Are You Being Pound Foolish?

Many of you who regularly read this column are hospital CFOs. You have my sympathy these days. You're trying to figure out how to project financial success, or at least, financial independence, through 2009 and beyond. Perhaps you're just trying to survive. You've already been hit with huge investment losses, a lack of access to capital, and in many cases, rapidly declining volumes. It's hard to deal with that level of triple-witching that so quickly soured good economic times for the industry, but you aren't standing idly by.

You're trying to deal with the uncertainty of future revenues through a variety of measures. You're taking a hard look at eliminating money-losing services. You're tightening up on the supply chain, you're postponing needed investments in technology as well as bricks and mortar, and you're working on refocusing the strategic direction of the hospital or health system through a cracked lens. But those solutions take time. Meanwhile, the positive hit to the bottom line from laying off staff is almost instantaneous, and hospitals are taking advantage of it.

Not a week in the past half-year has gone by in this newsletter without at least one hospital or health system announcing a 6%, 7%, or even 10% across-the-board staff reduction. It's true many of these layoffs don't include clinical staff—many such positions are still in shortage, in fact—but the cutbacks are pretty brutal on administrative staff—people who are hard to replace should the economy turn.

On the other hand, recessions offer opportunities for resizing often-bloated organizations. And I'm going to give you the benefit of the doubt by assuming that many of the first people laid off at any institution are the low performers, but in times like this, it's often hard to be so surgical. This recession hit lightning-quick, so as responsible CFOs, you've responded in kind. Often in times of such strategic stress, it's difficult to cut with a scalpel rather than a hatchet. And it seems to me from the news reports that across-the-board cuts can't, by definition, be made with any precision.

I'm concerned that even financially secure organizations are cutting too deeply. You should act quickly to contain the financial damage during any business downturn as drastic as this one seems to be, but be careful not to destroy any hope of recovery should the business climate turn around as quickly as it soured. Many CEOs and CFOs I've talked to over the past couple of years have said how they appreciate the level of scrutiny being placed on their organizations by outside individuals—one recently remarked to me that hospitals and health systems are being judged on the same metrics as public companies—especially when it comes to being able to borrow. But let's remember something here: Nonprofit hospitals are not public companies, and never will be. You have more flexibility in good times and bad, so take advantage of it.

It's easy to fire good people, and of course it's the last course of action you'd like to take. But once they're gone, it's not nearly as easy to rehire them and continue on your merry way. If you've spent years in time and talent building your market position and operational excellence, don't destroy it permanently in a short-term attempt to minimize your losses. You'll take heat, but you can justify keeping good people even in bad times, because in the long term, those losses in talent might not be so easy to recoup even if the economy turns quickly.

When it comes to taking prudent measures, lay off people if you have to. It's up to you to decide how much is too much.

P.S. Check out our two new blogs on leadership and marketing. I think you'll be happy you took the time.