Chapter 4
Strategy and
the Balanced Scorecard
The Balanced Scorecard
What gets measured gets managed
Healthcare Operations Management
© 2008 Health Administration Press. All rights
3
What’s on Your Desk Today?
Urgent operating
problems
Last year’s
initiative
Employee
turnover—
recruiting
40 e-mails
and 10 voice mails
This year’s new
initiative
Financial
performance
pressure
Healthcare Operations Management
© 2008 Health Administration Press. All rights
4
Traditional Management Tools
Financial
Reports:
P/L
Balance
Sheet
ROI-ROCE
Operating
Statistics
Healthcare Operations Management
© 2008 Health Administration Press. All rights
Strategic
Plan
5
The Theory of Management
Operating
Statistics
Strategic
Plan
Operations
Management
Control
Healthcare Operations Management
© 2008 Health Administration Press. All rights
Financial
Results
6
Traditional Management Tools
•
•
•
•
Created by different departments
Reviewed by different managers
Reviewed in different time frames
No connection to each other
Healthcare Operations Management
© 2008 Health Administration Press. All rights
7
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
8
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”
Healthcare Operations Management
© 2008 Health Administration Press. All rights
9
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
10
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
11
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
12
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
13
The Four Perspectives
Healthcare Operations Management
© 2008 Health Administration Press. All rights
14
Financial Strategies
• Grow
– Revenue growth
• Sustain
– Profitability, ROI, ROCE
• Harvest
– Cash flow, working capital
• Risk management
– Diversity
Healthcare Operations Management
© 2008 Health Administration Press. All rights
15
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
16
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
17
Asset Utilization
Investment Strategy
• Manage working capital
– Accounts payable
– Inventory
– Accounts receivable
• Improve asset allocation
– Sharing of IT, specialized equipment,
buildings
Healthcare Operations Management
© 2008 Health Administration Press. All rights
18
Risk Management
Through Diversity
•
•
•
•
•
Revenue sources
Market segments
Customers
Products
Asset allocations
Healthcare Operations Management
© 2008 Health Administration Press. All rights
19
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
20
Standard Measures
•
•
•
•
•
Market share
Customer retention
Customer acquisition
Customer satisfaction
Customer profitability
Healthcare Operations Management
© 2008 Health Administration Press. All rights
21
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
22
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
23
Internal Business Process
Identify
the
Market
Create
Product/
Service
Innovation
Build
Product/
Service
Deliver
Operations
Process
Service
Post-Sale
Services
Healthcare Operations Management
© 2008 Health Administration Press. All rights
24
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
25
Measures for
Product 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)
Healthcare Operations Management
© 2008 Health Administration Press. All rights
26
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
27
Post-Sale Services
•
•
•
•
Warranty and repair
Billing and collection
Rapid reliable service contracts
Feedback on product performance to
drive improvement
Healthcare Operations Management
© 2008 Health Administration Press. All rights
28
Learn and Grow
Results
Employee
Productivity
Employee
Retention
Employee
Satisfaction
Staff
Competencies
Information Technology
and Data
Healthcare Operations Management
© 2008 Health Administration Press. All rights
Climate for
Actions
29
Measures of
Employee 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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
30
Drivers of
Learning 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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
31
Linking Balanced Scorecard
Measures to Strategy
• Cause-and-effect relationship
• Outcomes and performance drivers
• Link to financials
Healthcare Operations Management
© 2008 Health Administration Press. All rights
32
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
33
Outcomes and
Performance 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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
34
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
35
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
36
General Balanced Scorecard
Improve
financial
results
Finance
Customers
Improve marketing
and customer
service
Improve
operations
Business
Processes
Learning and
Growth
Provide employees
with skills, tools, and
motivation
Healthcare Operations Management
© 2008 Health Administration Press. All rights
37
Emergency Department (ED) Balanced Scorecard
Increase net revenue of
ED product line:
Goal = 10%
Finance
Measure market share:
Goal = 5% increase
Customers
Business
Processes
Learning and
Growth
Measure patient wait
time:
Goal: <30 minutes
Do project on patient flow—make
changes:
Goal = value stream increased by 30%
Learn Lean process improvement
tools:
Goal = complete by December 1
Healthcare Operations Management
© 2008 Health Administration Press. All rights
38
Obstetric (OB) Service Balanced Scorecard
Finance
Increase net revenue of
OB product line:
Goal = 10%
Measure market share:
Goal = 5% increase
Customers
Business
Processes
Learning and
Growth
Measure patient
satisfaction (facilities):
Goal: >90%
Remodel OB suite:
Goal = complete
by November 1
Measure patient satisfaction
(perceived clinical quality):
Goal: >90%
Measure patient
satisfaction (high touch):
Goal: >90%
Contract for emergency
transportation:
Goal = complete by
November 1
Begin tours and survey:
Goal = patient
satisfaction >90%
Customer service training:
Goal = complete by July 1
Healthcare Operations Management
© 2008 Health Administration Press. All rights
39
Rotated General Balanced Scorecard
Improved patient
results and
satisfaction
Customers
Improve
operations
Business
Processes
Finance
Learning and
Growth
Improve availability of
financial resources
Provide employees with
skills, tools, and
motivation
Healthcare Operations Management
© 2008 Health Administration Press. All rights
40
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
41
Display Results Graphically
Healthcare Operations Management
© 2008 Health Administration Press. All rights
42
Sample BSC—Financial
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Jan Feb Mar Apr May Jun Jul
Aug Sep Oct Nov Dec
Revenue
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Jan Feb
Mar Apr May Jun
Jul
Aug Sep Oct
Nov Dec
Profitability
Healthcare Operations Management
© 2008 Health Administration Press. All rights
43
Sample BSC—Customer
120%
100%
80%
60%
40%
20%
0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Customer Satisfaction
Healthcare Operations Management
© 2008 Health Administration Press. All rights
44
Sample BSC—Operations
35%
160
30%
140
25%
120
20%
100
80
15%
60
10%
40
5%
20
0%
0
Jan Feb
Mar
Apr
May Jun
Jul
Aug Sep
Oct
Jan
Nov Dec
Fast-Track Admitting Percentage
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Incremental New Admissions
$250
$200
$150
$100
$50
$0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug Sep
Oct
Nov
Dec
Cost per Unit
Healthcare Operations Management
© 2008 Health Administration Press. All rights
45
Sample BSC—Learn and Grow
102%
100%
98%
96%
94%
92%
90%
88%
86%
84%
82%
Jan Feb
Mar
Apr
May Jun
Jul
Aug
Sep
Oct
Nov Dec
Customer Service Training Scores
120%
100%
80%
60%
40%
20%
0%
Jan Feb Mar
Apr
May Jun
Jul
Aug Sep Oct Nov Dec
Six Sigma Training Scores
Healthcare Operations Management
© 2008 Health Administration Press. All rights
46
Project Selection (Niven)
Criteria
Weight Project
A
Points
Project Project
A Score 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
3
0.3
10
1.0
Total
10%
6.3
Healthcare Operations Management
© 2008 Health Administration Press. All rights
5. 95
47
Feedback and the Strategic
Learning Process
Clarifying vision
and strategy
Communication and
linking strategy
Strategic feedback
and learning
Planning and
target setting
Healthcare Operations Management
© 2008 Health Administration Press. All rights
48
Cascading Scorecards
Linking Directly or Influencing Higher-Level Scorecards
Corporate
Line
Department
(OB)
Higher brand
recognition
Increased patient
satisfaction
Support
(IT)
Healthcare Operations Management
© 2008 Health Administration Press. All rights
Clean and timely
bills
49
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
50
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
Healthcare Operations Management
© 2008 Health Administration Press. All rights
51
End of Chapter 4