How to make innovation happen—Part 1

Physician Executive, March-April, 2007 by Akram Boutros

As Lara Graham, CEO of Metropolitan Hospital and Medical Center, sat at her desk early Monday morning reviewing the month's key financial indicators, she wondered what was eroding profitability at Metropolitan and whether or not she could get performance back on track. She hoped she could have some ideas to bring to her senior executive management meeting later that day.

Only on the job a year, Graham had focused her efforts on solidifying her relationships with the board, key physicians and local business leaders. You see, she-had big shoes to fill and needed to establish her independence from the specter of celebrated CEO, Mark A. Bootstrap, the man widely credited with guiding Metropolitan through its spectacular expansion of programs and facilities over the prior 15 years. The hospital, located in a suburb of Las Vegas, had increased its bed capacity from 120 to 350 beds during his reign.

Previously, as COO of Metropolitan, Graham enjoyed a close relationship with Bootstrap. She was certain that her ascent to the CEO position would not have been possible without his generous and considerable support. The timing of Bootstrap's move to Texas to lead a larger health system in another rapidly growing community was, however, curious.

For the first time, Graham suspected that it was not merely the opportunity, but the flattening revenues at Metropolitan that might have sparked his relocation. Though much of the growth was a product of key acquisitions and partnerships with physicians, some saw the growth as passive or reactive to the rapid influx of population into the surrounding region. The area had been ranked as one of the ten fastest growing cities eight out of 10 years.

Reflecting on her term as COO, Graham considered that it was difficult developing programs and facilities to meet the seemingly endless demand for services. Now her first year as CEO clearly demonstrated dampened volumes, flattening revenues, and unfettered cost increases.

In hindsight, signs of these trends were apparent almost two years earlier. She attributed the cost increases to the service-focused culture coupled with the significant latitude over resource procurement given to managers. This was even memorialized in one of the strategic priorities "We will do whatever it takes to provide the requested services while maintaining quality."

Nowhere did the words cost-effective appear. She considered that the unregulated growth might have hidden some poor management processes.

Then Graham remembered something Bootstrap told her years ago. "Top line growth can be your best friend or worst enemy. It depends on the processes underlying the growth."

She now realized that the managers had been so focused on growth that they had little time to consider best practices. As for most of the past 10 years, the urgent need to respond to demand trounced the importance of developing sound business processes. Graham concluded that she had to benchmark and focus on costs. At the same time she realized that she must look to develop new business opportunities to get top line growth back on track. With a general sense of direction, the only question remaining was, "How?"

Innovate or else

Hospitals, like all businesses, must innovate or risk being replaced by alternative organizations that can better serve the needs of their customers (patients, physicians, and payers.)

The rate and extent of innovation required is proportionate to the level of instability in the environment in which they operate.

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Today, most would agree that the health care industry has become a very dynamic, often chaotic business, filled with opposing stressors that threaten the very existence of hospitals. Consequently, it is critical that hospitals innovate and transform in order to compete in the new, developing markets, some of which are global.

To begin the journey of innovation, it's important that we examine what business scholars have learned about it.

Innovation can be seen in two dimensions:

1 Reactive vs. anticipatory

2 Strategic vs. incremental

Much of what takes place in hospitals can be ascribed to the reactive-incremental innovation quadrant. This is innovation that is a direct response to some external force and enhances the effectiveness of only a part of the organization within the existing strategy. Rarely is it anticipatory and strategic--innovation that senior management believes will offer future competitive advantage and impacts the entire organization so as to redefine it or change its basic framework.

It has been argued that strategic innovations are critical to the longevity of an organization. They do not, however, guarantee success. In contrast, organizations that fail to engage in strategic innovations will by and large fail over time.

Strategic innovation can be further classified into reorientation and recreation. Reorientation is a strategic innovation that is anticipatory and therefore by its nature allows senior executives time to shape the change. This luxury of time permits leadership to focus on empowering the existing management to learn to be effective in the new organization.