HHCN Capital + Strategy: Capital + Consolidation Needs More Software to = Growth

This article is sponsored by AlayaCare. This article is based on a Home Health Care News discussion with George Psiharis, Chief Operating Officer at AlayaCare, Geoff Darling, SVP of Corporate Development & Strategy at AlayaCare, and Ian K. Gordon, Managing Director at Next Step Advisory Services, LLC. The discussion took place on March 30, 2023, during HHCN Capital + Strategy in Washington D.C. The article below has been edited for length and clarity.

Home Health Care News: Some of the themes that we’ve talked about are the deal-making due diligence process and how it’s so difficult. Buyers are a little bit more timid to make big investments. In the past, they would maybe kick the tires on the car that they were trying to buy. Right now, they are taking it apart, scrubbing it down with a toothbrush. They are looking at things like software. I guess starting at the very beginning of all this, remind us why acquirers and capital providers here should consider agency management software when evaluating M&A opportunities.

Geoff Darling: I think for us, all the financial benefits that you anticipate when pursuing an acquisition or the return on investment, you are targeting the critical path to realizing that is flowing through the integration of those business practices.


When bringing two disparate business lines together—the company and the software—you need to have a strategy to bring those together, so we feel when you’re pursuing a deal thesis and looking at the geographic expansion, like the service lines and the addressable markets that are going to evolve as you first pursue that expansion, whether it’s your first big deal or the first of a series of deals you’re going to do, you need to have a playbook developed for how you’ll bring those target systems together with the system that you’re starting from.

HHCN: Ian, any thoughts you want to add there?

Ian Gordon: Yes, three points.


One: Whether you are doing an initial integration or a merger acquisition, you’re doing an implementation. When you do that, what you can learn from the due diligence process is that the implementation gives you your roadmap to so many different things. One of the things that I have done in the past is to look at every decision point that has to be made when you’re implementing a system. That gives you an idea of how your policies, procedures, and affairs are set up, so you truly dig in and understand your operating model.

Two: The second reason that’s profoundly important, is that when you think about your frontline folks, your clinicians, care givers and support staff, this system is their security blanket. Whether you’re doing a new implementation or trying to integrate two different organizations, you’re messing with their security blanket, and you really must understand what you are doing and positively engage them.

Three: In accord with Geoff’s point—all revenue comes through the system. With revenue cycle management (RCM) you must truly understand its critical role because I’ve seen so many organizations fail at that point because they’ve made inappropriate decisions or didn’t understand the implications because there’s high-level due diligence assumptions made. I think understanding that system is just core to everything.

George Psiharis: Yes, and I would add—building off everything that both Ian and Geoff have said so far—is basically couching this in context. Underlying each acquisition’s needs is a due diligence process as a business case with some kind of hypothesis around industrial logic. There’s some reason to put companies together, and with it in terms of evaluating how likely these hypotheses become reality and how fast. We have well-versed playbooks on financial due diligence and understanding all of that very deeply.

We have more emerging playbooks on the business’s operating system and operating due diligence and making sure that that is far enough along that we’ve removed risk from that side of things and are expediting this process to the outcomes that we want. The technology platform is often the biggest part of that. There’s no guarantee as well that it always comes from the bigger entity. It may be part of an acquisition strategy that’s taking place.

I think that across industry sectors, not just in healthcare and in home health, we’re seeing that evaluating the operating systems with the business in more depth and with the technology infrastructure that underlies that as being important. Of course, it is part of the integration as well, the data architecture underlying operating systems. If you’re using tools that are of high quality, you’re more likely to have a data situation that’s not a mess and can be more readily ETL or sensor extract, transform, load into an integrated set of properties that will go much more smoothly and get to those outcomes much better.

Then, on the flip side, I would add a great way for someone looking to get acquired to show readiness is to make these investments early and to have a lot of that work taken care of.

HHCN: We just teed up the conversation on why software architecture is so critical for acquirers. That concept holds true, not just for the platform you might be buying into, but potential follow-on acquisitions. Digging into this though, what specific things do you want to look at for software architecture? What characteristics could help buyers fuel efficient, scalable, and repeatable M&A?

Gordon: For me, one of the most important things will be extensibility. If you start looking at a platform, if you designed starting today, by the time you deliver it, it is out of date, you’re behind, you’re trying to catch up. It is important that you see how the future—which is unknown in mind—obviously will meet the current needs and be extensible to the future.

Gordon: I think when you move past that, obviously with flexibility, because the market and the model changes. When you look at healthcare as a broader industry it’s just evolving at a pace that’s unbelievable. Home health is really moving at a quick pace. A great example is value-based arrangements.

As you look at the platforms that people have in place, some of them are not extensible, not flexible enough to handle value-based arrangements, so I think that’s critical.

The next piece I would say is that there’s an openness to the environment. You’ve got some closed platforms out there. Then, I’ve been involved in organizations where we’ve had our core platform as a vendor platform. We’d go and ask questions for something that we needed, and they would say, “Sure we can do that. We’ll put it on the roadmap.” I said, “Great, so when should we expect it, 2027?” Those types of things just don’t help. If it’s closed, the challenge that we had was we couldn’t go through the platform. We couldn’t use that. We had to find ways to work around it which create tremendous amounts of inefficiencies and cost to your system. That’s really, from my perspective, a pretty bad thing.

The last piece I would talk about is the data side of things. As you’re looking at the data environment you need to be able to extract your data from an enterprise-grade environment.

You need to be able to get the data out, get data in, be able to share it, not just across your environment, your own environment, and operate it, but the entire ecosystem, not just technically, but business process perspective, reporting, analytics, and all types of things. It would be those three things really. Extensibility, flexibility, openness, and then the ability to handle the data.

HHCN: On the sharing point, I imagine, share it in a way that makes sense to those parties that are receiving the data.

Gordon: Yes, it needs to be obviously secure, but an openness to how you’re making data available to others and that is probably the most critical piece. As we heard earlier, when you talk about trying to create integrated care models, it is difficult to create an integrated care model when you’re trying to have three partners who are outside of your true technical environment to leverage data.

What happens is you put the patient in the middle of what’s going on, not at the center of what’s going on, which is where they’re supposed to be, but in the middle, because we’ve now made our data sharing problems an issue for them having to repeat themselves not knowing that something’s already been done, those types of things. That’s why it is so critical.

HHCN: George, any other characteristics or factors that acquirers really need to consider in that software architecture?

Psiharis: I think it must be very closely aligned—but also different in some nuanced ways from what Ian talked about—is configurability. One of my favorite themes that I’ve seen come up over the course of the day so far, I’m really thrilled to see come up, it hearkens to a Peter Drucker quote is, “Culture eats strategy for breakfast.”

I think the tendency is to try to get into standardized, use these operating systems as perhaps somewhat rigid approaches to guarantee a level of quality, but also sustainable financial performance across multiple businesses, across multiple service lines even that can work up to a point. I think the reason most acquisitions fail, from an operating perspective, is that the culture rejects the processes that are being put in place. If a platform can be configurable, it can be standardized at a high level, but at a micro level, it can allow some of those nuances that allow culture to adapt to whatever system you’re trying to get folks to use.

I think that could be a lot more powerful if done well in de-risking but also creating opportunities for success. To make it a bit more specific, on the external facing side, what are the little things a team can do to use a common operating system and tech tool, but to add little brand touches or to customize the client experience in little ways that really matter to them and make them feel like they’ve preserved a bit autonomy in the way that they provide care?

On the internal side, what are the ways that they can plug into doing that, but also meeting all the internal requirements and some of the benefits that come from best practices, short playbooks, and standardized datasets, especially in sources of truth in reporting? That’s the one thing I would add. I’ll leave it at that.

HHCN: The two headline items I think we’ve gotten so far, extensibility, configurability. Could you hit me with another one?

Darling: When I think about acquisition strategies, I don’t think it’s Peter Drucker, “Indigestion kills more companies than appetite.” My answer is more of a riff off yours, which is centralizing your business intelligence. You need an operating system that allows you at HQ to understand what’s going on in your region, what’s going on in your branches, at the same time, depending on your operating model, you need to be able to deploy responsibility for making the right frontline decisions in your organization.

That’s something that we found when we were dealing in our software worlds with franchise models versus large national operators, there’s always differences in philosophies on how much regional versus HQ decision-making they want to be able to do. I think that’s fundamental in terms of how you approach that software architecture for that platform as you’re building it out, or as you’re adding to it, make sure everything’s feeding back the right way so that you can have empowered decision-making across.

HHCN: You mentioned indigestion. Ian, were you about to say something?

Gordon: I’d just like to add something there because it ties so much into what these two gentlemen were saying, is that when you’re doing an integration, it’s a great time to not do it in a vacuum, to engage the people who are there. You can think about it. All too often folks think that the acquirer or the bigger entity if it’s a merger of close to equals has the right answers. It’s a perfect opportunity to engage the frontline in grades, do organization, look at things, and purposefully and very thoughtfully make decisions about moving forward. Everybody wanted the synergies yesterday. Today’s okay but tomorrow is too late.

From my perspective, you can pay us now or you can pay us later because you are going to end up having to deal with the cultural issues that you talked about, the reporting issues that you talked about. The last thing we all know that we can afford to do is alienate the front line.

HHCN: You went where I wanted to go with the next question. If we are even putting software aside for a second, what are one or two things that really need to go well to fuel a successful integration process? What are the things acquirers should really be laser-focused on?

Psiharis: Yes, there is still great value in spending time on the change leadership aspect and over-communicating the why behind decisions that are made. When we’re going through processes of picking best practices, standardizing them across portfolios, if there isn’t a healthy amount of why behind those decisions that are being made, transparency and visibility into that, and almost over-communication, and a closed loop process of circling back to these decisions, I think that can be really, really damaging. That’s where, again, the culture side of things starts to drift away from the benefits that we know can happen in these types of scenarios.

I think also having very clear objectives that everybody is aware of and being able to remind folks that this is a part of the why. You need to change the process for standardizing this across the portfolio that can seem very tone-deaf to a frontline team, to folks providing care. We’re doing it because the pros significantly outweigh the cons, but we’re going to be real about the fact that there are cons as well and effort and lift that needs to go into some of these change decisions.

Those things are hard to do, but crucial. That’s a place where I think you can never spend too much time really supporting major changes to operating models and with it, introducing or adapting technology platforms that are part of that.

Darling: I would also emphasize post-merger integration. I feel like leading into the deal, you’re going to have a very detailed plan and it’s going to be exactly wrong. Ensuring that you don’t lean in too hard and stay too rigid in how that plan gets deployed through the process because there will be hiccups. I think part of that PMI planning is having clear accountabilities. You’ve got vendor partners, you’ve got target and acquire change management elements, and you’ve likely got third-party consultants, depending on the scale of your organization involved.

Knowing who’s responsible for what aspects of a migration is incredibly important. Everybody loves quick wins, whether in any part of their job, but I think there’s a danger in rushing to claim some quick wins in terms of realizing synergies with an acquisition that backfires. Instead of paying once to do it right, you pay twice to fix it. A related note is moving too quickly on the people’s side. Where there may be synergies and HQ and administrative layers, we often see a tendency to rush those before the processes are done and fully cooked. Those, again, will come back and bite you in like, “You know what?”

HHCN: Ian, did you have anything else that you wanted to add?

Gordon: I think I need to leave you with the visual on what Geoff was talking about, is that you must ask yourself in this integration process and your planning process, are you Wile E. Coyote? Are you the Road Runner? If you remember back to your cartoon days, the Wile E. Coyote always had that detailed plan, followed it, and always lost, and got crushed by a rock, whereas the Road Runner had that plan. It wasn’t perfectly wrong. It was directionally correct and remained flexible throughout time. You can never think that doing something as large as a system integration or implementation, that you actually have the right plan.

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