chapter 4 power points edited

Chapter 4

Strategy and the Balanced Scorecard

Healthcare Operations Management© 2008 Health Administration Press. All rights reserved.

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The Balanced Scorecard

What gets measured gets managed


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What’s on Your Desk Today?

Urgent operatingproblems

Employee turnover—recruiting

Last year’s initiative

This year’s new initiative

40 e-mailsand 10 voice mails

Financial performancepressure


5

Traditional Management Tools

Financial Reports:

P/LBalance

SheetROI-ROCE

Operating Statistics

StrategicPlan


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The Theory of Management

Financial Results

Operating Statistics

StrategicPlan Operations

ManagementControl


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Traditional Management Tools

• Created by different departments

• Reviewed by different managers

• Reviewed in different time frames

• No connection to each other


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The Problem • Poor linkage of strategic plan to operations

and expected financial results; strategies are not “actionable”

• Strategies are not linked to departmental, team, and individual goals

• Strategies are not linked to both long-term and short-term resource allocation

• Feedback is tactical, not strategic (e.g., focuses on financial reporting only)

• The result—poor execution and long-term outcomes


9

Kaplan and Norton

• Study in 1990—“Measuring Performance in Companies”

• Balance– Financial, customer, internal, innovation, and

learning– Short-term and long-term objectives– Financial and nonfinancial measures– Leading and lagging indicators– Internal and external performance

• Aligning measures with strategy• Developing a “theory of the company”


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Balanced Scorecard as a Strategic Management System

• Clarify and translate vision and strategy

• Communicate and link strategic objectives and measures

• Plan, set targets, and align strategic initiatives

• Enhance strategic feedback and learning


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Balanced Scorecard in Healthcare

• Highly complex environment

• Multi-stakeholder leadership

• Resists change

• Catastrophic failure difficult to anticipate

• Excellent strategic management tool

• Use increasing in many healthcare organizations


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Elements of the Balanced Scorecard

• Mission and vision• Perspectives

– Financial– Customer– Internal business process– Learning and growing

• Linking measures to strategy• Structure and strategy• Strategic alignment—top to bottom• Targets, resources, initiatives, and budgets• Feedback and the strategic learning process


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Mission and Vision:Some Balanced Scorecard Examples

• Achieve financial strength• Develop reputation/brand• Grow the business• Be able to demonstrate operational excellence• Form strategic alliances, especially with

physicians• Develop IT infrastructure to improve continuity of

care Source: Inamdar and Kaplan, Journal of Healthcare Management, May/June 2002


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The Four Perspectives


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Financial Strategies

• Grow– Revenue growth

• Sustain– Profitability, ROI, ROCE

• Harvest– Cash flow, working capital

• Risk management– Diversity


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Revenue Growth and Mix

• New products (e.g., HP and 3M)

• New applications for existing products

• New customers and markets

• New relationships—partnerships

• New product and service mix

• New prices


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Cost Reduction—Productivity

• Increase revenue/employee

• Reduce unit cost

• Improve channel mix—how customers use products or services (e.g., online reservations for air travel)

• Reduce overhead—sales, marketing,general and administrative


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Asset UtilizationInvestment Strategy

• Manage working capital– Accounts payable– Inventory– Accounts receivable

• Improve asset allocation– Sharing of IT, specialized equipment,

buildings


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Risk ManagementThrough Diversity

• Revenue sources

• Market segments

• Customers

• Products

• Asset allocations


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Customers—Market Segmentation

• What is the key value proposition to be delivered to the targeted market segment?

• Healthcare market segment examples:– Patient with chronic illnesses (e.g., diabetes)– Obstetric care– Sports medicine– Cancer– Emergency care


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Standard Measures

• Market share

• Customer retention

• Customer acquisition

• Customer satisfaction

• Customer profitability


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The Value Proposition

• Product and service attributes– Low price, leading edge, or high performance, etc. – Time: quick, slow

• Customer relationship– Customer intimate (e.g., Nordstrom) or not

(e.g., HP)– Integrated supply chain relationship

• Image and reputation


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Hospital Example

• Market segment: pregnant women ages 18–35

• Product attributes– Quick access– Warm, welcoming facilities

• Customer relations– Strong relationships with nurses, midwifes, and

doctors• Image

– High-quality care– Excellent referrals and transport for high risk


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Internal Business Process

Create Product/ Service

Identifythe

Market

Build Product/ Service

Deliver

Service

Innovation

OperationsProcess

Post-SaleServices


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Innovation

• Identify the market– What benefits will customers value in

tomorrow’s market?– How can we innovate to deliver these

benefits?

• Create the product– Basic research– Applied research– New product to market


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Measures forProduct Development

• Percentage of sales from new products• Percentage of sales from proprietary products• New product introductions• Time to develop new products• Time to break even

(development cost = accumulated profit)


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Operations Process

• Process optimization in a stable environment

• Statistical process control

• Rapid prototyping

• Six Sigma

• Quality function deployment and Lean

• Real-time simulation and control


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Post-Sale Services

• Warranty and repair

• Billing and collection

• Rapid reliable service contracts

• Feedback on product performance to drive improvement


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Learn and Grow

Results

StaffCompetencies

EmployeeSatisfaction

EmployeeProductivity

EmployeeRetention

Information Technologyand Data

Climate forActions


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Measures ofEmployee Satisfaction

• Involvement with decisions• Recognition for doing a good job• Access to sufficient information to do the job

well• Active encouragement of creativity and

initiative• Support for staff-level functions• Overall satisfaction with the organization


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Drivers ofLearning and Growing

• Reskilling– Level and intensity of reskilling– Number of employees involved

• Information systems capabilities• Motivation, empowerment, alignment

– Suggestions and involvement in decisions– Team performance and rewards– Personal alignment and rewards


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Linking Balanced ScorecardMeasures to Strategy

• Cause-and-effect relationship

• Outcomes and performance drivers

• Link to financials


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Cause-and-Effect Relationships

• A strategy is set of hypotheses about cause and effect (“if, then” statements—e.g., “If the wait time in the emergency department is lowered, then the patient will be more satisfied.”)

• Every measure selected for a Balanced Scorecard should be an element of a chain of cause-and-effect relationships that communicates the organization’s strategy


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Outcomes andPerformance Drivers

• Outcome indicators– Lag– Tend to be generic– Examples: profitability, market share, customer

satisfaction• Performance drivers

– Predict the future– Are specific to strategy– Examples: emergency room wait time, remodeling on

time lines• Need equal mix of both types• Suggested maximum is 5 per quadrant or 20


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Link to Financials

• Financial goals are topmost in Balanced Scorecard

• Each other strategy eventually needs to link to financial goals

• Causal pathways need to be clear and quantitative, if possible

• Some healthcare organizations make the customer/patient topmost


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Strategy Maps and Initiatives• Strategic method of execution • Set of linked initiatives

– Can be small action or major project– “If, then” statements – Links to top quadrant results (finance, customer)

• Initiatives can become formal project• Metrics

– Leading– Lagging– Dates


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Finance

Business Processes

Learning and Growth

Customers

General Balanced Scorecard

Provide employees with skills, tools, and motivation

Improve marketing and customer service

Improve operations

Improve financial results


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Finance

Business Processes

Learning and Growth

Customers

Emergency Department (ED) Balanced Scorecard

Learn Lean process improvement tools:Goal = complete by December 1

Measure market share:Goal = 5% increase

Measure patient wait time:Goal: <30 minutes

Do project on patient flow—make changes:Goal = value stream increased by 30%

Increase net revenue of ED product line:Goal = 10%


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Finance

Business Processes

Learning and Growth

Customers

Obstetric (OB) Service Balanced Scorecard

Customer service training:Goal = complete by July 1

Measure market share:Goal = 5% increase

Measure patient satisfaction (facilities):Goal: >90%

Remodel OB suite: Goal = complete by November 1

Increase net revenue of OB product line:Goal = 10%

Contract for emergency transportation:Goal = complete by November 1

Begin tours and survey:Goal = patient satisfaction >90%

Measure patient satisfaction (perceived clinical quality):Goal: >90%

Measure patient satisfaction (high touch):Goal: >90%


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Learning and Growth

Customers

Rotated General Balanced Scorecard

Provide employees with skills, tools, and motivation

Improve availability of financial resources

Improve operations

Improved patient results and satisfaction

Finance

Business Processes


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Targets, Resources, Initiatives, and Budgets

• Set stretch targets

• Identify strategic initiatives

• Identify critical cross-organization initiatives

• Link to annual resource allocation and budgets

• Remember to maintain critical monitoring systems for nonstrategic operations


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Display Results Graphically


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Sample BSC—Financial

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000


Revenue

Profitability


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Sample BSC—Customer

0%

20%

40%

60%

80%

100%

120%


Customer Satisfaction


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Sample BSC—Operations

0%

5%

10%

15%

20%

25%

30%

35%


0

20

40

60

80

100

120

140

160


$0

$50

$100

$150

$200

$250


Fast-Track Admitting Percentage

Cost per Unit

Incremental New Admissions


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Sample BSC—Learn and Grow

82%84%86%88%90%92%94%96%98%

100%102%


Six Sigma Training Scores

0%

20%

40%

60%

80%

100%

120%


Customer Service Training Scores


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Project Selection (Niven)

Criteria Weight Project A Points

Project A Score

Project B Points

Project B Score

Link to strategy 45% 7 3.15 1 0.45

Financial gain 15% 5 0.75 10 1.5

Project cost 10% 5 0.5 10 1.0

Key personnel required

10% 8 0.8 10 1.0

Time to complete 10% 8 0.8 10 1.0

Affects other projects

10% 3 0.3 10 1.0

Total 6.3 5. 95


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Feedback and the Strategic Learning Process

Clarifying vision and strategy

Planning andtarget setting

Strategic feedback and learning

Communication andlinking strategy


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Cascading ScorecardsLinking Directly or Influencing Higher-Level Scorecards

Increased patient satisfaction

Higher brand recognition

Clean and timely bills

Corporate

Support (IT)

Line Department(OB)


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Does the Strategy Work?

• Double loop learning– Can you achieve the initiative’s goals (control

loop)?– If not, what other initiative can achieve the

strategic goals (secondary loop)?– Control loop—weekly; strategic (secondary) loop

—quarterly• Tools

– Statistical tools (e.g., correlation analysis)– Anecdotal reporting– Peer review– Team review and problem solving


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Implementation

• Link scorecards at corporate and departmental level

• Use scorecards to communicate strategy implementation

• Link cross-departmentally• Link to budgets• Monitor all operating statistics—may

be basis for new initiatives

End of Chapter 4