ENHANCE PERFORMANCE,
ELIMINATE THE BUDGET
Gordon T Edwards
RESEARCH PROJECT
Enhance Performance, Elimination the Budget
Viterbo University
The Problem
Overview
• Background literature
• Purpose of the study
• Methods
• Results
• Discussion
• Implications
• Limitations
• Future Research
Corporate Budgeting
• Overall dissatisfaction of current budget process
• Consumes too many resources
• Takes to long to prepare (out of date when done)
• Undermines ethical foundation of organization
• Illusion of control by robbing potential
(Hope & Fraser, 2000)
However, finance management continue to
believe budgets are indispensable
(Rickards, 2008)
Increasing radical changes
Revise or Abandon
Beyond
Budgeting
Advanced Budgeting
Better Budgeting
Traditional Budgeting
Potential number of users
(Rickards, 2006)
A Radical Concept
• Beyond Budgeting Framework
Budget
1.
2.
3.
4.
5.
6.
Targets relative to competition
Rolling forecasts
Rewards on relative performance
Up to date/transparent information
Give managers freedom to act
Adaptive to changing environment
• A new management model, not just
financial control structure
(Hope & Fraser, 2003)
Slow Adoption
• Lack of empirical data on effectiveness
• Lack of practical experience on implementation
• Difficulty in managing without budgets
• Governance concerns
• Environmental factors
• Fear of change
(Rickards, 2006)
Purpose of this study
A qualitative case study to explore the process that
healthcare organizations undertook to eliminate the
traditional budget.
Specifically explored,
• Motivation
• Governance
• Internal controls
• Financial tools
• Expectations
Methods
• Qualitative interviews
• Interviews transcribed
• Review of transcripts
• Coding and themes
• External peer review
Research Questions
Describe the process your organization undertook in
transitioning away from the budgeting process for operating
and capital.
Follow-up inquiries included:
• Motivation to eliminate the budget
• How concerns raised by others were addressed
• The financial tools/reports provided to management to hold them
•
•
•
•
accountable for performance
Describe education process
Any changes to internal control policies
How are financial targets established
Benefits realized
Participants
Organization #1
Operating Revenues
Leaders
Excess of $700 million
Participant A, Male
Participant B, Female
Participant C, Male
Organization #2
Excess of $3 billion
Participant E, Male
Organization #3
Excess of $2 billion
Participant D, Female
Five Major Themes
• Budget Wasteful
• Gonna Go Forward
• Quarterly Rolling Forecast
• Financial Management
• Easier in the Old World
Budget Wasteful
“Wrong the day after we create it”
“We’re just not really using them to manage anymore”
“Spend all your budget or you’re gonna lose it”
“Cost us a million dollars to create it . . .and it was wrong”
Gonna Go Forward
“CEO . . put it on [his] board performance plan”
“[driving] towards continuous improvement versus thinking every
year is a new day and that January first, things magically
change”
Organizational self confidence
“this is the right thing to do. We’ll figure it out”
“Let’s get right and close and then will continue to improve it and
modify it”
“At some point we had to leap”
“It wasn’t about eliminating the budget [but] replacing it with a
better financial planning tool”
Quarterly Rolling Forecasts
• High level forecast
• Basic economic inflation
• Key revenue indicators
• Major impacts
• At least 18 months into future
• New management tool
• Senior leadership review
• Forecast versus target
• Establish action plans
“Every quarter we’re [senior team] having a pretty robust
discussion and it’s never about the budget’s wrong”
Finance Management
“Annually . . . [the Board] approve an operating margin target,
maximum capital spend, and a price increase”
Hold management accountable through timely key metrics
• “if the volume’s not coming in and you’re not adjusting your hours, you’re
not gonna hit your productivity target”
• Productivity metrics were electronically delivered on a daily basis
Financial performance compared to “run rate” and prior year
• “the only thing that changed was instead of . . . a budget, there was a run
rate”
“We allow people a lot of leeway”
“We don’t micro-manage . . . People are accountable to year-overyear improvement and its on margin, its on productivity”
Avoiding the Inflexibility of Budgets
Easier in the Old World
“99.9% of world still uses a very traditional management system and
people are comfortable with it and know how to do it . . . they don’t
know what they’re walking into”
“front-line manager was struggling with what am I supposed to be
accountable to . . . while they hate a budget in one way they like it”
“putting them [front-line managers] towards continuous improvement
process was a bigger job than I anticipated”
“external world didn’t really know or care”
“People were pretty tied to their budgets as a safety blanket”
“I have this budget. I can spend it. Instead of if I don’t need it, then I
won’t”
Discussion: Ideal Environment
• Rapidly changing business climate
• Organizational self-confidence
• Cultural readiness to manage differently
• Desire to encourage front-line decision making
• Lean management may facilitate transition
Discussion: A Better Financial Management System
• Eliminated a “waste” of resources
• Emphasized performance improvement
• Clear accountability
• Better communication across functional teams
• Empowered front-line managers to run the business
• Facilitated organizational nimbleness to changing
business climate
This researcher would recommend others adopt the
alternative framework
Limitations
• Size of the population
• Three organizations
• Geographic location
• United States (west coast, east coast, and midwest)
• Healthcare Industry
• Researcher’s influence
• Educational and occupational background (e.g. CPA; Health
System CFO)
Future Research
• Link between Lean Management and Beyond Budgeting
• Design of financial management systems and the
practical tools utilized
• Performance outcomes of organizations that eliminated
traditional budgets
• Relationship between organizational strategy and the
alternative financial management system
CASE STUDY
Two Visions for Improving Financenance
Vision A
Vision B
Increase targets, measures,
controls
Reduce targets, measures, controls
Improve financial and accounting
expertise
Improve business analysis skills
Tighten top-down planning and
control
Enable local managers to respond
to events
Manage costs through tighter
budgets
Eliminate costs that add no value
Measure to tighten accountability
Measure to learn and improve
Manage risk through better
procedures
Manage risk by raising
competences
The Transformation
Acquisitions
Product Line Profitability
Risk Assumption
Consulting
Consulting
Analysis
Analysis
Pricing
Cost
Elimination
Financing
Transactions
Transactions
Accounts Payable
Cost Accounting
Payroll
Accounts Receivable
Cunningham & Fiume 2003
Integrated Healthcare System
• Located in the Midwest
• Operating revenues in excess of $900M
• Multi-specialty medical group, hospital operations, health
plan, nursing homes, retail pharmacy, and others
• Roughly, 6,000 employees
• Over 400 physicians
The Challenge
• Existing Infra-structure
• Corporate Budget
• Forecast Targets
• Board focus on corporate budget
• Operating units compared to forecast
• Forecast
• Too slow & detailed
• Declining targets
• No traditional budgeting cycle in place
• Educational effort
• No consistency in approach (different every year)
Readiness Assessment
• Strong continuous improvement culture
• Quality Driven
• Losing money
• Required immediate improvement from status quo
• Managed cost reductions through attrition
• Many department felt under resourced
• New finance leadership
• Well respected peer operating without budgets (and Epic)
• Confidence we could do something better
We Leaped
Objectives
Problem we were solving
• Budget inaccurate and irrelevant over time
• Budget not connected to daily management
• Budget did not adjust to varying level of demand
Target state
• Right information, right time for daily management
• Financial forecast to enable management to proactively adjust
plans
• Board to oversee outcomes versus detailed budgets
Board Involvement
Board approved four targets
• Operating margin
• Capital
• Days cash on hand
• Charge master increase
• Targets primarily driven based on capital plan and rating
agency expectations
• Initial forecast
• A $12M gap between targets and expected performance
• Discussions become more future orientated
Forecast Process
• Best estimate of what will happen in the future, given what we
know today
• Forecast 18 months into the future (6 quarters)
• High-level, not at a department level
• Quarterly process, two weeks post quarter close
• Evaluate accuracy
• Leverage past quarterly results as baseline
• Adjusted for known projects
• Utilized a few KPIs
• No plugs
• Results discussed
• Senior leadership team (on track, modify)
• Finance Committee (with senior leadership team conclusion)
• All management/Medical Staff
Management Reports
Metric Driven
• Cost per unit of service
• Productivity (worked hours per unit of service)
• Revenue (unit driven) per FTEs (medical practices)
Monthly Reporting
• Actual compared to run rate (past three month average)
Future Intent
• Daily productivity reporting
• Improved financial reporting
Accounting Changes
• Eliminated accruals at departmental level
Retained Aspects of Budgets
• Capital
• Amount available to spend driven by forecasts
• Managed under a “budget” approach
• Excluded specific subsidiary operations
• Foundations, Health Plan, other decentralized operations
• Stable business models
• Incorporated into new approach once stable with largest operation
Semi-Annual Business Plan Reviews
• Major business lines
• Finance, quality, service, & people key metrics
• Presented to senior leadership team
• Key accomplishments, plans for improvement, & barriers
to achieving targets
Outcomes
Positive
• Management more focused on results versus budgets
• Discussion became more future orientated
• Operating results significantly improved
Negative
• Managers wanted to know what they could “spend”
• Reporting wasn’t adequate to support change
• Change in leadership impacts sustained practice
Continued Challenges with Accountability Regardless of
System
Comparisons
Budget
New Planning Model
Board approved detailed budgets
Board approved organizational targets
Annual
Quarterly
Cumbersome, wasteful process
Nimble, focused process
Slow to respond
Quarterly discussion & course correction
Very detailed
Focus on the significant few
Silo accountability
System view / accountability
Significant resources to “balance”
All hours redeployed to daily management
and quarterly forecasting
Variance analysis to continuous
improvement from previous period
Metric Driven
Variance analysis to “budget”
Static Dollar Focus
Better Alignment with Priorities
CONTINUED REFINEMENT
What’s in Name?
• A TON!
• Think about language
• Perceived ability to “control”
Foundational Change
• Reduce targets, measures, controls
• Single measure rather detailed line item budgets
• Consistency of measure between cost per and productivity per
• Enable local managers to respond to events
• Manage within targeted costs per UOS
• Eliminate costs that add little value
• Resources spent on improving performance versus negotiating budget
• Measure to learn and improve
• Continuous feedback loop on performance
• Action plans to improve current performance
• Focus is on responding to customer demand vs. anticipating demand
Common Questions
• How will managers know whether they are meeting financial performance goals?
•
Departmental Management reports are much the same as current reports for Flexing departments. Line item
detail data will be available for Actual compared to trend. Overall performance in Productivity and Exp/UOS will
be compared to a target. Dollar variances for the period and YTD will be calculated. Bottom line: A manager
will know “I am __ % and $_______ off my target.”
1003000 - OPERATING ROOM
Target Performance
Current
Month
Target
Run Rate
(3 months)
Prior Year
Month
Fiscal Year to
Date
$
$
$
$
Prior Year to
Date
Prior Year
Total
IMPROVEMENT GOAL
Total Operating Expense per Unit
Total Revenue per Total Unit
Total Hours per Unit
$
26.18
$ 136.53
0.141
Variances
Total Operating Expense per Unit
Total Revenue per Total Unit
$
$
27.99
136.17
0.158
$
$
Hours Variances
FTE Variance
$
$
27.60
139.75
0.150
22.13
128.11
0.156
27.60
139.75
0.150
(128,462)
(25,409)
$(1,333,205)
$ 732,465
(1,206)
(6.8)
(1,934)
(3.7)
$
$
22.13
128.11
0.156
$
$
25.93
128.80
0.141
STATS / ANALYTICS / METRICS
Salary & Wages per Unit
Purchased Services per Unit
Supplies per Unit
Other Expense per Unit
Total Operating Expense per Unit
26.18
5.73
1.11
19.25
1.89
27.99
5.15
1.52
19.20
1.73
27.60
5.14
1.01
14.19
1.79
22.13
5.15
1.52
19.20
1.73
27.60
5.14
1.01
14.19
1.79
22.13
4.97
1.37
17.91
1.69
25.93
IP Revenue per IP Unit
OP Revenue per OP Unit
Total Revenue per Total Unit
136.5
151.57
103.37
136.17
155.70
98.16
139.75
143.54
89.05
128.11
155.70
98.16
139.75
143.54
89.05
128.11
145.06
90.26
128.80
Productive Hours per Unit
Total Hours per Unit
0.141
0.131
0.158
0.124
0.150
0.131
0.156
0.124
0.150
0.131
0.156
0.119
0.141
48,423
22,718
71,141
54,885
21,061
75,946
50,659
20,020
70,679
164,654
63,183
227,837
50,659
20,020
70,679
645,281
272,218
917,499
PRIMARY STATISTIC
IP Surgery Minutes - Primary
OP Surgery Minutes - Primary
Total Primary Statistic
4 Qtr Trend
Common Questions
• How will leadership know if we are meeting overall and department targets?
•
Target Performance Report below has been developed in XYZ system to review performance by department in
all metrics by VP, Director, Community, or Network. Easily modified to add other columns of data or trending if
required.
PeaceHealth
Target Performance Reports
300 - Alaska
Dept
3001002000
3001002100
3001002300
3001003000
3001003020
MTD
Actual
INTENSIVE CARE
MEDICAL-SURGICAL
OBSTETRICS
OPERATING ROOM
ANESTHESIOLOGY
PeaceHealth
Target Performance Reports
300 - Alaska
Dept
3001002000
3001002100
3001002300
3001003000
3001003020
3001003030
3001003150
3001003200
3001003220
3001003300
MTD
Actual
INTENSIVE CARE
MEDICAL-SURGICAL
OBSTETRICS
OPERATING ROOM
ANESTHESIOLOGY
SHORT STAY UNIT
RECOVERY ROOM
EMERGENCY
MEDICAL TRANSPORT AIR
EKG
28
280
81
9,340
117
96
3,998
689
12
52
UOS
YTD
Actual
28
280
81
9,340
117
UOS
YTD
Actual
113
1,164
359
36,761
518
359
14,013
3,295
87
262
113
1,164
359
36,761
518
Revenue per UOS
Prior Yr
Actual
300
3,460
1,091
115,378
1,630
MTD
Actual
18,686
3,928
8,831
121
4,798
MTD
Target
13,536
3,072
6,670
108
3,008
Revenue per UOS
Prior Yr
Actual
300
3,460
1,091
115,378
1,630
1,139
42,056
9,172
401
821
MTD
Actual
18,686
3,928
8,831
121
4,798
4,889
115
1,391
35,616
9,171
MTD
Target
13,536
3,072
6,670
108
3,008
3,020
78
1,009
7,084
4,556
Variance
5,150
856
2,161
14
1,790
1,869
37
382
28,531
4,616
$ Variance
144,197
239,625
175,071
127,381
209,433
179,443
148,215
263,387
342,374
238,160
Variance
5,150
856
2,161
14
1,790
YTD
Actual
13,285
3,285
7,196
105
3,283
$ Variance
144,197
239,625
175,071
127,381
209,433
Expenses per UOS
YTD
Actual
13,285
3,285
7,196
105
3,283
3,617
90
1,080
13,096
5,014
Prior Yr
Actual
12,067
2,914
6,214
102
2,798
2,808
73
927
6,741
3,963
MTD
Actual
78,152
8,383
27,976
239
18,332
22,654
538
3,349
178,114
41,509
MTD
Target
86,873
7,719
23,253
221
15,067
21,826
575
3,100
58,933
32,215
Variance
(8,720)
664
4,723
18
3,264
828
(37)
249
119,181
9,293
$ Variance
(244,166)
185,947
382,549
169,716
381,896
79,481
(148,011)
171,758
1,430,170
479,537
YTD
Actual
78,357
8,162
25,595
246
16,738
24,542
620
2,807
99,456
33,068
Prior Yr
Actual
3
1
2
0
0
1
0
0
0
0
MTD
Actual
32.0
17.5
27.2
0.2
0.9
7.2
0.0
4.6
2.0
Prior Yr
Actual
12,067
2,914
6,214
102
2,798
Hours per UOS
MTD
Hours
Target Variance Variance
33.6
(1.5)
(43.0)
15.4
2.0
571.0
21.5
5.7
463.4
0.2
(0.0)
(14.7)
0.8
0.1
12.3
7.4
(0.2)
(16.2)
0.0
0.0
30.3
3.2
1.4
946.9
1.7
0.2
11.6
YTD
Actual
30.5
17.6
26.0
0.2
0.9
8.3
0.0
3.4
1.6
Prior Yr
Actual
31.9
17.0
24.0
0.2
0.8
7.6
0.0
3.4
1.7
Common Questions
• How will we be able to quickly react to performance issues at network and
departmental level?
•
Quarterly rolling Forecasts will give us the ability to act more prospectively to changing trends.
• Department and Network target reports will allow network leadership identify which areas are under/over
performing compared to target & trend and implement action plans that will align with improvement plan.
• Will we lose a line of sight into overall revenue and volume performance with a metric
based budget?
•
Revenue and volume budgets will still exist at Network level based on LRFP. If we are falling below overall
targets, trend reports of UOS and Revenue by department can show exactly where volumes are declining or
increasing at a rate less than overall LRFP assumptions.
• How will we hold managers accountable to an overall metric as opposed to a line item
budget?
•
Target monitoring reports provide accountability and line of sight to department performance. A standard
monthly process is implemented to trigger department reviews on a monthly basis.
• How can past performance help us when our future targets are so aggressive?
•
Targets are informed by a number of factors: past performance, internal and external benchmarking, future
performance. With the target modeling tool, we can assess level of change required of targets to achieve
budgets.
• How does improvement plan fit into the new model?
•
It is similar to current process, but is no longer static for a fiscal year. Improvement plan is adjusted at each
quarterly forecast as needed, or more frequently at network discretion if metric targets are not being achieved.
Baseline is actual performance as opposed to budget.
• What do we lose?
•
Line item budget amounts.
Finance Team Questions
• How is variance analysis performed without targets at the natural class?
• It isn’t. Emphasis shifts from explaining variances to identifying improvements required to meet
targets.
• What does Board reporting look like? How can we provide meaningful
reports to Stewardship in a short timeframe without a detailed budget?
• Annually: Long-range financial plan
• Quarterly: Rolling forecasts, projected gaps, and improvement plan adjustments
• Monthly: Network and community performance to targets. Key Indicators trending.
Improvement Plan Performance
• How are 100% fixed costs handled? Why would we flex them (e.g.
contracted services that will not shift with volume)?
• All expenses are monitored per volume, but performance is also evaluated to trending.
Management discretion will be required in assessing and reacting to overhead expense
variances that are driven by volume.
Finance Team Questions
• How will the department volume budgets be determined?
• Volumes will only be set for high level drivers (Admissions, Patient Days, Surgeries, ER Visits).
Department volumes and revenue will be monitored to trend. Significant volume targets will
monitored in Improvement Plan and Rolling forecasts.
• How will targets be set? How will varying inflation factors be utilized to set
targets (Drugs at 8%, Other Exp at 3%)?
• There is flexibility in how targets are set. A target could be set based on a benchmark, an
improvement goal, or a detailed line item account analysis which could incorporate multiple
inflation factors. Management judgment.
• How will seasonality be applied?
• Significant seasonality can be applied to targets based on historical performance.
• How will a new department’s target be developed?
• The same way a new department’s budget is currently set – a more detailed analysis may be
required for new departments.
Operation Leadership
• Endorse the proposed process and methodology, assuming
leadership will allow managers to
• Manage to an overall unit of cost per service
• Ability to hire lower cost professionals to reduce overall costs, even if
hours are higher
• Requires a level of trust with managers
• Believe a manager would have everything they need to manage the
department
• Concern about whether leadership will trust or allow manager the
flexibility to manage within the broad targets
• Big change for overhead departments, not used to looking at costs
on a volume basis
• Concern on how targets will be set.
What is the risk?
• Lack of plan to achieve results
• Revisited quarterly through forecast
• Clear improvement plans based on current performance
• Lack of accountability
• Every manager will have a clear target on performance
• Targets linked to productivity
• Lack of understanding
• Consistent with Lean rollout this year and quality improvements
Questions
References
Cunningham, Jean & Fiume, Orest (2003). Real Numbers
Management in a Lean Organization. Durham, NC: Managing
Times Press.
Hope, Jeremy & Fraser, Robin (2000). Beyond budgeting. Strategic
Management, 82(4), 30-35.
Hope, Jeremy & Fraser, Robin (2003). Beyond budgeting how
managers can break free from the annual performance trap.
Boston, MA: Harvard Business School Press.
Rickards, Robert C. (2008). An endless debate: the sense and
nonsense of budgeting. International Journal of Productivity and
Performance Management, 57(7), 569-592.
Rickards, Robert C. (2006). Beyond budgeting: boon or boondoggle?.
Investment Management and Financial Innovations, 3(2), 62-76