Experts advise on viability and sustainability

No organisation wants to be faced with closure, and no community wants to lose its local aged care facility, but that’s exactly where many aged care providers could find themselves if they fail to adapt, leading experts tell AAA.

They are still in the community, the staff are there and the place is humming, says Michael Goldsworthy, recalling a regional not-for-profit aged care provider he helped save from closure.

Goldsworthy, who is principal consultant at Australian Strategic Services, says the community did not know how things went so wrong but issues included failed accreditation, financial problems and a range of organisational challenges including management.

“The bank would have foreclosed. Someone would have probably bought it, but at a fire sale, the directors may have been liable and it would have ended in tears and disaster after 56 years of non-profit institution,” Goldsworthy says.

The veteran of 242 amalgamations and mergers says they spent six months cleaning the place up and getting it amalgamated into a likeminded organisation. The residential properties and retirement villages are now thriving, he adds.

No organisation wants to be faced with closure, and the community can’t afford to lose the service, but Goldsworthy says it is where many regional non-profit Australian aged care providers could find themselves if they fail to adapt to the new order of aged care.

It is a widely-held sentiment. Patrick Herd, principal consultant with Community Business Australia, says as the sector is being manoeuvred toward a freer market dominated by the consumer, operators need to adjust their ways to remain viable.

“If they continue to operate as they have in the past they will find themselves uncompetitive in a new market place in the future,” Herd says.

Similarly, Bruce Bailey, director of accounting firm RSM Bird Cameron, says the increased transparency and competition will affect an operator’s ability to attract good staff, get residents and be relevant. “The greatest risk is complacency,” Bailey says. Many providers will need to shift their sole focus from regulation to increasingly include the customer, he says.

Viability generally refers to the short term and sustainability the long term. While the big picture is all about sustainability, the small picture is about both viability and sustainability, says Bailey. (See tips from Bailey below).

An example of viability is a provider having enough surplus to operate day-to-day and replace the bits that wear out, while sustainability is having sufficient funding to spend on significant refurbishment, according to Bailey.

“The industry is sustainable when a whole lot of operators can generate enough surplus each year to give them the amount of money that is needed to invest in building new facilities.”

Bailey’s firm has been commissioned by the Federal Government to undertake a detailed study into factors influencing the financial performance of aged care providers. The initial report investigating residential providers is due at the end of 2014 with the final study due in time for the five-year review of aged care reforms.

The biggest risk to industry sustainability is legislation and it therefore becomes a balancing act between positive and negative legislation and its stability, Bailey says.

For example, on the positive side, Bailey says changes under Living Longer Living Better have put more money and flexibility into the system. While on the negative side, axing the payroll tax and dementia and severe behaviours supplements has taken money out.

Assessing your viability

At an operator level, the LLLB legislation is forcing providers to adapt. To do that, they first need to know how they are performing.

Bailey says it is most important to measure the trend of the business. “The benchmark is important to understand where you are, but once you know where you are, you just have to focus on your own personal best.”

He says that will work because generally the industry is viable and sustainable as evidenced by the fact that not many operators are going broke. Bailey notes that some providers are struggling but questions whether that indicates the industry is unviable or operators are not working hard enough.

Goldsworthy recommends organisations assess their viability and sustainability through strategic review workshops or discussions assessing where they are “honestly” at versus where the world is going. He says:

“To me it is not board meetings per se. I think it needs separate time and separate space and it should involve the board, the CEO and the executive team. Not just the board, or not just the senior team.”

The review should focus on the “mission criticals,” the things that are absolutely paramount to future success and sustainability, and lead to scenario type planning rather than straight strategic planning, Goldsworthy adds.

Herd agrees with the need for robust discussions. He says he often tells organisations if they don’t have them now, then down the track somebody will be making the decisions for them.

“Whether it’s your financier, government departments or another organisation, you may lose control of that decision making if you’re not having those robust discussions,” Herd says.

Growing your business

Herd and Goldsworthy agree the discussions should involve assessing potential growth strategies, of which there are two broad paths.

There is organic growth, which involves growing existing services or products or developing new products, and growth through strategic relationships. The latter could involve targeted partnerships that add mutual benefit to both parties, undertaking an amalgamation into your organisation or amalgamating into another, or doing a merger where two companies come together to make a new entity.

The process is usually driven by CEOs, who use their contacts and networks to find suitable organisations to work with or consultants like Herd and Goldsworthy to make introductions.

In a competitive marketplace providers are looking for market size and they see partnerships as a way to gain that faster than they could do on their own, says Herd.

“Often organisations use partnerships for funding rounds because it shows they are connecting with the community; they are working with other likeminded organisations to provide further enhanced services to the community,” he says. (See tips from Herd below).

While some view an amalgamation as one organisation winning over the other, Goldsworthy disagrees. “If the amalgamation is done with a proper process, it is not a takeover. I don’t believe it is because it is by mutual agreement, it is by a good stepped-process,” he says.

At the highest strategic level, he says the reason for undertaking an amalgamation or merger comes back to the following three key questions:

• How do we ensure that current and future residents or clients in our communities can access the service?
• How do we ensure the organisation is viable, sustainable and profitable and able to fund its future?
• How do we continue to ensure or contribute to the economic, community and regional development of our town, or region?

If this questioning leads to an amalgamation or merger, a name change and transfer of ownership could leave some in the community with a sense of loss, Goldsworthy says, but he argues it is not a real loss.

As in the aforementioned regional provider’s case, he highlights that the vision, mission, purpose, intent, services, and employment continue after an amalgamation or merger, where they might otherwise have disappeared.

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Financial sustainability: what you need to get right 

If residential aged care providers maximise the income they are entitled to, achieve high occupancy and get the capital intensity right, they should be sitting somewhere above average, says Bruce Bailey, director, accounting firm RSM Bird Cameron.

Bailey says ensure the accommodation pitch is right and aim for 94 per cent occupancy and above. As the amount of capital you put in determines the return, you have to get the capital cost of the facility right, he says.

“If you have good revenue, good occupancy and if you spend $400,000 per room and I spend $200,000 per room then I am going to get a better return on the same amount of income that’s coming in. So you have to get the right capital intensity in it.”

At the moment, the quickest way to get more money is to do substantial refurbishment because of the supplement available, Bailey says. “The extra supplement works out as 27 per cent return on your investment minimum if you just meet the minimum standards required. That’s a fantastic return in anyone’s language.”

If the business is looking unviable, Bailey says while anyone can have a form slump, if an operator has lost the desire to win then it’s time to get out of the game. “If you have been trending down for three or four years and things are getting worse then you need a fundamental change at the top.”

If someone has been leading a declining operation you have to question whether they are the right person to turn it around, he says. “If they were, they would have done it already because they would have seen it and reacted.”

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The zone of mutual benefit: forming partnerships

Partnering with an organisation is one of the strategies organisations will look at to ensure their competitiveness in this new marketplace, says Patrick Herd, principal consultant with Community Business Australia.

A partnership is when two organisations come together for a project or service area but keep their identities separate elsewhere. Organisations do it for a mutual benefit, such as a wider scope of services, a combined strength that can help the sustainability of both organisations and for efficiencies through combining of resources, he says.

A good partner is someone who is strong and rich in areas including expertise, experience, systems, practices, processes, staff development and technology, says Herd.

“You are always looking for that organisation that can add value to what you are currently doing whether it is in service provision, good system practice, training; whatever those elements are that potentially you may be lacking.”

Likewise, an organisation needs to know what it offers in return, Herd says, but it should have its house in order first. Once organisations start talking and as discussions progress, potential partners start to exchange a lot of detail, he says.

“You don’t want a whole lot of skeletons being shown out in your closet. You want to make sure you get that tidied up, so that you’re very open and transparent.”

Once the process is underway, Herd says it is important for each organisation to document as soon as possible their understanding of each other to solidify what the partnership will and won’t do. “I have seen a number that have gone sour because people’s understanding, expectations and assumptions can differ greatly from verbal conversations.”

It is also important to watch out for organisations where the intent is not obvious, or they are presenting themselves as something they are not, he says, because quite often that is driven by financial, leadership or compliance problems.

Herd’s final piece of advice is that partners should plan their futures together and not assume they are on the same path.

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Amalgamations and mergers: a process for success

It is a relationship game and a relationship process, Michael Goldsworthy, principal consultant at Australian Strategic Services, says is the greatest learning from the 242 amalgamations and mergers he has worked on.

Firstly, the two parties need to be a good match, which Goldsworthy describes as someone rich in resources, ideas, information, money, services, culture and the vision or the passions of the place. Secondly, a proper process is essential to a successful amalgamation or merger, he says.

That includes a good change manager to facilitate and project manage the process and provide technical advice. He recommends those with little or no experience get somebody in. If using an internal person, Goldsworthy says they need to be very skilled and understand the process from beginning to end.

Top of the must have list is an amalgamation project Gantt chart so everyone is clear on the steps and activities over time, he says. The other key elements are an amalgamation or merger working group and plan for the 12 to 24 months after the transaction.

It causes huge problems for those without these, says Goldsworthy. “You hear some horrendous stories of 12, 24, and 36 months later about cultural clash, problems with the systems that don’t work because they didn’t have a good amalgamation process and they haven’t had a plan about how they are going to go forward.”

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