Reprinted from:  Focus on Change Management - Cases in Business Process Reengineering
                         Issue 18: October 1995

THE TRANSFORMATION OF THE HILLHAVEN CORPORATION

by Randall A. Lipton

As U.S. companies are meeting the challenge of difficult economic conditions, tougher competition and increasing rates of change in industries from healthcare to telecommunications, we have seen an increase in consolidations, mergers and acquisitions. The need to become leaner, more competitive and more profitable has driven companies to reengineer operations to increase efficiency and achieve their performance goals.

Following is a reengineering case study involving a major company in the healthcare field—a field that has experienced unprecedented changes over the past five years in terms of organizational and financial structures, and service delivery.

The Case for Reengineering

In February 1990, in an effort to improve shareholder performance, a large U.S. healthcare organization – National Medical Enterprises (NME) – spun off a subsidiary, The Hillhaven Corporation. Seven months later, the chief operating officer and president of Hillhaven, Chris Marker, recognized that the company would have to make some significant changes in a number of key areas if it were to remain competitive and prosper in the 21st century. To achieve these objectives, he realized that Hillhaven would have to:

Develop a clear strategic direction and an organizational commitment to accomplishing stated company goals

Improve the quality of clinical and customer services

Strengthen "core" convalescent business by improving reimbursement, fixing or divesting poorly performing business units and improving defined margins to enhance financial performance

Achieve faster innovation in responding to sub-acute healthcare service needs (i.e.; rehabilitation) to gain greater market penetration

Develop an organizational structure that supports these efforts consistent with appropriate risk taking

Contain labor costs and improve productivity by reducing turnover; empower management and employees by instilling a sense of responsibility and accountability at every level; strengthen leadership and management skills; develop a strong team approach; reduce contract labor and decrease the worker’s compensation incident rate

Increase the ability of each facility to function as an effective, essentially "self-contained," market driven, relatively independent business

Develop the organizational capability to sustain and expand upon dramatically improved company performance

 

Marker recognized that Hillhaven could not achieve these goals, fulfill its commitments to shareholders, residents and employees or take advantage of evolving healthcare needs without a major "shift" in the organization.

In October 1990, Hillhaven was a $1.2 billion company with 40,000 employees in 22 states. Its stock was trading at around $2. It had not achieved its business plan in three years and was operating near break-even. Unable to respond to the rapidly changing environment, the company had to reengineer and reengineer fast if it wanted to secure its place in the future.

The Commitment to Reengineering

For many companies, reengineering is a dirty word that strikes fear and uncertainty into the hearts of both management and employees. But Marker was determined to accomplish the task, and it was his commitment and enthusiasm, and that of Kris Scoumperdis, senior vice president of human resources, that caught the imagination of Hillhaven’s senior executives. They quickly got behind the program and committed to:

Find an expert with a proven track record of orchestrating successful, large scale organizational change within a three year time frame as opposed to the traditional five years

Fund the reengineering costs

Commit the necessary people resources to lead and support the process

Choosing the Methodology

There are three basic choices when it comes to reengineering:

Do it yourself

Hire a large team of consultants from a major consulting firm

Do it yourself with outside assistance

Within the healthcare industry, no comparable large, geographically dispersed company had ever accomplished the aggressive, multifaceted change that Hillhaven was committed to achieving. In fact, comparable examples outside of healthcare were hard to find.

In 1990, reengineering was considered risky. It still is. Marker and his team knew that they did not have the in-house capability to quickly and effectively accomplish the task or there would have been no need to reengineer in the first place. Hence, one of their objectives was to develop the management expertise that would allow them to design and implement the necessary changes and maintain ongoing improvements at an effective rate. Clearly, choice number 1 was inappropriate.

Five years ago, the large, "traditional" consulting firms typically would charge $1.5 million to $3 million for each year of a three-year engagement using 10 to 20 consultants. These firms would do most of the research, analysis and planning, then hand implementation directives to the responsible managers. This methodology often resembled restructuring with some process reengineering and it has reliably made the workforce very ill-at-ease. While this approach usually resulted in lower expenses, a decrease in the workforce and a noticeable improvement in immediate financial performance it also tended to trigger a noticeable drop in morale. Hillhaven’s research showed that the long-term success of these engagements were very limited, so choice number 2 was eliminated.

Looking beyond healthcare, Hillhaven was able to identify some promising processes. Each was accomplished through committed company leadership and full management and staff participation coupled with expert outside assistance. Hillhaven chose option number 3.

Choosing the Expert

That done, it was Scoumperdis’ job to look for individuals with the right track record outside of healthcare. He was able to identify only three such experts. In December, 1990, Chris Marker and the executive team selected The Lipton Group. It was the combination of the firm’s depth of experience and expertise in developing successful, customized reengineering programs and the chemistry that developed between the two companies during those early meetings coupled with the realization that their philosophical approaches were in complete accord, that led to this decision.

The Philosophy and Approach

Effective reengineering is a highly creative activity that requires expertise in multiple disciplines. Hillhaven’s program was enormously successful, but it could have been ineffective or even disastrous for another corporation. Every situation is different, so reengineering plans must be carefully tailored to the individual company.

While there is no set formula for successful reengineering, there is a philosophy for and approach to the process that works. Hillhaven adopted it and as a result accomplished one of the most outstanding examples of reengineering to date.

The philosophy is as follows:

The executive team must lead the reengineering initiative

There must be high participation in the process at every level

Leadership can be cultivated

Significant, positive change is a natural process once the opportunity for change is properly designed and the necessary knowledge and skill is imparted

Employees are capable of supplying most, if not all, of the solutions

Corporate culture shapes thinking which determines action. A corporate culture that allows and promotes the necessary action can be created

Trust is essential and attainable regardless of history

Reengineering requires a coaching model of management and a team approach

The role of a consultant is not to dictate but to coach, educate, co-create and facilitate the process

The Hillhaven approach was based upon this philosophy which provided the framework for the reengineering plan. It was accomplished in three phases, each of which provided a clear, conceptual model for the process while establishing a valuable perspective on reengineering process design.

Phase I prepared Hillhaven for change. The organization was analyzed from both a technical and social perspective, and overall process objectives were established. The executive team worked closely with The Lipton Group to design the process, which then was presented to the staff in a way that fostered an aligned commitment to the process and the objectives.

Phase II was the core of the process. The leadership team implemented a strategic and personalized blueprint for change with emphasis on organizational design, process design, work dynamics and results. Phase II intentionally drove to the forefront issues that had to be resolved for Hillhaven to advance. This was the most challenging and rewarding part of the entire change process.

Phase III focused on final systems integration and documentation of results. It also included developing new and aggressive goals that would keep the company on a continuous improvement path.

The Process

Phase I: The Start

The gross objectives of the process were established at the very beginning, but the actual process began with three concurrent, related activities:

The starting point was established from a reengineering perspective

New vision, mission and strategic intent statements were developed

A new process of strategic planning was created

While there are myriad ways to view a company, reengineering requires a certain kind of perspective. The Lipton Group facilitated a two-month audit of Hillhaven—a self examination that included identifying work processes, strengths, perceived limitations, core competencies, weaknesses, cultural characteristics and potential leverage points for positive change. This resulted in a view of the organization that was both enlightening and enabling.

The process of developing the new vision, mission and strategic intent statements began with the executive team. Each member was asked, "What gets you up in the morning to come to work?" "How would you describe Hillhaven if it was perfect?" "Why did you choose this field and this company?" Each individual began to speak of his personal vision from the heart. It was a moving and insightful experience. Some had become so engrossed in their jobs that they had forgotten their original intent in joining the company. The meeting notes were typed in some semblance of order and stamped "Draft." The existing mission statement also was stamped "Draft" and a brief memo was written requesting nominations for Hillhaven’s strategic intent statement. This was the beginning of a five-month process that reflected input from every company employee.

Each statement went through multiple modifications that were reviewed at every level. By the time the process was complete, the vision statement had become the living, breathing purpose and identity of Hillhaven. The mission statement defined the company in business terms and the strategic statement became its battle cry.

While high quality statements could have been drafted in a couple of weeks with no input from the staff, that would have been a missed opportunity. Company leaders then would have had to go out and "sell" the program. By including everyone in the development process, no one had to be persuaded to "buy into the program" because they all had helped to create it. Thus, the development of these statements was the primary strategy for aligning the whole company in a specific direction on a specific path of positive change.

The new vision, mission and strategic intent statements determined the strategic plan which involved a complete mapping of the battlefield reflecting information gathered during the internal audit. Leadership intentionally led the development of a strategic plan that could not be accomplished with the existing organization — and everyone knew it. Hence, the commitment to the plan became a primary driver for change.

Hillhaven is a prime example of how to prepare a company for major transformation. The executive team did not drive the change process, they led it and, at times, they had to run to keep up with it. It was as though the process had a life of its own. Adequate preparation is vital to a successful reengineering program. Reengineering processes are either set up to succeed or set up to fail.

Hillhaven’s reengineering process began in December 1990 and its 1991 fiscal year ended on May 31, 1991. Despite a poor history of achieving plan, the company did so a mere six months into the process. This provided greater motivation throughout the organization to continue to drive change.

Phase II: The Heart of the Reengineering Process

Phase II began while Phase I was still in progress. Well orchestrated change processes are non-linear so the components of change are implemented based upon priorities and readiness.

Phase II focused on four major areas:

To establish roles and responsibilities for individual and team performance

To develop leadership and management skills

To reengineer systems, processes, policies and practices

To achieve specific breakthrough results

A great deal of concurrent, symbiotic activity marked this phase of the program. Company-wide leadership and management development training programs ran the gamut from abstractions to concepts to practical application. Designed to provide the essential perspectives and competencies for successful reengineering, they often were the birthplace of bold initiatives. These programs prepared and empowered Hillhaven’s management for the work ahead.

As time passed, a fundamental shift began to emerge regarding how employees viewed their work. Prior to the process, most described their jobs in terms of "what they did." They were paid to do some process that had an intended outcome. By the summer of 1991, they began to describe their jobs in terms of results. They were paid to make the company vision a reality by being accountable and producing results. It gave them a sense of pride to know others were counting on them to get their part done.

The process provided the opportunity for people to fully express their commitment, experience and intelligence in a focused, well orchestrated and personally rewarding manner.

The new organization was designed as a complex structure of accountabilities. Roles were clearly defined so that there was no question regarding who was responsible for what. And some roles were expanded substantially. For example, many employees believed that facility administrators were accountable for P&L at their respective facilities which were, on average, $5 million profit centers. Most administrators did not subscribe to this theory and viewed their power and authority as very limited. Their signature could not stand on its own for amounts greater than $1,000.00, even for budgeted items. Clearly, a system was needed to give administrators increased power and authority to run their facilities and make more decisions. The purpose of the larger organization was to be a resource to support facility effectiveness so that being part of Hillhaven gave them an edge over their competitors.

Business office managers also had increased accountability. As the senior financial people at each facility, their responsibilities included coding costs for government reimbursement. Under the old system, they would code costs and send them to the company’s finance group in Tacoma, Washington. Here, they would be audited for mistakes and corrected before being forwarded to the reimbursement department. Greater efficiency could be achieved by having business office managers, who understood the reimbursement systems in their respective states, accountable for proper coding. This redesign element eliminated inefficiencies and substantially reduced overall processing time. Every time government reimbursement was moved up three days, Hillhaven added $1 million to the bottom line.

Marketing was another important area of potential improvement. While Hillhaven had a centralized marketing capability, it had failed to convince administrators and staff of the value of a concerted marketing effort — a fact that was reflected in the results. Healthcare professionals generally view themselves as care givers concerned with meeting patients’ needs, not sellers of healthcare services. It took little encouragement to have them expand their circle of compassion to the larger community outside. As a result, they began to develop a strategy to better serve their local constituents, and the marketing department was able to work more effectively with administrators and staff to achieve this goal. The improvement was dramatic. In fact, the retirement housing division which had been made discontinued operations became so successful with their marketing efforts that Hillhaven reestablished it to continued operations.

Ninety-nine percent of the improvement ideas came from company employees who were committed to building a better organization as opposed to simply finding ways to cut costs or fix problems. Everyone understood that making changes, or not making them, had to make good business sense.

Since the change process began, Hillhaven has grown from a $1.2 billion company to a $1.5 billion company. And that growth has not been attributed to acquisition. In fact, Hillhaven has divested a number of poorly performing units.

The organizational chart required little change. The convalescent division removed a layer of management and some other modest streamlining occurred, but overall, Hillhaven saw no benefit to "rearranging the pieces."

Phase III: Final Integration & Documentation

While we failed to formally complete the process, the momentum that had been established and Hillhaven’s commitment to continuous improvement convinced us to be satisfied with properly acknowledging the people who made it work and the results.

An excellent job of documenting changes and improvements occurred as the process unfolded. Reengineering had taken less than 18 months to complete and Hillhaven has continued on the path of improvement. The results bear testimony to the success of the company’s leadership and the dedication of its employees to effect positive change.

The Results

Operating revenues from the convalescent division saw 10 percent growth by the end of the process. Net operating cash flow (pre-tax) rose 4.9 percent while per property, pre-tax operating margins improved 30.6 percent.

Facility turnover was reduced to 13.4 percent from 20.2 percent, and lost time incidents fell by 16.5 percent. In addition, the company also achieved a 6.8 percent improvement in the number of Gold Awards for deficiency-free surveys.

The operating revenue improvement was a direct result of developing successful marketing programs and initiatives to expand ancillary services. By the end of 1992, Hillhaven had become the largest provider of rehabilitation services in the Unites States. Enhanced quality of service, the reduction of workers’ compensation incidents and improved attrition can be linked to employee empowerment and team-building efforts from the training programs and management system changes. Net operating cash flow and pre-tax operating margin increases were a result of these factors combined with overhead reductions that were natural outcomes of reengineering various processes for greater productivity and efficiency.

But the real test of a successful reengineering program is the state of the company two years after the process is complete. During that time, quality measures continued to trend upward, census, revenue and cash flow posted ongoing improvement and expenses declined another 17 percent.

Hillhaven stock has tripled in value since the reengineering process began. Clearly, by any and all measures, the company stands as one of the finest examples of a highly successful, accelerated reengineering program to date.

# # #

Hillhaven Corporation

The Hillhaven Corporation is the second largest provider of long term care services in the United States. As an example of successful reengineering, Hillhaven stock has tripled in value from late 1990, when the reengineering process began, to the present.

* Aside from census improvement, Hillhaven has appreciated strong growth of
ancillary services within nursing centers.
** projected

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