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India's changing! Health franchising set to boom
Sangita Reddy & Ratan Jalan
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September 02, 2005

To many, it may seem a bit odd to apply the concept of franchising to healthcare, but to some, it makes eminent sense. At the vanguard of this new frontier is the Apollo Hospitals [Get Quote] Group which is rapidly emerging as India's largest healthcare chain.

Over the next three years, Dr Pratap C Reddy and his four daughters hope to double the group's bed capacity from 5,000 to 10,000 with minimal capex through the franchise route.

At the same time, they want to capture a substantial chunk of the Rs 26,000 crore (Rs 260 billion) primary healthcare market by building a 250-strong chain of franchised clinics. As a business model, franchising enables rapid market expansion while conserving capital and it exploits entrepreneurial potential offered by the individual franchisees.

India's Rs 73,000 crore (Rs 730 billion) healthcare business offers huge business opportunities. Not only is it recession-proof and growing at an amazing 13% annually, but demand also continues to outstrip supply.

With a large gap between need and availability of hospital facilities, our focus is to increase bed capacity by about 30% every year. The demand- supply gap in quality primary healthcare is even wider.

Franchising in the healthcare segment is common all over the world, so why not in India? According to the Confederation of India Industry (CII), 17% of world business is through franchising; while in India it is less than 3%.

However, as a concept franchising is beginning to take off in India with NIIT [Get Quote], Archies, Lakme Lever, Ceat, Satyam [Get Quote] Infoway, Aptech and Titan leading the way.

Franchising models

Apollo offers several franchising opportunities. We have our own hospitals, we manage hospitals for others, and then we also have franchised hospitals. Clinics too are both owned and franchised. These activities are through two companies: Apollo Hospitals Enterprise Limited (AHEL) and Apollo Health and Lifestyle Ltd (AHLL).

AHEL, which is listed on the Bombay Stock Exchange, provides consultancy services from conceptualisation to commissioning and running of 'managed' hospitals; and consultancy for projects and wide range of other healthcare models.

AHLL, one of our most ambitious initiatives, aims to build a Rs 1,000 crore (Rs 10 billion) business over the next three years. Initial plans include establishing a nation-wide chain of more than 250 primary healthcare centers on a franchisee basis.

These clinics will be equipped with tele-consultation, diagnostic and pharmacy services to provide a one-stop solution to primary healthcare needs of the whole family. This project was conceptualized in partnership with Arthur Andersen, the management consultancy firm.

We are also experimenting with a new hospital franchise model called First Med, which will offer immediate secondary-care treatment in case of an emergency such as an accident, heart attack or poisoning.

A First Med hospital, with around 100-150 beds, will have a fully equipped intensive care unit (ICU), diagnostic and emergency facilities, a pharmacy, emergency ambulance service and a poison information center. Specialists will be on call 24 hours a day.

We plan to take this new brand to 'B' and 'C' towns. Training provided by a specialised service team in Chennai would standardise the medical services at First Med hospitals. A pilot First Med is operational in Chennai, with plans for 50 such hospitals all through the country by the end of 2003.

In the early days, franchisees would ask us, 'Will you treat us the same? Will you do for us that you do for your hospital?' Today we have pretty much gotten over that and there is much better understanding of complexities of the processes that go into running hospitals and clinics, and why we insist on what we do.

We are planning to spend about Rs 4 crore (Rs 40 million) on the communication and marketing of the Apollo clinic concept, and 30 clinics could be operational by the end of December 2002. Currently we have 40 people working on the project.

Even after three years, the figure should not exceed 100 people. In the initial phases, there is a fair amount of effort in setting it up, followed by upgradation, but over a period of time the effort should taper down.

These 40 people have been recruited largely from outside the Apollo Group and outside the healthcare business. Managing a franchise business is very different from managing healthcare.

Our franchisees will gain not only from our deep healthcare domain knowledge, but will also be serviced by a team of young, bright professionals from various backgrounds such as project management, retail, logistics and franchising. They bring with them a wealth of knowledge and experience with companies like NIIT, BPL, Pizza Hut, Raymond, Ebony, Bayer, Gati, Mercedes-Benz, HCL [Get Quote] and Lintas.

What franchisees can expect from us

A franchisee enjoys the best of two worlds. As the owner of an independent business, she is free to leverage her entrepreneurial capabilities and knowledge of the local market. She also knows that a nationally recognised brand like Apollo minimizes her risks.

All the knowledge and expertise required to successfully run the business are ensured from us. Being part of a large network allows the franchisee to offer world-class service without spending a fortune.

We have been in the business for twenty years, and have standardised systems and processes to such a degree that the franchisee doesn't have to waste time inventing the wheel. She can immediately get going on value-adding activities such as creating and driving the market rather than waste time designing an envelope or putting together a brochure.

At the project stage, we assist on:

For the clinic, the interiors have been designed by Alfaz Miller, a leading architect. His firm, ABM Associates, has won several awards and has a background in designing franchised retail outlets.

IT support is through a comprehensive and seamless clinic management software solution developed for us by GE Medical Systems. The employee uniforms have been designed by Ravi Bajaj.

After the hospital, clinic or project is launched, we help the franchisee upgrade his skills and those of his employees through continuous training programmes. For example, once selected, franchisees undergo a 15-day customised training program at the Indian Institute of Management-Bangalore to orient themselves to the needs of the healthcare segment.

The staff at these clinics who are eventually responsible for its functioning, undergo a training program designed by NIS Sparta (an associate of NIIT). Technology updates are provided from time to time. We benchmark against the best in the world. For clinics, we have a detailed operation manual to help in managing them in efficiently.

Apart from the managerial support, we also support the franchisee by building the Apollo brand. It's a sustained marketing initiative both at the national and local levels with promotions, direct marketing activities and a comprehensive public relations exercise.

The USPs (unique selling proposition) of franchising are demonstrably superior quality, consistency, price sensitivity, IT-enabled value- added services and training. Apollo will be investing around Rs 12 crore (Rs 120 million) in the coming months to set up basic facilities like the hardware and software backbone for the chain of clinics.

Promising returns

For the clinics, franchisees are expected to lease premises with an area of at least 4,000 sq ft in an appropriate neighbourhood. The total project cost is likely to be about Rs 2 crore (Rs 20 million) and may be funded by a 1:1 debt fund ratio.

Consultation, diagnostic services, health check-ups and pharmacy are the major revenue streams, and the franchisee can expect an income of Rs 2.5 crore (Rs 25 million) in the first year of operation, resulting in a 'no cash loss.'

In the third year, we expect each clinic to yield a revenue of Rs 4 crore (Rs 40 million) and a profit of Rs 60 lakh (Rs 6 million). Our projections indicate a post tax internal rate of return of over 35%.

Of course, those with larger ambitions can opt for a larger clinic offering additional services but these require higher investments.

Bailing out hospitals in trouble

We embarked on franchising partly because of our experience in managing hospitals owned by others. We generally get a lot of enquiries from existing hospitals asking us to improve their working.

Sometimes the requests come from semi-charitable trusts who built hospitals and now face problems in maintaining them. They come to us saying, 'We have to keep putting in capital. Can you protect us from this continuous capital infusion?' So we do some financial analysis and restructuring and get debt to the level that it can be serviced without the promoters having to keep putting in their own money.

Some promoters are in multiple businesses who invest their surplus in healthcare thinking it to be a good sector to be in. Then they find it is not so easy to manage and they come to us because we have the expertise. Another category are the doctors who start their own hospitals and find they cannot or do not enjoy running an institution.

We typically bring five of our people into the management: the CEO, the medical superintendent, the nursing head, the HR head and one more person depending on the scenario. It could be the operations manager or the theatre manager.

The one person we definitely allow them to have is their finance person because we want them to feel that it is their project and we want to be very open and transparent. They feel more comfortable and we feel much happier that way.

We need the freedom to put in the right people to handle day-to-day operations, to administer quality in terms of people, materials and machines and to have a certain kind of control on communication, in terms of the way the logo is used, the type of brand, advertising, etc.

Broadly speaking, there are a certain number of things that have to be done but how they are done varies from hospital to hospital. The mechanics really depend on the extent of promoter involvement, the level of senior management, the level of their assistance and the level of their comfort with our coming in.

The degree varies a lot, and dictates the amount of work we need to do and the speed at which we can handle the transition.

Transitions are of different kinds. One is a slow entry, giving advice first, meeting the team and then getting into the restructuring. Sometimes it is a green field where you are recruiting from day one.

Ideally the promoter should address the core group, the senior management team and then the general staff, informing them that Apollo is coming in, about why we are coming in and what is our expectation of them. After that we need to address people to allay their fears of the kinds of change that will come.

During this meeting, we openly admit that there will be some amount of change, but ensure that after three or six months all of them will feel happy about the change. We talk about the new systems, new equipment, new orientations and the new training we will bring in.

We think we succeed because all the people who work in hospitals are not there only for a livelihood but also because they enjoy seeing people get better, enjoy working with the process of healing. When Apollo comes in and we are able to enhance their ability to affect the healing process, I think we have helped them at a deeper level.

There are always some managers who are fairly powerful and find the more structured job unattractive. We acknowledge this issue and have learnt to deal with it. Once in a while, a senior person may leave.

Then again, once in a while someone becomes so motivated that they want to join the mainstream Apollo group. We have done so many reforms, we have become successful at handling people. Some hospitals have positive happy unions, others don't have unions. We believe in people, we understand people.restructuring

Then comes the second phase, where we get into readjustment and reorganisation. Our HR head takes a primary role and sits with the heads of departments. We give them time to settle down and initially don't do too many things except for nice cosmetic actions: staff quarters will improve, uniforms will improve and so on.

However, behind the scenes, the CEO and the core team would have been planning the change process and this would take typically a month to two months: They decide what the new operations structure should be, the equipment required, the new doctors needed, method of assessment, the doctors who need to go, the specialties we want to induct. It becomes very serious.

The plan is presented to the promoter because we need his buy in to start making changes. After we get clearance from the promoters and decide the pace at which the changes will happen, we again start departmental sharing.

We try not to make it traumatic. It is always a shared vision for a better program for patients, better ability to handle patients. So far, thanks to God's grace, it has been pretty good.

What we expect from a franchisee

Franchisees must appreciate what we stand for in terms of quality care for the patient and if something is needed, we expect the franchisees to support us. Suppose a trauma unit is started without xyz equipment, but it grows and the franchisee needs to invest an additional Rs 50 lakh (Rs 5 million) in the trauma unit, she should support our request because this is the way to retain doctors and give patients better care.

We need them to be with us on investment decisions and we definitely need them to be with us in HR policies because no hospital runs without people. Keeping people happy, motivated and constantly committed is a fairly complex thing.

Franchisees need to understand the elements of our HR policy and to give us the freedom to administer HR in that manner.

Service quality depends on the people in the organisation. It's critical that the franchisee understands this, has the ability to recruit the right people, can motivate them and invest in their training. If a good front office executive costs Rs 6,000, they shouldn't tell us they can get the same for Rs 2,000.

A person may be available for Rs 200 also, but when we say Rs 6,000, we do not compromise. If they have a niece who is very good looking, can speak English, she still needs to go through the training process, we make this very clear from day one and not after we sign up with them. We refuse to compromise on these parameters.

A franchisee must understand that if Rs 80,000 is needed for training every year, we need the investment, it's not a luxury. We also warn franchisees that they should not be reluctant about standing behind the front office counter or opening the door for a sick old lady. They have to be as much a part of the team as anyone else. One can't talk good things and not do it.

Franchisees also need to have a certain amount of commitment to quality in terms of materials purchasing and hospital supplies. They have the option to plug in to our group purchasing system though it is not a compulsion. But they must listen to us in terms of specifications.

For example, a particular piece of equipment may be available for as much as Rs 65,000 or as little as Rs 12,000. After a lot of analysis, we may ask the franchisee to select from a range of Rs 30,000 to Rs 64,000. If the franchisee insists on the Rs 12,000 product, we don't believe we will be able to operate with the kind of freedom and quality standards that we require.

People often worry about quality when talking about franchising, but in the end everything boils down to the franchisee. If your franchisee is right, half the battle is won; and if she is not right, no amount of policing will help.

The ideal franchisee

Some franchisees, including doctors, just want the brand. The starting point is, I am a doctor, I can run the hospital, I can handle the processes but I want your name up there, it will help me push the breakeven point from year three or four to year one, let me be your partner.

The challenge is to make her change her mind. Capturing the value of the brand is not enough, the Apollo brand comes with a lot of quality initiatives.

Before we appoint a franchisee, we conduct a few checks. Obviously one is his ability to invest. The franchisee must look at healthcare and service quality the way we look at it.

Healthcare must be a better business than what she is currently doing, otherwise she won't be seriously committed to the healthcare segment. We meet the prospective franchisee at least three or four times to get a feel of what is it that makes her feel happy or unhappy.

In the Indian context, we ask her to explain what makes a good organisation, make her talk about her benchmarks. Often she has not really thought through what is important to her, we make her verbalise her own expectations.

We also engage SB Billimoria -- the accountancy firm, to conduct a rigorous due diligence. If a promoter plans to invest Rs 2 crore (Rs 20 million), the source of the money has to be transparent. We get reference checks from their current suppliers or current clients. If our existing franchisee recommends someone, we do consider the person.

The ideal franchisee is someone whose concern for quality is similar to ours, someone who expects good returns from the business but does not expect it tomorrow. She is a person who can create markets.

People orientation, the ability to drive and create markets, understanding service quality and an utmost conviction that healthcare is a business that is here to stay, if these four things are clear, we're in business. The lack of even one factor means a 'no'.

Facing competition

In any growth sector, competition is bound to increase. In terms of international competition, for example, if the large American chains were to come to India, our cost structure would give us a competitive edge.

For example, it is cheaper to buy clothes abroad than in India; basmati rice is cheaper in America than in India; cars, cosmetics or any other product, the price is cheaper abroad than in India. Healthcare is the only service or product where in India the price is one-tenth of the international price for an equivalent product.

Whenever we make a presentation at an international forum, and we say we have done 42,000 open heart surgeries, they say 'Wow!' For 5,000 hospital beds, they say 'Wow!' But when we mention the sales turnover, they say, 'What happened here, did you miss a zero or something?'

Second, it's unlikely that they will come to India in the short term because spending on healthcare within the United States has not come down even though there has been a slowdown and toughening in other areas of the economy. So none of them are forced to come to India.

Of more interest is the fact that local pharmaceutical companies and individuals are setting up both general and specialised hospitals. Hence franchising makes very good business sense: it allows us to use our expertise, extend the well-known Apollo brand, and hasten the path of our growth in a capital intensive business with a long gestation period.

It is a win-win scenario for both franchisees and us as we go forward with our plans.

Sangeeta Reddy is Dr Reddy's daughter and Managing Director, Apollo Health Street. Ratan Jalan is CEO, Apollo Health and Lifestyle.

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