those days, and house calls were commonplace. I can remember physicians bringing their black bags with instruments to the home to treat outbreaks of mumps or chickenpox. Despite the close doctor-patient relationship, however, medical technology was limited in the number of conditions it could treat. Hence, a natural shift to product leadership was imminent.
Healthcare 1975-1995: Product Leadership Supply Chain (The 20-year “PL Period”)
The invention of the pacemaker proved that other remedies to treat heart disease, obesity, arthritis, cancer, etc., were desperately needed and therefore, product leadership boomed. There was an explosion of innovation during this period and companies of all sizes were flourishing, regardless of ownership (public or private). Capitalism was alive and well, as inventors and investors were handsomely rewarded and patients reaped the benefits of technological advancements. Product ingenuity and capitalism worked in harmony and formed a powerful alliance that enabled tens of millions of patients to be treated for disease.
Healthcare 1995-2010: Operational Excellence Supply Chain (The 15-year “OE Period”)
With capitalism thriving, the industry’s focus turned to scale, reach, and affordability. Unlike the banking industry’s “eat or be eaten” stage, it was important during this time for companies to provide global scale and reach, acquire smaller firms and products, and push their wares into the market. The focus of supply chains shifted to operations, benefitting Wall Street, caregivers, and patients, though none at the expense of the others. Most industry observers would agree that product leadership/operational excellence/customer intimacy existed in harmony throughout this period. And, a key component of this concordance was the explosion of outsourcing that benefited the entire care chain and industry.
Healthcare 2010-Current: Unnatural Operational Excellence Supply Chain (The “UOE” Period)
The harmony created during the Operational Excellence period was abruptly derailed by the 2010 passage of the Affordable Care Act. The legislation (supply chain configuration) provided health insurance to about 20 million additional Americans, but it jeopardized the healthcare of those 20 million (5 percent), as well as the other 380 million-plus people already covered (95 percent). Lawmakers risked more than 20 percent of the U.S. gross domestic product to benefit 5 percent of the population. And, as in banking (Lehman), the actions of a few (in Washington) are significantly impacting many, only this time, corporate zeal and/or Wall Street greed are not the culprits. In this particular instance, lawmakers have only themselves to blame. If we’re not careful, this man-made configuration could bankrupt health insurance and caregiver systems, stifle healthcare innovation, and lead the industry further astray from its humble patient- (customer intimate) focused origins.
History does indeed repeat itself. Business directions change over time to meet the needs of cultures, geographies, individuals, organizations, and governments. Some of these new directions will occur naturally and others will be forced upon companies. The steps taken to materialize business directions are known as supply chain (or value and care chain) configurations. These configurations can sometimes trigger a crisis, but they can also be used to avoid calamities.
There have been peaceful and disruptive business directions/supply chain configurations that have had both a positive and negative effect on the healthcare industry. And while the industry has survived these various changes, it should be noted that both business directions and their corresponding configurations require great consideration.
Although I can play drums as well as Christian Bale in “The Big Short,” I don’t want to be the person that said, “I told you so.” Therefore, we should all urge U.S. lawmakers to work together quickly on a new supply chain configuration so the healthcare industry can avoid the same fate as the banking sector. Otherwise, I’ll be forced to start banging those drums. And trust me, nobody is going to want to listen to that.
Chris Oleksy is founder and CEO of Oleksy Enterprises and Next Life Medical; and the CEO of Emergent Respiratory. He can be reached at firstname.lastname@example.org or email@example.com.