By Jack Cumming
At a LeadingAge California conference not long ago, I asked a “Panel of Pundits,” “How would your business practices change if you lost your not-for-profit standing?” The answer from one CEO was quick and dismissive. “Not going to happen,” he said.
It’s easy to aver that change is never going to happen, but that should never be the attitude of a CEO. The Board pays you to anticipate change and to prepare for it. Embracing change, so your enterprise can ride the wave of time, is harder than it seems.
Disrupting Your Business
There are always people looking at your business model and wondering if they might improve on it. Some may change it so significantly that it will never be the same again. This is a topic that has fascinated Jeff Cole, a professor at the University of Southern California, who has just released a book, “Disrupters at the Gates.” Steve Moran brought the book to my attention. You should read it.
The question that Steve brings to us is, “Could senior living be disrupted the way Amazon disrupted retailing or as Alphabet’s YouTube is disrupting television?” The answer is, “Of course.” The answer to that CEO, who didn’t think not-for-profit senior living could ever lose its tax exemption, likewise is, “It could.” The disrupter might be Covenantal Benefit Corporations.
What Do Buyers Want?
Consumers look for value and trustworthy performance. In general, they believe that a nonprofit senior living business will not fail financially. Recently, though, there has been growing media attention showing that many not-for-profit communities do fail. Of course, financial failure has always been a risk factor, but now that fear has begun to impact market perceptions.
The challenge is that the not-for-profit business model is not well suited for a capital-intensive business like senior housing development because not-for-profits lack access to equity capital. Though it’s not well understood by prospects, entrance fees are often diverted from securing contract obligations to use as risk equity to protect banks and other creditors.
Opportunity At the Gates
That creates an opportunity for disruption. Listening to Professor Cole, it occurred to me that there are three ways that disruption can impact a business. First is disruption coming from an unexpected place. Professor Cole calls this “two guys in a garage,” citing Hewlett-Packard, Jobs-Wozniak, Larry Page/Sergey Brin, Gates-Allen, and Bezos-Scott.
Second is disruption by internal research. It can happen, or better said, it could happen, but usually not. The lost opportunities here are Kodak with digital cameras and Xerox’s Palo Alto Research Center (PARC). Internal disruption is less likely due to corporate executive myopia, but it could succeed. Much of the mutual life insurance business transformed to investor ownership during the late 1990s and early 2000s. That was internal disruption.
Third is simple irrelevancy. Many companies that just keep doing what they’ve always done fall victim to their intransigence. Think of the equestrian livery business that provided horses before the 20th century. There were still livery businesses in my childhood, but they continued primarily due to World War II gas rationing. They’re all gone now.
Disrupting Senior Living
Disruption can be by a product, as in the case of Kodak, or by a change in business model, as in the case of those big mutual life insurance companies. The latter is the more likely way in which not-for-profit, and even for-profit, senior living might be disrupted. It’s unlikely that it will be two guys in a garage.
Those mutual companies, like not-for-profit senior living communities, lacked access to the capital markets. Although it’s not well understood generally, initially life insurance is a capital-intensive business, though in maturity it becomes capital-generating. Life insurance companies involve large upfront “acquisition costs,” which they cover with gains from older cohorts of business.
That initial strain can be covered with reinsurance arrangements to provide capital. Still, it made sense for many to demutualize. They didn’t change their business principles, but they did change their business models and their capital structures. My career started in mutual life insurance, and we obsessed over customer value.
The disruptive power of a covenantal corporation is that it puts resident/consumer security front and center. It can take a marketing genius to explain why to a skeptical public. If that succeeds, virtually all other senior living communities will seem high risk for aging people seeking low-risk peace of mind. More on this disruptive business model to come in a later article.
