Application rationalization during M&A is a like newlywed couple with each person bringing their own stuff to the marriage. But nobody needs two toasters, two sets of pots and pans and two irons. Somebody’s dishes go in the cabinet and somebody’s get donated. It is how you arrive at those decisions that is crucial to the success of the union.
The same goes for healthcare provider organizations during a merger or acquisition. Each entity has their own amalgam of information technology and software, and in most cases, there is tremendous unnecessary and costly overlap. As a part of M&A, organizations should be prepared for complex decision-making across the two sites regarding infrastructure, core and ancillary systems and end-user hardware. This process of application rationalization enables organizations to objectively and strategically look at all their software products, as well as consolidate and optimize the mix and lifecycle management for each application.
M&A activity can, and often does, uncover a second tier of application rationalization within each organization. Despite growing discipline and governance of IT assets in organizations, “shadow IT” still exists. Various departments and sites buy separate software packages with similar functionality and/or departments and sites purchase their own licenses for software already licensed somewhere else in the enterprise. The results are multiple license agreements and multiple software packages intended for the same purpose. When organizations consolidate, they can and should use the opportunity to carefully review application portfolios within each entity, as well as across them, to maximize opportunity to reduce application costs and management complexity.
For example, in one application rationalization project we uncovered 917 software applications within the health system – many were duplicate products, some had different versions and many were department one-offs whose core functionality may have been met through enterprise applications. This was before we incorporated in the applications portfolio of the hospital the health system had just acquired.
Healthcare CIOs and other executives almost universally understand the need for disciplined application rationalization, but it takes intentional leadership and planning to tackle it. Below are 3 proven strategies to drive the process and realize the value of application rationalization.
Stop – and Start – with Low Hanging Fruit
Given COVID-19 cash disruptions and ongoing operating margin strain, M&A in healthcare is anticipated to gain velocity. By mid-year 2020, a report by Waller Law found nearly 27% of hospital systems had used more than 50% of their reserves, and another 41% of hospital systems had expended between 21% and 50% of their reserves and the financial position for many entities remains challenged.
With this bleak horizon, operating budgets are being tightened and greater M&A is expected; a study earlier this month found 44% of CFOs surveyed expected the pandemic to drive an increase in partnerships across the healthcare ecosystem and 42% predicted further consolidation in 2021 and beyond.
For organizations engaging in M&A, particularly the site being acquired, there should be a freeze on any application purchases. Additionally, application renewals should be negotiated with favorable early cancellation clauses. Acquiring entities should also look closely at the application portfolio of the entity being acquired – if the later has an application being considered for the enterprise, it may provide opportunity for due diligence on the product in an real world context. It also may provide an opportunity to negotiate favorable terms for broader licensing.
At a time where IT departments are being pushed to maximize the value from software and systems, disciplined application rationalization can yield low-hanging fruit.
Find the Right Balance
The application rationalization process can actually be easier when it happens in the context of M&A because change here is almost expected. But do merging organizations just tell cardiologists they can’t use their favorite product to track device implants anymore? Or the pharmacy that their medication dispensing software is going away?
The challenge comes in finding the right balance no matter how you plan to streamline your IT portfolio. Do you rip the Band-Aid off fast or slow? That depends more on the organizational culture and its capacity for change and to some degree their historical contracting – all of which are important to understand before tugging on the Band-Aid. There’s a balance between getting to an optimized state quickly and taking a more measured approach that allows the organization to effectively address and manage change over time.
Manage the Human Side
A critical step many organizations overlook is the change management associated with application rationalization. It’s just as important to identify, address and neutralize internal politics as it is to dig into the applications mix. Change in business operations and daily workflows is highly disruptive, so much so the Project Management Institute has aligned its Change Management Processes to Elisabeth Kübler-Ross’ well-known model of the 5 stages of grief.
Proactively managing change from application rationalization must include executive sponsorship and governance, broad communications and plans for managing resistance.
The level of change and complexity – technical and interpersonal – inherent in M&A application rationalization can be hard to manage internally. IT teams already have full plates and team core competencies reside in establishing and managing technical solutions. Recognizing application rationalization as a large added burden saddled with internal politics and culture change is a key reason why healthcare organizations increasingly rely on consulting partners who bring expertise in application rationalization, objectivity and a practical understanding of the change management required to make the value engineered into M&A transactions stick.
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Laura Kreofsky, Pivot Point Consulting Vice President VP, Advisory & Telehealth, brings a wealth of expertise to her role leading Pivot Point Consulting’s Advisory practice. Over the past 27 years, she has led health IT planning, implementation and operations in the private and public sectors; working with and for academic medical centers, community hospitals, insurers, public health agencies and international clients. Her areas of focus include IT-enabled business strategy, IT operations and governance and industry regulations and reform. Additionally, she directs Pivot Point’s thought leadership, providing insight and guidance on health IT policy, emerging technologies and industry trends.
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