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Procter & Gamble's lesson for hospitals: Reduce complexity

August 28th, 2014

by Kenneth Kaufman

"We are going to create a faster growing, more profitable company that's far simpler to operate," said Procter & Gamble CEO A. G. Lafley, announcing that the parent company of some of the world's most well-known products would be shedding half of its 200 brands.

The situation that led Procter & Gamble to this move has some striking parallels to the situation for today's hospitals. Like Procter & Gamble, hospitals are well-known brands in their communities. Like Procter & Gamble, hospitals' delivery networks have grown over time, creating great complexity in structure and operations. And like Procter & Gamble, hospitals are legacy organizations in an environment that favors the innovation and speed of upstart companies.

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Simplicity and profitability

Procter & Gamble's brand portfolio is broad, deep and complex. It operates in markets throughout the world. By paring down its brands, Procter & Gamble can reduce non-core product categories, as well as the number of brands within each category, helping to focus the company on what it does best. Although underperforming brands will be obvious targets, Procter & Gamble "will sell a billion dollar-plus brand if it is no longer strategic," according to Lafley. "We are not selling flies on the tail of a dog."

A significant motivation for this move is reducing costs and improving profitability. In 2013, Procter & Gamble's top 80 brands accounted for $84.1 billion in sales, while its other 120 brands accounted for only $2.4 billion. The top 22 brands each had between $1 and $10 billion in sales, while the bottom 55 brands each had less than $10 million in sales. Clearly, reducing its brand portfolio provides Procter & Gamble with an opportunity to improve its financial picture.

Equally important, reducing the breadth of brands will allow the company to dramatically simplify its operating structure and processes. Management will be reorganized into four sectors, each containing only a few business units. Research and development will be able to focus on core product types. Marketing will have fewer brands to maintain. And manufacturing and the supply chain can be streamlined.

Implications for hospitals

The traditional mindset of community hospitals is to be all things to all people, from cancer care to orthopedics to MRIs. As a result, extremely complex organizational structures, infrastructures and operating processes emerged to support the array of services. This level of complexity is a major barrier to success in a transformative environment.

Upstart companies can develop their organizational structure, infrastructure, talent and operating processes specifically for a focused service. In contrast, when hospitals want to offer a new service, they need to conceive, develop and deliver that service through a complex existing operating model that is not designed for speed and innovation.

On a more basic level, downward trends in payment and volume make it necessary for hospitals to reduce costs more drastically than ever before. To reach the desired cost level, hospitals must go beyond improving the efficiency of existing services. Like Procter & Gamble, hospitals must re-examine their portfolio of services based on strategic fit, quality and contribution margin.

Yet, the complexity of healthcare organizations makes that analysis extremely difficult. It requires taking a hard look at the intertwining superstructure that supports those services, the financial relationship among the services, the quality and cost of each service, and the extent to which each service may cross-subsidize other services.

Taking into account all of these factors, hospitals should consider whether the all-things-to-all-people model is still viable and relevant, or whether they need to apply a Procter & Gamble-style review to the portfolio of services.

For the services the hospital continues to offer, executives should look carefully at how the services are deployed throughout the delivery network--whether tertiary care should be centralized; which facilities are best positioned to deliver high-quality and cost-effective care for key service lines; and what changes to structure, process and resources are necessary to reconfigure the network to deliver consistently high quality in the most efficient way.

Preparing for uncertainty

Healthcare is at a tipping point between an inpatient focus and an outpatient/web-care focus, between volume-based payment and value-based payment, and between wholesale and retail customer interaction. The exact complexion of the future healthcare system is far from clear, nor is the role that hospitals will play. Despite this level of uncertainty, the macroeconomic, competitive, technological and structural signs suggest that changes will be significant and could emerge rapidly. A. G. Lafley offers a valuable message for hospital leadership: Simplifying structure and operations is a critical first step in preparing for even more dramatic changes to come.

Kenneth Kaufman is chair of Kaufman Hall, in Skokie, Illinois. He is a frequent speaker and author or co-author of six books on healthcare strategy and finance.

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