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Why small operators are nervous

January 20, 2017

Many behavioral healthcare operators are sensing that private equity has become a serious disrupter in their markets, as they witness investment groups buying up individual facilities and consolidating them into large enterprises. It some ways, such disruption can be a boon to individual customers, while at the same time being the bane of existing businesses.

Consider how travel has changed, for example. As a consumer, you’re probably enjoying the emerging trend of market disrupters that have made the often grueling experience of business travel a little cheaper and easier for you:

  1. Uber—Why wait on the street corner for a taxicab when you can use the Uber or Lyft app on your phone and have a driver come to you with faster, cheaper, more convenient service?
  2. Airbnb—In 2009, a couple of starving college students rented an air bed on the floor of their loft apartment to an overnight guest. They now can offer you an app that lists 2 million nontraditional hospitality listings worldwide—including ancient castles and funky penthouses.
  3. Plowz & Mowz—This new yard service app lets you schedule an impromptu lawn mowing, leaf raking or snow plowing service without having to secure a seasonal contract. The on-demand scheduling is great while you’re away from home.

But wait, there’s more

Now consider the existing operators whose businesses are suffering because of these innovators, respectively:

  1. Taxicabs—There are 234,000 taxicabs in the United States, and in most cities, the cabs are licensed in an effort to control their numbers. In San Francisco, for example, a license historically might have cost the owner as much as $250,000. The competition now sparked by Uber, however, has started a transportation civil war, resulting in the city’s largest cab company going out of business.
  2. Bed and breakfasts—Few B&Bs have a marketing budget adequate enough to reach their ideal customer. Compare that to Airbnb, now a global company valued at $30 billion, and you can understand why it’s tough for Mom and Pop with their five-bedroom century home to compete. Their only choice it seems is to post their listing on Airbnb and let the big company take its cut of the profits.
  3. Local lawncare providers—While many lawncare providers are family owned and pride themselves on their reputation, not all of them have cultivated the response time and customer service capabilities equal to that of Plowz & Mowz. The app is selling convenience, reliability and on-demand services that not all providers can produce, thus eliminating many of them from ever becoming a contractor for the app, much less a competitor. And again, this would be a case where the big company would take its cut of the profits.

Your response

If you’re a smaller provider, competing with large, disruptive organizations might seem impossible. Your scope of services might be limited, your access to capital might be nonexistent, and your ability to attract top clinical talent might be hampered. Joining the big guys might also seem like a less-than-palatable idea that compromises your autonomy and adds risk for your bottom line.

I’ve been talking to some industry folks about their outlook for the future of the small provider, and a few have recommended adopting a new business model that would include affiliations. Ideally, the mutually beneficial arrangements would allow a group of provider organizations to remain separate entities while combining forces clinically to deliver coordinated care. It’s an idea still being developed, however.

Meanwhile, others caution that the small not-for-profit must stay the course with the established mission-driven model because the demand for services is so great there’s room for everyone. They believe the larger enterprises won’t drive them out of their distinctive community-based niche in the market. Time will tell I suppose.

Whatever your response might be to private equity and other market disruptions, make it a thoughtful, strategic move that works not just for today, but for tomorrow as well. Not everyone can be the next Uber or Airbnb, but even so, standing idly by is not an option.

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