Magnificent-7: Pairing Capital Investments
Running a business is about providing a service or product to make a profit. Without profit, a business fails to survive. Profit is made by earning more than spending. In our view, there are 7 places in a business where value is enhanced or lost. We have dubbed these places the Magnificent-7 (M-7) in tribute to the movie of the same name where 7 gunfighters joined together to save a town from bandits. In our case, we gather the M-7 to help a business maximize value! Descriptions of the M-7 are provided in the Blog of 24 October 16; the 7 investments we noted were: Human Capital, Relational Capital, Organizational Capital, Physical Capital, Financial Capital, Spiritual Capital, and Customer Capital. Collectively, these capital investments drive the Return-on-Investment (ROI) of a business. Further, these investments are intimately interconnected and produce the value one desires in companies.
An illustration of M-7 is provided by citing the needs of Accountable Care Organizations (ACOs) with each investment type shown in brackets. At a recent conference, ACOs gathered to address the challenges they face in supporting healthcare for the public. The federal government and the Center for Medicare and Medicaid Services (CMS) have mandated that healthcare provision needs to be focused on quality and cost effectiveness. This means that ACOs need to adjust. On the one hand they must provide quality care to patients and on the other they have to manage well the cost for the care. Importantly, they no longer can continue to do what they have always done — just treat the patient (organizational) and move them through the system. They now are penalized if the patient returns (customer) within 30 days after discharge. Thus, they need to manage costs while improving their infrastructure (physical) to optimally care for patients so they are not readmitted – a new paradigm!
The risk for ACOs is that if their data is insufficient or incomplete in deciding on a treatment modality for patients (human), they will be penalized financially by the CMS. They must find cost-effective means (financial) to maximize return on their selecting a data analytic approach. It was clear from speaking with participants at the conference that they fully recognize the needs to better utilize the data they have on patients and to consider other data relevant to both financial and health management success. From their perspective, they want an affordable and simple to utilize analytic system to optimize data analysis. Additionally, they recognize the need to insert social determinants (relational. spiritual) into their computations.
An example to show how pairing investments generates optimal value for a business, we use structural investments (organizational and physical) coupled with human and spiritual investments. Were an ACO to recommend to its members to increase staff (people side) to better support patients but not recommend commensurate support on the structural (task) side with organizational or physical investments, then these staff providers will be doing more without support, just an increase in effort. This approach places negative pressure on the spiritual (morale, satisfaction) investments and over time, this will degrade the overall effectiveness of this recommendation. We can expect that this will ultimately cost the ACO members real money in reduced energy (and slowed work) and increased stress (and possibly sick time) on their people. Thus the M-7 model helps to anticipate such issues and lets businesses proactively adjust to support task changes with people needs. This is effectively a financial investment framework that should be of key concern for management and leadership. This increases value in an organization. In a real way, this approach is a wealth builder!.
© Gregory T. Reinecke, President