The Importance of Succession Planning in Healthcare

The unique environment of the healthcare sector makes it more important for private equity investors, chairs and boards to get healthcare succession planning right. When people's lives are in their care, good governance demands that the leadership team can handle both a high quality of service and realise a return for investors – and be able to evolve along with growth plans.

This article will detail the differences in healthcare that make succession planning key to the future success of the organisation, and why it is important to the private equity investment cycle.

Contents

• What is succession planning?

• The 7 step succession planning process

• Why succession planning is important

• Why is healthcare succession planning different?

• Building an optimal leadership team for healthcare

• The cost of poor succession planning

• Using data-led people analytics for healthcare succession planning

What is succession planning? 

Also known as succession management, this is the process of identifying individuals to succeed in key positions in leadership, either by bringing in external talent or developing existing internal candidates well in advance of a leadership vacancy. In private equity, good succession planning has an added urgency because the leadership team must always be aligned with a time-limited value creation plan and convince potential buyers of the long-term sustainability of the team and the business. 

To learn more about successful succession planning in general for all industries, see our articleSuccession Planning in Private Equity Explained.

The 7 step succession planning process

Every portfolio company, no matter its industry, should have a succession plan ready to ensure they are always ready for a leadership change. While the type of leader desirable in a healthcare company is unique, the process is largely the same across all sectors. 

1. Be clear on your value creation plan

2. Identify gaps within a leadership team

3. Identify high-potential talent within the business

4. Model the impact of leadership change before it’s taken

5. Map out the timeline

6. Build development plans 

7. Monitor & ensure the long-term sustainability of your leadership team

Too much change too quickly can be damaging and unsettling to employees; but not making change at the right time can lead to stagnation. For the full step-by-step guide to succession planning in any high-growth company, read our full article:How to Manage Succession Planning in Private Equity.

Why succession planning is important

Value creation is usually achieved through internationalisation strategy, M&A, improved operational efficiencies and digitisation. The most important value creation lever, however, is leadership. Only with the right management team in place can you enable the other levers. Succession planning is critical to maintaining the right team at all times.

With this in mind, it’s reasonable to say that poor succession planning (or none at all) interrupts and damages a company’s ability to create value, especially in private equity where the journey from investment to exit is (intended to be) fixed, meaning any delays to suitable replacements can dramatically impact returns. 

Without a succession plan, it’s difficult to start the process when a leadership role change is mandated by the VCP, as the time needed to either develop leadership skills or hire an external candidate has passed by. In primaries, it can be difficult to start the conversation post-deal. Emotional connections override rational decision-making, and delay means performance lags behind expectations. 

Why is healthcare succession planning different?

The main benefit of investing in healthcare businesses is the visibility of revenue; it’s easy to forecast a return on investment over a fixed period of time as the demand for healthcare services is constant and is mandated by local authorities who have to allocate budget to provide them to citizens.

The downside is the risk profile. Once a healthcare business’s reputation is damaged, it is very hard to get it back, and it will become very hard to sell. 

Reputation is everything

There are pressures on leadership in healthcare that are not as pronounced in other industries. With people’s welfare and often their lives in a company’s hands, the ability to provide a high quality of health care is paramount. In most other industries, if a mistake is made, a customer is let down, they could write a bad review or take their business elsewhere, but it can be overcome. In healthcare, a customer being let down can be life-changing, and the impact on the company’s reputation is hard to come back from.

Reputation is everything in a healthcare company, especially a private equity-backed company as it can severely limit the prospect of a sale at the end of the value creation process. No one wants to buy a company with recent scandals in the press, and as investment timelines are relatively short (3-5 years) investors cannot afford to wait until the damage fades from memory.

This all means that the major focus of healthcare leaders is always on delivering a constant and consistent quality of service. While all types of service providers aim to do this, in healthcare, the consequences of failure are that much more impactful. This is why leadership change is so important to get right. If performance drops, the risk of missing investment targets is much higher for healthcare organisations than it would be for a non-healthcare business.

Regulatory pressures

In the UK, the fact that most healthcare providers, whether in care, medical treatment or technology, are likely to be exposed to the public purse and therefore fall under some form of regulatory framework. The Care Quality Commission regulates and assesses hospitals, dentists, ambulances and mental health providers.

If the regulator gives the company a poor rating, it’s unlikely to sell at the returns expected by the investors. 

Building an optimal leadership team for healthcare

Due to healthcare’s unique characteristics, these businesses have different priorities when creating an effective leadership team. More so than in any other industry, a healthcare leader must emphasise quality of service above all in order to maintain the viability of the company.

Leaders need to be able to handle the complexity of scale. The nature of healthcare providers means that growth often means physical presence, and a 10 site company demands different skills and experience to a 100 site company.

The importance of behaviours

At Leadership Dynamics we look at three aspects of an individual leader to determine their suitability to a role. Their competencies, their experience and their behaviours.

While personality is static, behaviour is dynamic. Assessing behaviours goes beyond the CV and deeper than an interview. We have found that, when an assessment of performance history is combined with behavioural analysis, we can more accurately predict whether or not someone is likely to behave how they say they will. Behaviours tell us what a person is likely to do in a given situation, no matter their experience. So while personality shows us "who they are", behaviours tell us "how they act".

Pragmatists with high execution

When we assess healthcare leadership teams, our PACE behavioural analysis looks for those who are strong in what we call Pragmatism and Execution (the P and the E in PACE). Within those two categories of behaviours, the best performing teams exhibit a diverse range of behaviours, including those with personal agency, optimism, proactivity, work orientation, internal control, outcome motivation and challenging behaviour.

To learn more about how these behaviours work together, take the PACE test yourself for free, and you will get a detailed analysis of your own profile.

An example of a team’s behavioural assessment across the PACE behaviours

The importance of diversity and balance

Assessing individuals is just the first step to building a team, it's knowing how they work together that determines their success as a team. When we assess healthcare executives using our leadership analytics tools, we look for a balance between competencies, experience and behaviours that complement each other. 

The healthcare sector tends to be better at gender diversity across all levels than other sectors. In the US, healthcare boastsa higher proportion of female executives than the rest of corporate America, at vice president (13% more) and C-suite (8% more); and women receive 102 promotions for every 100 for men. 

In terms of cognitive diversity, the best teams are made up of diverse healthcare leaders but in a more nuanced way than in non-healthcare companies. It’s desirable to have a team with varied backgrounds, experiences and behaviours in leadership roles across all sectors, but each sector will skew towards a certain type of leader. In healthcare that's an "operator".

As we mentioned earlier, health services management means delivering a consistent quality of service is the priority here, which means the ideal CEO is more of a COO, i.e. someone who understands the challenges and prefers administration and detail to vision and risk taking. 

It is the same for the rest of the C-suite. There is only so much a CMO can do if clients are local authorities with a defined budget. Because so much of healthcare is location dependent, competition is limited by how close they are geographically to the user, and growth comes from expanding to new neighbourhoods.

Bringing together operators who have a diverse range of behaviours within Pragmatism and Execution is important for the smooth functioning of the team.

Consider domain vs situational experience

What do we mean by this?

• Domain Experience: Market sector area experience, their experience of companies and their market and customer focus. 

• Situational Experience: How that business has created value. Whether inorganically, e.g. M&A trade exits, or organically, e.g. internationalisation, digital transformation, operational effectiveness etc.

• Functional Experience: The individual’s own role in those companies and markets, effectively their work history and their skills or function.

Finding leaders with domain experience is especially important in healthcare, important for identifying and building a management team that understands the risk framework and has empathy with the healthcare service. 

Those with out-of-sector experience thrive; but only from parallel sectors that have similar challenges to healthcare. For example, a leader who knows the intricacies of a highly regulated industry – such as prison services, education or any government outsourcing service provider – are some of the best hires.

The cost of poor succession planning

It typically takes three months to search for a leadership replacement, another three months to serve out a notice period, as well as the time taken for the new hire to settle into their new role. It can take several months for performance to regain its pace to meet the VCP. If the timeline until exit is only 3-5 years, that is a large proportion of the journey spent with an underperforming team.

Whether planned or unplanned, the cost in time, performance and returns are significant. We have found that on average for every one month a change is delayed, a week is added to the investment timeline.

Using data-led people analytics for healthcare succession planning

People analytics tools use data to offer an objective assessment of current and future leadership teams

They help optimise succession planning by cutting through emotion and ego and help leaders to think like shareholders, those who put the success of the organisation over their individual careers.

Conversations around replacing roles can be uncomfortable for both management teams and PE investors. An objective analysis provides an opportunity for people to rationally assess themselves and come to the realisation that what makes them more comfortable may not be good for the company.

Similarly, by holding up a mirror to a leadership team, to help them disconnect from their own role and see the company as an entity with its own risks and opportunities laid out lets individuals think like a shareholder. They can invest in the success of the business more than in the success of their own performance, and start to make or accept decisions in the interest of the company.

Keeping the ship steady

Ensuring the right leadership team is in place at all times is critical to a healthcare company's ability to deliver services to a high level, staying on the right side of regulators and continuing to see a return.