Organizational Context: The Key to Implementing Successful Cost-Reduction Strategies

By Bell, Houston L., Jr. | Frontiers of Health Services Management, Summer 1997 | Go to article overview

Organizational Context: The Key to Implementing Successful Cost-Reduction Strategies


Bell, Houston L., Jr., Frontiers of Health Services Management


Having spent the last two-and-a-half years as a member of the Senior Leadership Team for a 13hospital health system aggressively downsizing, reengineering, and restructuring, I was not certain I could plod through an article on these subjects. I was surprised, however, perhaps because I was in the mood for a heavy dose of introspection regarding our experience-that is, a discussion of what worked, what did not work, and why. Or, perhaps the article teased me with the prospect of new insights into the role of "organizational context" in implementing cost reduction strategies. I am convinced that this soft side-the art of management-is as important, if not more so, than technical management strategies and tools used successfully to implement and sustain results from any cost-reduction effort.

"Downsizing, Reengineering, and Restructuring: Long-Term Implications for Healthcare Organizations" spent very little time attempting to build a case for our industry to be concerned about cost reduction. The healthcare environment is changing dramatically. And our delivery system must also change dramatically. Issues associated with managed care (i.e., increased emphasis on communitybased care, excess capacity in traditional hospital facilities, shrinking margins, hospital closures, mergers and consolidations, etc.) clearly point to a need for proactively managing our destinies.

The article focused on three core areas:

1. definition and description of various cost-reduction strategies;

2. consequences of these strategies on organizational performance:

cost

quality

employee satisfaction

customer satisfaction; and

3. implications of organizational context (i.e., culture, trust, and leadership) relative to the change process and shortand long-term outcomes of cost-cutting strategies.

Much of this article is devoted to defining three cost-reduction strategies, discussing circumstances for appropriate use, and listing various tactical options available to management. This is useful because these three strategies-at least in my world-are frequently misused and confused. As the article notes, fundamental to the ultimate success or failure of any of these strategies, stakeholders affected by and responsible for the change process must have a clear understanding of the need for change, the process, and their role in the process.

If these issues are not incorporated into the impact and outcome analysis of the planning process, initial and sustained positive results from any strategy employed will result more from luck than skill.

This article further notes that the relative effectiveness of each of these three strategies is controversial and difficult to document. Research presented shows that only one-half of the companies employing downsizing strategies achieve and sustain reduced cost objectives. Fewer than one-fourth showed improved productivity. Four out of five reengineering efforts were unsuccessful by any measure. This unimpressive track record should give pause to all who contemplate initiating any of these strategies for their own organizations. Authors cited research that offers observations regarding success and failure that must be considered carefully when planning cost-reduction initiatives.

The authors cited Nohria and Love 11996), which "showed downsizing to be effective only when the scope of change extended beyond cutting costs to organizational redesign and when downsizing was timed to coincide with the poor fit between organizational resources and the environment (i.e., there was a real, well-defined, well-communicated, and well-understood reason for change)."

Several references cited research that stressed the importance of including comprehensive strategic impact analysis in the planning process. Such analysis should compare expected outcomes following implementation and should include issues such as the real cost of change and the costs of not changing. …

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