Last week the Department of Health announced a tough new performance regime that could see failing managers replaced with teams from the private sector or foundation trusts. Will anyone want to take on the risk of running a bankrupt business? Heart of England foundation trust chief executive Mark Goldman argues that the lessons from Good Hope Hospital could be applied in other troubled organisations

In 2005, Good Hope Hospital was failing. It had significant historic deficit, continuing adverse income and expenditure, an auditor's report in the public interest and poor performance.

It was struggling with a very odd management arrangement whereby a private sector chief executive was answerable to a board of executives and non-executives employed by the NHS. The strategic health authority, which had encouraged the franchise and deemed the trust unfit to become a foundation trust, was propping up a bankrupt organisation. At that point, the private sector withdrew two years into the agreed three-year contract.

After a period of stabilisation under a management contract held by Heart of England, the hospital became part of Heart of England foundation trust in April 2008. The joining was described as a "merger by absorption" by the Department of Health and an "acquisition" by Monitor. The process was costly and complex and has yet to be repeated.

One year later, Heart of England has retained its Monitor performance ratings and delivered a predicted financial surplus sufficient to propose a£90m investment in the much-neglected Good Hope estate. Heart of England is a stronger organisation and by the end of this decade, north Birmingham will have the hospital it needs and deserves.

In the private sector, mergers and acquisitions are relatively common. Their purpose is to increase profits and it is on this that success or failure is judged. As the NHS contemplates a further round of mergers and acquisitions to deal with the most financially challenged organisations, this time encouraging private sector interest (see Failing managers to be axed under new NHS regime), the most pressing question for existing NHS trusts is: "Why get involved?"

In the private sector, mergers fail more often than they succeed. Good businesses have wrecked themselves by indulging in overly optimistic acquisitions. However, there are some factors that make success more likely.

Success is more likely:

  • if the merging businesses are similar;

  • if there are no surprises in the balance sheet after merger;

  • if there is a clear operational plan to bring the two organisations together;

  • if cultural issues are considered;

  • if the new business retains its senior managers;

  • if the emerging business becomes a single entity.

Failure is likely to be associated with:

  • too high a purchase price;

  • an attempt to create synergy across product range;

  • unrealistic predictions of operational benefit;

  • failure to reward existing management.

These guidelines can help in predicting whether a merger will be commercially successful. Unfortunately, in the NHS, mergers are often seen as a way of using a successful organisation to prop up one that is struggling. Survival of both is seen as the mark of success.

Worthwhile risk?

For a foundation trust, performing a rescue act without the expectation of added value is simply bad business. Chief executives and boards seeking to solve sensitive local political issues or enhance their organisation through an increase in size alone are advised to think again. Taking on a failing organisation is a risky venture. The host organisation is subject to severe disruption and may itself lose ground on performance and financial stability. The integration process could also undermine its excellent staff.

Dealing with failing organisations is the job of the NHS that has watched over them. These are bankrupt businesses. Many have no trading value and what value they have rests in an estate that is unsuitable to trade and has a commercial value much less than that represented in the balance sheet. If this is the family silver, it is seriously tarnished.

Repairing these financially broken organisations should not be accomplished through acts of heroism by "turnaround teams" or by putting perfectly good organisations at risk. For a foundation trust to take on such a challenge, the risk/reward balance must be clearly in favour of reward.

The NHS has a responsibility to provide healthcare to its population. A foundation trust has no responsibility to help it unless there is a clear case that by doing so it will benefit its existing membership. The onus is on the NHS to create an attractive opportunity for an FT, acute trust or private business.

Lack of experience

Without transfer of assets, it is hard to see the attraction for the private sector. A management arrangement does offer a chance to make money, but the risk of failure is high and there is no private sector organisation with the experience of running a PCT or an acute trust.

The remaining acute trusts are those yet to achieve FT status. They are least likely to have the confidence to take on a failing hospital. For an acute trust, increasing critical mass to create a viable new organisation from two medium-sized organisations is a possibility. Both boards, probably unequal partners, would have to recognise the need and have the courage to commit to the project, as would the staff and the local population, perhaps as part of an FT application. Such far-sightedness is scarce.

Foundation trusts are most likely to be in a position to become involved. They alone have the governance arrangements, the management skills and the organisational stability for such a task. Even among FTs, there will be relatively few seeking to take on such an undertaking, especially if the failing trust is geographically off their patch.

It is the Department of Health that must deal with the problem. No-one expects a "sweetheart deal". Neither does any participant expect to put itself at risk to do anyone a favour. Healthcare organisations are under intense external scrutiny in an unforgiving environment.

The NHS should not misjudge the attractiveness of a bankrupt business.

Unless the process and the rewards are clear, there will not be many takers. In the NHS, a failed acquisition will upset voters, not just shareholders. The DH needs to be realistic if it wants to transfer the future of these failing organisations to other agencies. Given a sensible appreciation of what they have on offer and the right encouragement, Good Hope could be the first of many success stories.

See this week's HSJ for more news and analysis of the performance regime.