The day after the deal was done, Bak, president and CEO, started transforming the third-party benefit administrator into an organization that would not only survive but grow.
The three entities that formed HealthPlan Holdings HealthPlan Services, American Benefit Plan Administrators and Montgomery Management were subsidiaries of a larger company. Bak had been president and chief operating officer at HealthPlan Services and saw the potential of a combined organization, so with the help of Sun Capital Partners, he led a leveraged buyout to take control.
But buying the companies was just the beginning. The new organization was beset with inherited problems. The previous management had made commitments to customers that couldn’t be kept, it made acquisitions that didn’t pan out, and debt had piled up as a result.
“Rather than going north, they went south, and it got them in trouble,” Bak says.
The company couldn’t support the number of employees it had on the payroll, and cash flow was a problem.
Tough decisions needed to be made and made quickly if the company was going to survive.
“What we’ve learned the hard way is we are better off making a decision with 60 percent to 70 percent of the facts and, if necessary, correcting, than we are waiting for 90 percent of the data,” Bak says.
Control your cash
Bak says the first thing to do in a turnaround is to make sure you manage your liquidity and know where your cash is at all times.
He and his team first had to negotiate a revolving line of credit that could get them to a point where they could put their plan in place.
“Once we knew we had enough to get our plan, we looked at everything else that was potentially cash-generating,” Bak says. “We went to work on being very aggressive on cash management.”
It meant stretching every payable as long as they could without going into default.
“Why would we want to pay a bill in 15 days?” Bak says. “We went to Net 45, and I challenged the organization to go Net 90. Let’s just say you go from Net 30 to Net 60. You just picked up an entire month of payables, and if you’ve got $6 million of payables, you just created $500,000 of liquidity by pushing out payables by 30 days.”
Many vendors, provided they are paid, are fine with that approach.
“A few scream,” Bak says. “What you do is dial them back to faster terms if they are very important vendors that you need to run your business. A lot of things are in your control, and you just don’t take advantage of them.”
The team also put together cash forecasts so they could see what was going on with the inflows and outflows of the business and the balance sheet. Bak says saving money and being cash-conscious can go a long way to improving earnings.
“We stretched, and we made every dollar go a long way,” Bak says. “We looked at every check that went out, and myself and our CFO would personally review every accounts payable check that went out of the building. It’s amazing how many things you don’t need that the business thought they needed previously. So, we did a lot of reviews of, ‘Who is this, why are we paying them, and why do they consult?’ You start almost like an onion through those small slivers at a time, you find out that those expenses go away.”
Bak called the first year and a half of running HealthPlan Holdings miserable, mainly because of the 200 job cuts that had to be made.
“We did a lot of cutting, and we shrunk the business down to a manageable level, knowing that we were going to have some further revenue decay and also knowing that we had to make money,” Bak says.
“It was probably the biggest challenge to have to get up every day and know you had to find different ways to save money and cut back on head counts. A lot of people who we liked and respected as individuals, we couldn’t afford to keep. You make those tough decisions.”
Bak says to get through those tough times, he tried to focus on the positives that would come out of the moves.
“I kind of turned it 180 and said, ‘I’m not really focused on the 200 jobs I’m cutting. What I’m focused on is the 350 jobs I’m keeping.’” Bak says. “I just had that mindset. That is what enabled me to get through it that first year and focus on the 350 that were going to be remaining and making sure that was going to work, or otherwise, it’d be 550 jobs that are lost.
“We had no choice. When your back is against the wall, you do what you have to do to make the company work.”
There was no easy way to make the cuts, so Bak made sure people knew where they stood as soon as possible.
“People generally want to know where they stand and what’s in it for them,” Bak says. “You know the old radio station, WIIFM what’s in it for me? The sooner you can tell them where you are headed and why you are headed there, even if it’s bad news and even if it affects them, the better. We didn’t dally. We got after it and got through that kind of period within a matter of 60 days, and I think people were appreciative. They knew where they stood. They knew ... they could be hired back someday, if, in fact, we were going to grow. They got a fair severance, and they were appreciative that we were communicative early, and we got all our cards on the table. I think for that 60 days it was tense, and people were unsure of their position, and, subsequently, performance goes down somewhat.
“But once we got the word out, once people knew where they stood, they could mentally start going to the next step. The survivors could breathe a sigh of relief and carry on, and the folks who were going to leave could do the same thing with their lives and their careers.”
Bak had to cut some “A” players because they didn’t have roles that fit in to the plan of keeping people who had customer-facing positions.
“You get back to basics, and you focus on executing, and you do more with less,” Bak says. “So, the things that fall off the table are anything that is not absolutely, positively needed.”
He says leaders normally don’t cut as much as they should because it’s not a pleasant experience.
“Cutting people who you know and who have worked for a business is hard,” Bak says. “It’s unpleasant; it’s not easy. If it ever becomes easy to do that as a manager, you probably shouldn’t be managing any longer because you’ve lost that soul around how you manage people.”
While Bak had to cut plenty of employees, he and his team also had to reassess what kind of clients they wanted.
“If you have an account which you inherited and you can’t get them to move off the dime on increasing your fees and you can’t cut your way to a margin that is acceptable, how long are you going to accept a losing proposition?” Bak says. “So, you make some tough decisions on those if you have an obstinate client or a client that’s not trying to create a partnership or a win-win scenario. You have those once in awhile.
“The company that owned the business previously was unwilling to take that risk because they were so concerned about keeping top-line revenue because they were public; they had different demands, different requir ements. When we went private, we had a window of really going underground and rearranging the pieces on the chess board to our liking, and we could afford to drop revenue and even drop earnings with the hope that it would rebound and come back.”
Time to grow
By the second quarter of 2002, the cuts were complete, and making a comeback was the new mission.
He went from what he calls “chief cost cutter” to “chief growth officer” and began putting himself out in the market to make contacts and attract new customers. Slowly but surely, the contacts and referrals fell into place and grew into opportunities to showcase the business.
“We had pretty much cut, trimmed, delayed paying and done everything we could do from an expense-cutting perspective,” Bak says. “So, the 80-20 rule was in effect. The handful of things we could do that was going to make 80 percent of the difference was done. Now, it was time for my operating team to take the next step to get the extra 20 percent out, but I didn’t need to do that. So, I focused more on strategically where we needed to go how do we get ourselves in a position to attract new clients?”
Bak says it’s important to define the ideal customer you would like to be able to land, all the way down to the arduous specifics size, products and how much are they going to pay you to come onto your platform.
“What you are going to do for them?” Bak says. “If you don’t know what you are looking for, you will waste a lot of time looking at things that aren’t really in your wheelhouse.
So, define what it is you really want, your ideal customer, and then do a modest amount of research on figuring out how many prospects there could be within that wheelhouse, then make sure you go about it and are persistent about trying to get as much exposure to those companies as you possibly can.”
Bak says you also need to be very reflective to a point of being critical about what it is you are doing or can’t do for that customer who you finally convinced to come to your office to hear your pitch. If you lose that first opportunity to a competitor, then you need to look in the mirror.
“You have to be hyperparanoid about why you lost that business, and be very, very honest with yourself and your business because if you’re not, you’re fooling yourself,” he says.
“Customers vote with their feet and their wallets, and if they are walking away from you in direction of somebody else and paying your competitors to do what you wanted to do for them, there is a great lesson. We have learned a lot more about losing deals than we ever did about winning deals. You learn from getting in front of your existing customers and asking them why they choose you and why they are working with you, and you learn from prospects who don’t work with you and figuring out why.”
After taking those steps, HealthPlan Holdings began to see positive results, increasing its revenue every year from $65 million in 2002 to about $74 million in 2003 and more than $80 million in 2004. The company jumped to more than $83 million in 2005, more than $103 million in 2006 and finished 2007 at almost $125 million in revenue, while continuing to add new customers.
Bak also sold Montgomery Management last year so as to better focus on HealthPlan’s core holdings.
“It’s been heavy growth mode, and it’s been expansion and training and hiring and expanding the amount of space we have and landing new customers and bringing on IT professionals,” he says. “The business has ramped pretty significantly.” <<
HOW TO REACH: HealthPlan Holdings Inc., (813) 289-1000 or www.healthplanholdings.com