Tag Archives: finance

Examples of what not to do – simple mistakes you have seen that others could avoid.  AKA – How many ways can you get yourself into trouble?

One of the items of constructive feedback I have received is that some of my articles are too long.  The subject of this article resulted in an article over 2,000 words long.  I have reminisced with friends in the consulting business that have suggested that we collaborate on a book on this topic based on the experiences we have had.  As a result, this article will be posted in multiple editions.

A very highly regarded friend of mine recommended that I address mistakes that might be beneficial to others.  Nasreddin said something to the effect that, ‘good judgment comes from the experience we get from exercising bad judgment.’  Given the benefit of this insight, I will address some of the things that I have seen as the cause of extreme angst in one healthcare organization after another.  An exhaustive listing is beyond the scope of any article.  However, I welcome tips and stories from my readers addressing vivid memories of things that would be beneficial for others to know, especially those that do not have the experience of some of us.

Blind trust of systems

This is one of the most basic managerial errors and it is seen over and over.  People ‘assume’ that a system will or will not do something without proving the assumption only to be surprised when their blind faith is proven wrong in a spectacular faux-pas.  Rather than assuming that people understand the meaning of the word ‘assume’, I will define it by dissection.  All to often, people engage in assumptions leading to flawed decisions that make an ASS/out of U/and ME.  I wish I could remember how many times I have witnessed flawed assumptions wreaking havoc around me.  Sometimes, these errors result in terminations of the people involved.  Mark Twain and Ronald Regan said that, “It is not what you know that will get you, it is what you are absolutely certain of that is just not right.”

Once upon a time when I had reason to doubt the controls in the hospital’s accounts payable system right after a new state of the art, super whiz-bang application had been implemented, I was assured by my Controller that there were safeguards in the system that he said would guarantee that there was no scenario under which an automated check for more than $25,000 could be produced and signed with my facsimile.  I had set this limit to insure that I had the chance to personally review large disbursements and sign them manually.  About a week later, it came to my attention that instead of keying a construction draw request of less than $25K, the A/P clerk keyed the remaining balance of over $275K to a contractor that the hospital was engaged in an active dispute with.  What do you think happened when this transaction went through the system without interruption and out to the contractor?  If you ass/u/me that he brought the check back, you would be sorely mistaken.  I am sure others can provide similar nightmare stories.

There are thousands of ways to be trapped by our own systems. The more complex the systems, the greater the number of interfaces with other systems and the higher the volume of transactions, the greater the potential for error and the larger the error will have to become before it is discovered by normal control and balancing processes.

Hiring mistakes

Another HUGE area of learning in the school of hard knocks is hiring decisions.  Jack Welsh said something to the effect of, “Getting the right people into the right jobs is a lot more important than developing a strategy.”  As an interim executive I have observed that one of the more common areas that gets organizations into trouble is hiring decisions that result in people being put into roles where they cannot succeed.  Some organizations and hiring decision makers are highly motivated to put the next person in line into a role whether they are qualified or not.  I have been criticized for bringing people from outside of town into the organization to fill crucial roles.  My response is that if  properly qualified local applicants were available, I would hire locally to save travel money if for no other reason.  I have counseled Boards and written on the subject of organizational performance being nothing more complicated than the collective caliber of the team on the field.  One of my mentors taught me by example the potential and value of getting the right people into the right places in an organization and the difference they can make.

Getting the right people is as important if not more important than avoiding hiring the wrong people by making mistakes in the vetting process.

AR valuation

I have seen so many executives brought down by incorrect valuations of their accounts receivable that I have lost count.  So many in fact, that I was inspired to address one of my blog articles to CEOs that all too often become one of the first victims of this error.  The article asks the question, ‘have you been caught looking?’  One of the biggest risks on a hospital’s financial statements is the valuation of revenue and accounts receivable and for every understatement, there are multiples of over-statements of receivable and revenue value.  In fact, I have not seen an undervaluation recorded although I have been in arguments with outside auditors about under and over valuations of revenue and A/R.  It is a lot easier to convince an audit partner to not book an undervaluation than it is an over valuation.   The executive that wishes to avoid becoming a victim of this trap needs to take the advice of my article on the topic to heart.

AR reclassifications

A reclassification of AR is potentially more dangerous and harder to catch than a simple error in calculating realizable value.  For example, consider an organization that holds self pay balances after insurance in the same bucket as the insurance.  This is considerably more common than many managers appreciate.  Suppose a commercial receivable is valued at 70% of the underlying charges and self pay receivables are valued at 5%.  When an amount like $5 million is reclassified from insurance to self pay to clean up a backlog after the insurance balances have been satisfied, the adjustment to the value of receivables will be 65% (70% – 5%) or $3.25 million.  There are other reasons for balances to accumulate in the wrong buckets on the receivable system leading to reclassification adjustments.  The receivables are not wrong, they are just valued incorrectly.  This kind of error is enough to knock an enormous dent into or potentially wipe out the operating income of any enterprise.  There are rarely adequate cushions or reserves in realizable value calculations to absorb a shock like this.

Summary

As can be seen, a text-book could easily be written on the topic of what not to do.  There are plenty of texts that are written on what to do, they are just all too regularly ignored.  Some leaders seem to not have the ability to connect academic learning and practice. These are but a few examples of things that I have seen go wrong in healthcare organization’s business operations.  This discussion is a good example of the value of experience.  Experienced executives operating on evidence based practice have a far better potential to avoid these pitfalls and others.  Sometimes the value of an executive in an organization is more related to what they know than what they do.  Once a patient in an outage accosted a surgeon  over his fee.  The patient took the position that the fee bore no relationship to the time spent on the procedure.  The surgeon replied that 5% of his fee was for the cutting and the other 95% was for knowing where to cut and what not to cut.

My plan is to publish another article on this topic with more examples of what not to do. If you have any stories to contribute, I would love to hear them.

I would like to thank Dr. Christy Lemak, Dean of the Health Administration program at the University of Alabama at Birmingham for inspiring this article.  I am looking forward to seeing my grade.

Please feel free to contact me to discuss any questions or observations you might have about these blogs or interim executive services in general.  As the only practicing Interim Executive that has done a dissertation on Interim Executive Services in healthcare in the US, I might have an idea or two that might be valuable to you.  I can also help with career transitions or career planning.

The easiest way to keep abreast of this blog is to become a follower.  You will be notified of all updates as they occur.  To become a follower, just click the “Following” link that usually appears as a bubble near the bottom this web page.

There is a comment section at the bottom of each blog page.  Please provide input and feedback that will help me to improve the quality of this work.

This is original work.  This material is copyrighted by me with reproduction prohibited without prior permission.  I note and  provide links to supporting documentation for non-original material.

If you would like to discuss any of this content or ask questions, I may be reached at ras2@me.com. I look forward to engaging in productive discussion with anyone that is a practicing interim executive or a decision maker with experience engaging interim executives in healthcare.

Are you into ‘sadistics’?

Statistics – the one discipline that almost anyone that has ever been forced through does everything in their power to forget anything they learned as soon as they can.  I used to be a member of this crowd.  In fact, the first statistics course I encountered in undergraduate school nearly ended my college career.  The D I received in that course remains my proudest academic achievement.  For a number of years, I thought my sadistical torture was over and behind me.  Then I enrolled in a post graduate program at The University of Alabama at Birmingham and much to my chagrin, in order to finish a doctorate program I was going to have to complete five more statistics courses including an Applied Multivariate Statistics for Health Administration course.  The icing on the cake was the requirement that my dissertation be based on statistically valid research.  By the time I completed my doctorate degree, I fully understood the meaning of evidence-based leadership in healthcare administration.

What I have learned about ‘sadistics’ is that it is not nearly as complicated and intimidating as most people think.  In fact, to prove my degree of neurocognitive disorder, I will admit that I now study quantitative methods for fun.  They got to me at UAB.  As I learn better the application of the discipline, I cannot get enough knowledge or understanding of it.  For example, I am currently trying to get my head around Chua’s incredible article on Normative Decision Theory and its application to healthcare administration and strategy development.  Pretty good stuff for those of you that are interested in making yourselves better at what you do.

For the most part, statisticians are interested in understanding if this thing is different from that thing or if there is some kind of relationship between two or more things.  Some of them even try to make sense of the magnitude and frequency of the vibration (variance) of things.  They waste time trying to figure out what the probability might be that they are drawing the correct conclusion from what they are seeing.  Why anyone in healthcare administration would care about such a trivial concept escapes me.  One of the things that statisticians are obsessed with that does have profound application in healthcare administration is what they call ‘effect’ or more precisely, isolation of effect.  In other words, what the hell is happening and does the thing I think is causing what I am seeing really have anything to do with it?

As healthcare administrators, we spend a lot of (too much) time looking at data.  What we really need is information.  What in the data is relevant?  Is the change we are seeing in the data significant or is the change within the realm of expected normal variation?  Two of the worst mistakes we can make as leaders are to fail to react to data that is telling us something is not right or reacting to something when there is no legitimate reason for concern.  For those of you sensing statistical ghosts, I am talking about type I and type II (alpha and beta) errors.

The CMS is increasing its focus on payment for outcome instead of payment for throughput.  In this process, the risk associated with outcomes that vary (variance) from the expected outcome that will be the basis of reimbursement and that risk will be borne solely by the provider.

Those of you that follow my blog regularly know that I frequently digress and I am feeling the need to digress right now.  Sometimes, my digressions devolve to rants and I am feeling one coming on.  I have heard about all I care to hear about population health management and integrated delivery systems.  The largest part the cost of an episode of illness in most cases is the hospitalization.  Leadership teams are distracted into grandiose fantasies of managing the health of large populations.  The hypocrisy of this is that the same leadership teams cannot find the courage, will  or means to manage the population under their direct control.  If there were ever a group of people that know how to utilize healthcare benefits, it is healthcare workers.  Healthcare groups routinely utilize healthcare benefits at higher rates than their non-healthcare counter-parts.  What I do not understand is why provider organization leaders I have worked with in multiple organizations go to meetings to obsess over medical homes and population health management while they fail or refuse to do anything about the inappropriate utilization that is occurring right under their noses.  One leader I worked with was talking about medical homes before most people had any idea what a medical home was.  In spite of the fact that the organization had all of the resources necessary to develop and implement medical homes for their employees, they did nothing to demonstrate what a medical home was or what it might accomplish while the leaders were running up and down the road selling the idea to other organizations.  The message I was hearing was, “We are not doing anything about our medical costs and utilization but trust us, we will help you manage yours.”  Why would anyone expect to be believed while doing this?  I postulate that if you are the low cost, high quality provider, organizations needing the services you provide will be blazing a path to your door.  If you are not a low cost, high quality provider, either your organization will be left behind, it will become a part of a larger organization with utilization management capabilities or someone else will be running it.  I do not believe that the responsibility to achieve better outcomes and cost can be outsourced.

One of the fascinating aspects of healthcare cost is that a disproportionate amount of cost is concentrated in a relatively small number of resource intensive or catastrophic cases.  It is not unusual to see over half of the entire cost of a health plan was driven by less than five percent of the covered lives.  There is a lot in the press about the very high percentage of Medicare expenditures during the final two weeks of life.  The CMS is currently proposing to establish reimbursement for physicians to manage palliative care.  The point of this is that you do not have to manage the health of a population.  You have to case manage the cost that is being driven by a very small part of the population.  The question is who are the people?  What are their problems? Are resources being allocated efficiently for the best benefit of the patients?  In order to manage a population, we have to identify those at risk of becoming large claims and help them manage their conditions including medical costs incurred outside the hospital.  The other 95% will take care of themselves.

A good friend and classmate of mine was recently appointed CEO of a metropolitan safety net hospital.  Joe’s dissertation topic was on population health management so I suspicion he might know something about the topic.  If there were ever a population needing help managing their health, it is the people that utilize safety net hospitals.  What do you think one of the first things Joe did after arriving at the hospital?  He hired a Ph. D. statistician to head up his clinical quality department.  This is the difference between Joe and me.  Because of my background, experience and training, I tend to focus on helping the hospital reduce its cost by operating more efficiently.  Joe’s approach is to manage cost by stopping inefficient and inappropriate utilization of hospital services.  If we ever get a chance to work together, we are going to set some organization on fire.  We won’t make the cover of Rolling Stones but we might make the cover of Modern Healthcare.

Why would Joe do such a thing anyway?  Do you think it might be to have someone in his charge that could make sense of the mountain of data every hospital accumulates and give him some information that he can respond in ways that might improve patient outcomes and hospital costs?  I wonder if it might have anything to do with isolation of effects that are driving costs and outcome and focusing very limited resources in areas that might make a difference?  Do you think the application of quantitative methods might have some potential benefit to help prioritize initiatives that would make a material difference quickly?  Do you wonder how long it will be before Joe knows which of his physicians’ practice is too expensive for the hospital to afford?  Too often, leadership teams get drawn off their focus by trivial distractions that have little if any potential to make a lasting difference in the organization while issues that are costing thousands of dollars per day are ignored.  If you really want to get fancy, you can start thinking about variance and the analysis of variance or ANOVA as a means to understand the significance of the effect that is being observed.

A leadership team has a limited ability to focus because of a phenomenon that I describe as bandwidth constraint or not enough of us to go around.  The more items the leadership team takes up, its ability to provide concentrated focus on any particular item is degraded.  I have been frustrated by my failed efforts to get leadership teams to agree on what is important and resolve themselves to focus on a few high priority items that everyone agrees will make a significant difference if implemented while ignoring distractions.  A year later, the performance of the organization has failed to improve and most of the strategic initiatives remain incomplete and no one can remember what most of the time was spent on during the year.  Anyone that has ever hunted birds knows what usually happens when a rabbit runs between the dogs and the birds.  Where do you think this term ‘chasing rabbits’ came from anyway?

The world is changing quickly.  Our ability as leaders to make sense of what is happening around us and to discern how to respond effectively will define our potential for success.  One of the tools that can dramatically enhance this ability is to replace old skill sets that have little future potential with the skill sets necessary for survival in a different world.  Among these is quantitative methods.  The best part of this is that you do not have to know statistics but you need experts who do know statistics and who know how to mine ‘big data.’  If you are an occupant of most of the C-suite roles, you have become a generalist. We do not need the high technical knowledge required of many of those that report to us.  But you do have to have the correct resources in the organization if you plan to survive.

Throughout this article, I have interchanged the proper use of the word ‘statistics’ with a form that resonates with anyone that has ever been tortured by study of the subject; ‘sadistics’, a term coined by another classmate, Dr. Jim Burkhart that is currently the CEO of another large, municipal safety net hospital.

Please feel free to contact me to discuss any questions or observations you might have about these blogs or interim executive services in general.  As the only practicing Interim Executive that has done a dissertation on Interim Executive Services in healthcare in the US, I might have an idea or two that might be valuable to you.  I can also help with career transitions or career planning.
The easiest way to keep abreast of this blog is to become a follower.  You will be notified of all updates as they occur.  To become a follower, just click the “Following” link in the menu bar at the top of this web page.
This is original work.  This material is copyrighted by me with reproduction prohibited without prior permission.  I note and  provide links to supporting documentation for non-original material.

Are you a CEO? Have you been caught looking? Do you know anyone that has been caught looking?

I recently took part in reminisces of some of the organizations that some of my friends and I have served or known about.  One of the more common reasons for CEO turnover is an unexpected accounting adjustment.  Eight figure adjustments that go the wrong way are too common and there are few things that will get a CEO fired faster than his board learning that they are going to have to absorb a $50+ million loss that occurred on the CEO’s watch.  Like it or not, the CEO will be held accountable for hiring or retaining a CFO that could not produce accurate and timely financial reports.  He is expected to have a sufficient grasp of what the CFO is doing to control their work.

A common cause of this type of an adjustment is overstatement of the value of accounts receivable or stated another way, understatement of contractual allowances.  These understatements lead to interim income statements being overstated in terms of operating margin.  How does this happen?  Sometimes the CFO does not fully understand what he is doing, his models fail or he becomes confused by changes he cannot explain.  In other instances, CFOs are under withering pressure to produce results to meet expectations of a financial plan, corporate organization or worst of all, incentive compensation targets.

In my experience, few CEOs appreciate the degree of potential error in net revenue estimates or the degree to which their CFO may be exercising judgment in the determination of the appropriate valuation of accounts receivable.  Unless there is absolute transparency and crystal clear communications between the CEO and CFO on these issues, there is a very good chance that the CEO is setting himself up for a very unpleasant surprise.

Given this risk, what is a CEO to do?  How does the CEO manage and mitigate this risk?  How can he know his balance sheet is properly stated?

Without going into vexing detail about how all of these calculations are done, there are a few high level indicators that every CEO should be watching as indicators that things are not as they appear.  First, the CEO should review and understand every adjusting entry made by the outside auditors during the external audit.  Each of these entries represents either the correction of an error found by the auditors or a difference of opinion between the auditor and the CFO as to how a transaction should be recorded.  In a perfect world, there would be no audit adjustments and they are sometimes symptomatic of problems in your finance department.  If you have experienced adjustments, your focus should be to see that they are eliminated.  If your finance team cannot get this done, you have a problem that will probably not improve on its own.  These errors are also symptoms of the fact that your interim financial statements were not correct.  The magnitude of the adjustments or the difference between the last interim statement and the audit indicates the lack of precision of your finance team.

The CEO should also be cognizant of the contents of the management letter.  The management letter addressees internal control matters.  Again, in a perfect world, there would be no comments.  I have seen organizations that did not even get a management letter which is almost as bad.

Another thing the CEO should be doing is meeting privately with the audit partner.  There is no one that is in a better position to evaluate the efficacy of an organization’s accounting and finance functions.  My point here is not to address the audit process but to help a CEO avoid being blind sided by a large, unexpected adjustment.

Time and again, I have seen CEOs taken totally by surprise when their auditors recommend large, unfavorable adjustments to the value of receivables, revenues and profits.  All of these items are directly linked.  Time and again, the CEO that likely had no idea what was going on in his finance department is one of the first victims of the transitions these events precipitate.  The point of this article is to explain this linkage and give a CEO a couple of VERY POWERFUL tools to identify a potential problem.

Each month, your accounting department revalues receivables and in this process recomputes the reserves needed to reduce receivables to their realizable amount.  While these calculations can be very complex, the idea behind them is simple and compelling.  The other side of the adjustment to the value of receivables is the contractual allowance on the income statement.  The contractual allowance is what reduces gross revenue to net revenue.  If the contractual is too small, net revenue is inflated which leads to an inflation of operating income.  If the contractual is too large, net revenue and operating income are unnecessarily reduced.  Unfortunately, most errors go the other (wrong) way.  Note that I am including bad debt expense in this discussion as it too is a deduction from revenue (contractual) that reduces self pay receivables to their realizable amount.

How on earth can a CEO know if all of this is right?  The answer is extremely simple.  The CEO needs to look at only two indicators.  The first is the ratio of cash collections related to patient services to net revenue.  Net patient service revenue (NPSR) is nothing more complicated than an estimate of how much of the gross revenue will ultimately be collected.  If the NPSR estimate is correct, it will be proven over time by cash collections related to that patient revenue.  In other words, if your cash collections related to patients is less than your NPSR, you have a potential problem brewing.  In every situation where I became engaged in an organization that had just experienced a large adjustment to receivables, the cash to NPSR statistic was well below 100%.

A lot of people fail to grasp the magnitude of money involved in these estimates.  One organization I served was running a cash to NPSR ratio of 93% just before it experienced a write-down in receivables of over $60 million.  Consider a medium sized hospital with $1 billion of gross revenue.  Every percentage point of $1 billion is $10 million per year.  Be understated by 7% as was the case in the example I cited and you are looking down the barrel of a $70 million accounting adjustment that will reduce (or maybe obliterate is a better word) your operating margin for years and set you on a new, unplanned career path.  If anyone had been looking at this statistic, this tragedy may have been averted.  In the cited case, both the CEO and CFO Anton with a few others were ‘freed up to seek other opportunities.’

Changes in the magnitude of receivables (AR Days) can affect this statistic but if the cash is much below 97.5%, you had better start getting an explanation of the cause.  Why do I say 97.5%?  To account for normal variation, it is not unusual to see this statistic vary across a 5% (+/- 2 1/2%) range.  When it gets outside of that corridor, the CEO had better be pressing for answers.  He cannot say he was surprised by a proposed adjustment if his cash to NPSR ratio was low. He (and his CFO for that matter) should have seen it coming.

The second key indicator is yield on gross revenue.  What is NPSR as a percentage of Gross Patient Revenue?  The nominal value is not particularly  important as it varies widely by organization and by region of the country.  The explanation of this phenomena is beyond the scope of this article.  If the organization raises its prices and nothing else happens, yield will decrease because all payors do not participate equally in a price increase.  For example, an organization does not realize much of a price increase charged to Medicaid and/or self pay patients.   If the yield is going up, there are two primary reasons.  The first is that revenue cycle performance is improving significantly and if this is the (rare) case, good for you. This improvement should be validated by a decrease in gross and net A/R days. The second reason for increasing yield is that the contractual allowances discussed above are inadequate and you have increasing risk of an unfavorable adjustment in your future.  As I stated earlier, the nominal value of the yield statistic is not as important as its change over time.  A change in yield can be reconciled to the dollar by someone that knows what they are doing.  If the statistic is not decreasing slowly over time, you should be asking for explanations or seeking help from independent advisors to help you understand what is happening if you do not like the explanations you are getting.

A lot of the financial pressure on hospitals has a root in yield that is declining faster than gross revenue is increasing but that is the topic for another article. 

I would be the first to agree that it is unfair to see a CEO get whacked for a problem like this developing on his watch.  Unfortunately, I have seen this happen time after time as one unsuspecting CEO after another became a victim to judgment or accounting errors in their finance department.  I had Board members in a hospital that had relieved the entire leadership team at one time express remorse for knowing something was wrong but not knowing what questions to ask.  A savvy CEO will know what indicators to watch to give himself the best possible chance of not being caught looking.

Please feel free to contact me to discuss any questions or observations you might have about these blogs or interim executive services in general.  As the only practicing Interim Executive that has done a dissertation on Interim Executive Services in healthcare in the US, I might have an idea or two you would find value in.  I can also help with career transitions or career planning.
The easiest way to keep abreast of this blog is to become a follower.  You will be notified of all updates as they occur.  To become a follower, just click the “Following” link in the menu bar at the top of this web page.
This is original work.  This material is copyrighted by me with reproduction prohibited without prior permission.  I note and  provide links to supporting documentation for non-original material.

If you would like to discuss any of this content or ask questions, I may be reached at ras2@me.com. I look forward to engaging in productive discussion with anyone that is a practicing interim executive or a decision maker with experience engaging interim executives in healthcare.

How fast can you teach finance?

Sometimes, I am asked, “How did we get into this mess?”  “What did we do wrong?”  My standard answer lies in a phenomena that I have seen in one challenged organization after another and the thing that inspired me to pursue a doctorate degree in Healthcare Administration that was focused on Evidence Based Leadership.  When an organization becomes challenged, in every case in my experience, there has been a consistent pattern of questionable decision making sometimes spanning years leading up to the transition event.

Organizations that consistently do well have one thing in common.  They make consistent, disciplined, evidence based decisions that work out with a high probability of success.  Organizations that end up challenged and in transition have an equally consistent pattern of non-evidence based decisions that have a high probability of not turning out well.  Everyone makes mistakes.  The name of the game is to win more than you lose.

I am used to hearing, “Everything was OK then all of a sudden, we went off the track.”  They want to know if it can be fixed.

I always say, “Absolutely.”

The next question is inevitably, “What will it take?”

To which I respond, “One thing,” as I hold up a single finger.  Remember the movie City Slickers?

Of course, they want to know what the one thing is to which I reply, “I cannot tell you.”

When they want to know why, I say that if I tell you the ‘one thing’ there will be no further need for me.

After letting them stew for a few minutes, I relent.

The ‘one thing’ is to start making disciplined, evidence based business decisions. That is all.  See to it that this happens in your organization and we will never have a chance to work together.

Decision makers have told me, “I understand this concept but I don’t understand all of this finance stuff”.  I tell them that is not a problem because I don’t understand much of it myself.  A lot of people try to impress others by putting the razzle-dazzle on them. They use big words and arcane concepts in an effort to prove they are smarter than me and to convince me I cannot get where I want to go without their help.

In my opinion, it is easy to make something hard but infinitely more complex to make it simple.  I would argue that you do not understand a concept very well yourself if you cannot put it into terms that a lay person can understand.  All too often, complicated presentations sound like so much BS to lay people.  This is a severe problem if the lay people happen to be members of a Board of Directors.  Spouting BS instead of being clear, understandable and transparent has caused more than one executive I know to end up on the job market creating a gig for me in the process.  It almost always leads to a loss of credibility even when it is technically correct.

I had finance committee members in one organization express concern about ‘Voodoo arithmetic’ and ‘Cookie Jar Accounting.’  The prior CFO that was very good in my opinion had managed to lose credibility by failing to be sufficiently clear and transparent with the Finance Committee and Board of Directors.

I like to tell my clients that I can teach you everything you need to know about finance in a couple of sentences.  This never ceases to galvanize their attention.  You mean that you can learn everything you need to know about corporate finance in a couple of sentences?  The answer is an emphatic YES.  Here we go.

The financial performance of any organization is nothing more or less complicated than the weighted average return on investment of each of its many assets.  Collectively this return is generally described alternatively as return on equity or cost of capital.  Except for operating expenses, every commitment of funds the organization makes is an investment in an asset other than cash.  If the return on this investment is greater than the organization’s cost of capital, the effect of the investment will be to improve the financial performance of the organization.  If the return on an incremental investment is lower than the organization’s cost of capital, its effect on operating performance will be detrimental.  A series of bad investments will lead any organization into trouble. From a finance perspective, it doesn’t matter what the investment is.

There you have it.  Corporate fiance in a few sentences.  Everything you need to know to be successful financially and to lead an organization to improved financial and operating results.

Now, I have some questions for you.

Do you know what your cost of capital is?

Do understand how the cost of capital is derived?

When was the last time you considered the effect of what you were planning was going to have on the organization?

When was the last time you got this question in the Board Room?

What did you do the last time you were present when a politically motivated decision or a decision of expediency was being debated?

When was the last time you included in your project plan a mitigation strategy for a proposed investment that was not accretive in its own right?

Have you done a sensitivity analysis to understand the degree to which your project’s assumptions bear on the expected outcome?

Do you understand from your sensitivity analysis the threshold at which you would not recommend that the project go forward?

When was the last time you did an evaluation of asset returns in your existing portfolio to gain a better understanding of which of your investments are accretive and which are not?

Do you understand the difference between return on equity and return on investment?  If you want to get fancy, you can undertake a study of the effects and considerations of leverage on return on investment.

I frequently hear executives say that it is the business of the CFO to know all of the ‘finance stuff.’  My response to this is that if you call yourself an executive and you plan to advocate for anything (especially in a Board room) that requires an investment and you do not have a reasonable command of these concepts, you are an idiot.

Someone might read this and conclude incorrectly that this is all about money and not much else, a complaint I have often heard.  I have a fair amount of experience working in Catholic healthcare.  Every Catholic hospital I have worked in claims to be the one that housed the first nun that uttered the words, “No margin, no mission.”  It is about money but it is about more, the mission.  Unless the organization is financially healthy, it cannot sustain itself and if it loses the ability to sustain itself, it will find its ability to continue to carry out its mission compromised.

This is original work.  I have not seen content of this nature in my extensive dissertation research.  This material is copyrighted by me with reproduction prohibited without prior permission.  I always note and  provide links to supporting documentation for non-original material.

Please feel free to contact me to discuss any questions or observations you might have about these blogs or interim executive services in general.  As the only practicing Interim Executive that has done a dissertation on Interim Executive Services in healthcare in the US, I might have an idea or two you would find value in.  I can also help with career transitions or career planning.

The stages of an interim executive engagement

I have come to realize in my practice that an interim engagement follows a predictable pattern.  I have seen this happen time and again.  I understand the process that a decision maker goes through during the course of an interim engagement.  A majority of decision makers dealing with transitional situations have little or no experience with interim executives.  I asked about this as a part of my dissertation research.  A small proportion of my respondents (35.7%) reported having experience engaging and managing interim executives.  Another 33.6% of my respondents said they were knowledgeable about interim executive services but had not engaged an interim executive.  Similar to Elisabeth Kübler-Ross‘ five stages of grief, I have observed one organization after another going through a similar process during an executive transition.  The primary difference between organizations and decision makers is their exit point from this process. Some never get around to making a decision or decide to avoid the use of an interim.  In order of their occurrence, here are the stages of an interim engagement that I have experienced.

We do not need an interim – When faced with a transition situation, organizations employ a variety of strategies.  Some use internal resources, some leave the position open and others resort to consultants.  In a future blog, I will address the difference between an interim executive and a consultant.  Organizations will frequently initially resist the fees associated with engaging an interim executive.  They will search for any possible alternative to engaging the interim.  They will spend weeks or months struggling with the interim decision.  I have seen the passage of over six months between the time first contact was made with a decision maker regarding an interim position and the time the engagement actually started.

Acceptance of an interim – All too often, once the decision is made to employ an interim, the client wants the interim TOMORROW!.  Generally, the client communicates their desire to accelerate the interim engagement as a means of managing the cost of the interim engagement.  Sometimes, too much time passes between the time the decision maker meets an acceptable interim and the time they make a decision.  Then they are frustrated when they call to find that the interim they wanted is now engaged.  I once had a potential client get upset with me for ‘putting pressure’ on them to hire me.  All I had done was to tell them that I was being proposed by the firm I represented on multiple jobs and if they wanted me, they needed to make a decision.  In this case, one of the reasons they wanted me was perceived cultural fit.  They wanted someone that would fit into a rural eastern North Carolina culture and I had been a hospital CFO in that area.  Two weeks later, I received a desperate call.  They wanted to know how fast I could get to their site to address what had become a big problem.  I told them that I was literally on my way to Milwaukee.  I had been engaged a few days earlier by one of the other clients that had seen me.  The potential client that had let me ‘get away’ was not happy.  Ultimately, the firm lost the gig because they did not have any other resources that this client liked and I got to spend the winter in Milwaukee instead of eastern NC.  If you are a decision maker, MAKE A DECISION.

 
Recognition of the value proposition – I start my engagements with an assessment.  The purpose of the assessment is to determine the degree to which the function I am filling is or is not meeting the needs of the organization.  During the assessment, it is common to find a number of significant opportunities for improvement.  My experience has been that when a client sees the difference between the interim and what they had before or when they see the magnitude of opportunity revealed by the assessment, the value proposition ‘clicks.’  There is no easy way that I have found to tell a prospective client before an engagement that my experience might be valuable to their organization .  It comes across as self serving.  Once they understand the potential of working with a professional interim that is capable of being transformational in their organization, they want to get as much as possible out of the the engagement as fast as they can because they understand that the potential value is multiples of the cost.  This frequently reduces the client’s focus on getting the engagement over as fast as possible.

 
Employment overtures – Somewhere along the line, usually in the six to nine month period of an engagement, the client decides that the interim is highly desirable and recruitment overtures start.  Sometimes, they come to doubt that a recruitment would result in an equal or better permanent solution. According to my dissertation research, 25% – 40% of the time, the overtures result in employment even if it was not the initial intent of either party.  Tatum called this a ‘conversion.’  The respondents to my dissertation research survey stated that they had converted their interim 35.9% of the time.  If the interim is sophisticated, they will generally resist converting as they see consulting preferable to employment.  The challenge to this part of the process is to get through it without the client becoming concerned that they or their organization are not good enough for the interim.

Diminishing returns – If the interim does not convert, they ultimately begin to experience difficulty in achieving transformational gain in the organization.  Initially, they were a novelty full of energy and fresh ideas.  They are generally very impressive compared to their predecessors.  They are humored by the bureaucracy in the organization and their harvest of low hanging fruit is impressive.  Sooner or later, the resistance of the organization to engage in increasingly difficult change and increasing resistance on the part of the bureaucracy reduces the ability of the interim to produce transformational change.  One day the leadership is evaluating their situation and they conclude that the consultants are not earning their keep and the transition(s) start.  I will discuss the topic of culture and change in organizations in a future blog entry.

Recruitment – During this stage of the process, the interim participates in the recruitment by performing a number of key tasks.  They spearhead the development of a revised job description, they develop a specification for the recruiter, they participate in the interviewing and vetting and ultimately in the selection of the permanent candidate.  I have cast the deciding vote on my replacement more than once.

 
Transition – The transition occurs when the interim is replaced by a full time employee which can be the interim.  If it is not to be the interim, the interim generally assists the organization with the recruitment and on-boarding process.  When the on-boarding process is complete, the interim moves on to their next challenge usually leaving their client organization in much better shape and thankful for their service.

I have personally experienced this progression of an interim engagement time after time. I have also seen every one of my engagements run longer than initially discussed.  Before a client appreciates the value proposition, they are very highly motivated to get the engagement over as fast as possible.  I have been told time and again to not expect more than ninety days, 120 days at the most.   My average engagement is nine months and I am currently twenty months into an engagement  was initially mutually understood to be limited to an assessment only.

The other interesting phenomena that I have seen is that the process can be exited at any stage given circumstances unforeseen initially.  This is one reason that I go the extra mile by making it very easy for my clients to exit an engagement should it become necessary.

One of the factors that lead to engagements dragging on is that the client becomes comfortable with the interim and they allow distractions to degrade their focus on moving the organization beyond the interim engagement.  The next thing they know, the engagement is approaching its first anniversary.

If you are a decision maker considering an interim, my hope is that this material will enable you to better manage the engagement and get the most from it for you and your organization.  If you are considering interim services, and if you are any good, you should expect that your engagements will nearly always run longer than initially discussed with the clients.  Therefore, as an interim, you need to be careful making forward commitments that assume the engagement will be over by a time certain.

This is original work.  I have not seen content of this nature in my extensive dissertation research.  This material is copywrited by me with reproduction prohibited without prior permission.  I always note and  provide links to supporting documentation for non-original material.

Please feel free to contact me to discuss any questions or observations you might have about these blogs or interim executive services in general.  As the only practicing Interim Executive that has done a dissertation on Interim Executive Services in healthcare in the US, I might have an idea or two you would find value in.  I can also help with career transitions or career planning.
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If you would like to discuss any of this content or ask questions, I may be reached at ras2@me.com. I look forward to engaging in productive discussion with anyone that is a practicing interim executive or a decision maker with experience engaging interim executives in healthcare.

Welcome to my interim executive services blog

This is a new blog from Raymond A. Snead, Jr., D.Sc., FHFMA, FACHE

I am a practicing Interim Executive with a Doctorate degree in Health Services Administration.  My dissertation title is “The Contribution of Interim Executives to the Healthcare Industry.”  As far as  I know, I am the only person to have done a dissertation on interim executive services in healthcare.

The primary purpose of this blog is to advance the cause of interim executive services in healthcare by providing assistance and support to practicing interim executives and the decision makers that retain them.

I look forward to interacting with people interested in getting more from the practice and use of interim executive services in the healthcare indust