Using the Balanced Scorecard to Build A Strategy-Focused Healthcare Organization

For more information, contact: Kate OBrien 781.402.1143 Kobrien@bscol.com

Balanced Scorecard Collaborative, Inc. 55 Old Bedford Road Lincoln, MA 01773 Tel: 781.259.3737 Fax: 781.259.3389 bscol.com

Todays Agenda
Introduction to Balanced Scorecard Collaborative Overview of the Balanced Scorecard Background and Concepts Case Example Saint Marys/Duluth Clinic Health System Implementing the Balanced Scorecard At Your Hospital Questions and Answers

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Introduction to Balanced Scorecard Collaborative

Execution of Strategy Has Become the Corporate Challenge of Our Times!

Strategy has never been more important Business Week Less than 10% of strategies effectively formulated are effectively executed Fortune Magazine The problem is that our ages fascination with strategy and vision feeds the mistaken belief that developing the right strategy will enable a company to rocket past competitors. In reality, strategy is less than half the battle. .. In the majority of cases we estimate 70% the real problem isnt [bad strategy]. Its bad execution. Why CEOs Fail Ram Charan and Geoffrey Colvin Fortune (6/21/99)

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Executing Strategy in the Healthcare Environment Is Even More Challenging

Hospitals need a clearly articulated strategy to effectively manage:

Increasing competition, consolidation, and new healthcare delivery strategies

Evolving regulatory standards and public policy

Conflicting needs from clinicians, administrators, government and regulatory agencies, insurance providers, and boards

Changing expectations of multiple customer groups (e.g., patients, referring physicians, payers)
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BSCol Offers a Variety of Services to Achieve Our Mission

Our Mission: To facilitate the worldwide awareness, use, enhancement, and integrity of the Balanced Scorecard as a value-added management process

Conferences Create Awareness Standards & Certification

Publications

Management Consulting

Ensure Integrity Partner Programs Enhance the Approach

Support the Use Training

Design Communities

Best Practice Program

Balanced Scorecard History

Measurement and Reporting

1992

Alignment and Communication

1996

Enterprise-wide Strategic Management

2000

Articles in Harvard Business Review:

Acceptance and Acclaim:

The Balanced Scorecard Measures that Drive Performance January - February 1992 Putting the Balanced Scorecard to Work September - October 1993 Using the Balanced Scorecard as a Strategic Management System January - February 1996 1996

The Balanced
Scorecard is translated into 18 languages

Selected by Harvard
Business Review as one of the most important management practices of the past 75 years.

2000

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The Results are Widespread

CIGNA Property & Casualty
1993 1998 $275 loss Top Quartile $3b spin-off

Chemical Bank
Profits

1993 1998

X 20X

Brown & Root Engineering (Rockwater)

1993 1996 Losing money # 1 in Niche (growth & profits)

ATT Canada
1995 1998 1999 $300M loss Customer base doubles $7b spin-off

Saint Marys/ Duluth Clinic Health System

Measure Operating Margin Days in AR Overall Hospital Point Satisfaction Improvement $18M since BSC implementation Decrease 16 days 15%

Southern Citrus
1995 1998

Shipments on Spec On Time Delivery Rework Absenteeism Employee Turnover Cost per Pound ()

70% 89% 6% 10% 100 28.8

97% 98% 2% 1% 31 18.9

Duke Childrens Hospital

Measure Operating Margin Family Satisfaction Length of Stay Readmission Rate 25 11 25 63 % Improvement

Mobil US Marketing & Refining

Competitive Rank (out of 7,profit)

1993 1995 1996 1997 1998

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#6 #1 #1 #1 #1
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Overview of the Balanced Scorecard

Organizations Often Have A Gap Between Strategy and Action

Strategy Is a Step In a Continuum
MISSION Why we exist VALUES Whats important to us VISION What we want to be STRATEGY Our game plan

STRATEGIC OUTCOMES
Satisfied SHAREHOLDERS Delighted CUSTOMERS Efficient and Effective PROCESSES Motivated & Prepared WORKFORCE

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The Balanced Scorecard Is A Bridge To Close That Gap

Strategy Is a Step In a Continuum
MISSION Why we exist VALUES Whats important to us VISION What we want to be STRATEGY Our game plan BALANCED SCORECARD Implementation & Focus STRATEGIC INITIATIVES What we need to do PERSONAL OBJECTIVES What I need to do

STRATEGIC OUTCOMES
Satisfied SHAREHOLDERS Delighted CUSTOMERS Efficient and Effective PROCESSES Motivated & Prepared WORKFORCE

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What Is a Balanced Scorecard?

At the highest level, the Balanced Scorecard is a framework that helps organizations put strategy at the center of the organization by translating strategy into operational objectives that drive both behavior and performance.

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The Balanced Scorecard Provides a Four Perspective Framework to Translate Strategy Into Operational Terms
The Vision

Financial Perspective If we succeed, how will we look to our shareholders?

Profitability Growth Shareholder Value

u Measurement is the language that gives clarity to vague concepts u Measurement is used to communicate, not simply to control

Customer Perspective To achieve our vision, what customer needs must we serve?
Price Service Quality

Internal Perspective
To satisfy our Cycle Time customers and shareholders, at which Productivity Cost business processes must we excel?

Learning and Growth To excel in our processes, what must our organization learn?
New Skills Continuous Improvement Intellectual Assets

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A Good Balanced Scorecard Strategy Map Tells the Story of Your Strategy
The Revenue Growth Strategy Improve stability by broadening the sources of revenue from current customers The Productivity Strategy Improve operating efficiency by shifting customers to more cost-effective channels of distribution
Improve Returns Broaden Revenue Mix Improve Operating Efficiency

Financial Perspective

Increase Customer Confidence in Our Financial Advice

Increase Customer Satisfaction Through Superior Execution

Customer Perspective

Internal Perspective
Understand Customer Segments Develop New Products Cross-Sell the Product Line Shift to Appropriate Channel Provide Rapid Response

Minimize Problems

Increase Employee Productivity

Learning Perspective

Develop Strategic Skills

Access to Strategic Information

Align Personal Goals

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A Good Balanced Scorecard Tells the Story of Your Strategy Through A Set of Linked Cause and Effect Hypotheses
Strategic Objectives
Financial
F1 - Improve Returns F2 - Broaden Revenue Mix F3 - Reduce Cost Structure

Strategic Measurements
(Lag Indicators) u Return on Investment u Revenue Growth u Deposit Service Cost Change (Lead Indicators) u Revenue Mix

Customer

C1 - Increase Customer Satisfaction With Our Products & People C2 - Increase Satisfaction After the Sale

u Share of Segment

u Depth of Relation

u Customer Retention

u Satisfaction Survey

I1 - Understand Our Customers I2 - Create Innovative Products

u New Product Revenue u Cross-Sell Ratio u Channel Mix Change u Service Error Rate u Request Fulfillment Time

u Product Development Cycle u Hours with Customers

Internal

I3 - Cross-Sell Products I4 - Shift Customers to CostEffective Channels I5 - Minimize Operational Problems I6 - Responsive Service

Learning

L1 - Develop Strategic Skills L2 - Provide Strategic Info L3 - Align Personal Goals

u Employee Satisfaction u Revenue per Employee

u Strategic Job Coverage Ratio u Strategic Info Availability Ratio u Personal Goals Alignment (%)

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Theme Example from Southwest Airlines Balanced Scorecard

Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives

Strategic Theme: Operating Efficiency

Financial Profitability Lower Costs Customer Flight is on time Lowest prices Increase Revenue

Statement of what strategy must achieve and whats critical to its success

How success in achieving the strategy will be measured and tracked

The level of performance or rate of improvement needed

Key action programs required to achieve objectives

Objectives
Internal Fast ground turnaround

Measurement

Target

Initiative

Fast ground
turnaround

On Ground Time On-Time

Departure

30 Minutes 90%

Cycle time
optimization

Learning Ground crew alignment

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The Balanced Scorecard Supports a Complete Strategic Management System by Linking Long Term Strategy and Measures to More Tactical Planning & Budgeting
Longer Term (3-5 year) View
Mission Vision Themes/ Goals Objectives Measures % patient care revenue growth Targets 02 xx% 03 xx% 04 xx%

Shorter Term (Annual) View

Initiatives Milestones Accountable Resource Alloc.

ABC Hospital System will provide excellent care in our selected specialty areas while maintaining margin and growing share

Serve the needs of patients excellently

Customer Financial

Grow revenue from patient care

1. Strengthen innovation 2. Improve customer satisfaction 3. Assure consistent high quality 4. Provide operational excellence

Meet access expectations

3rd available appointment (% met)

02 xx% 03 xx% 04 xx%

Access project

Meet monthly target

Mkg. Team

$ xxxx

Internal

Assure optimum patient mix

% patient mix

02 = 39% 03 = 40% 04 = 41%

02 xx% 03 xx% 04 xx%

Mix Margins Project

Complete by 2003

Dept. Chairs

$ xxxx

Learning

Promote ABC Culture Model

Employee Satisfaction Survey

Evaluate survey response

Deadline met

HR Committee

$ xxxx

Strategic

Tactical

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The Mobil Story (US Marketing & Refining): 1993-1998

Growth Strategy Improve quality of revenue by understanding customer needs and differentiating ourselves accordingly. accordingly.
Financial Perspective

Productivity Strategy Maximize utilization of existing assets and integrate the business to reduce total delivered cost.

Return on Capital
Increased from 6% to 16%

Competitive Position
(profitability) From last (1993) to first (95, 96, 97, 98)

Volume Growth
Exceeds industry by 2-2.5% annually Customer Perspective

Reduce Cash Expenses

Down by 20%

Improve Cash Flow

From -$500 M/Yr to +$700 M/Yr

Customer Satisfaction
Continuous improvement for 3 consecutive years Product Innovation Customer Management

Internal Perspective

Speedpass Active
Increasing at rate of 1M per year

Dealer Quality
Continuous improvement for 4 consecutive years

Perfect Orders
Continuous improvement for 4 consecutive years Good Neighbor

Operational Excellence

Quality
Continuous improvement for 4 consecutive years Learning & Growth Perspective
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Capacity Utilization
Annual value of lost yield reduced from $175m to $50m

Safety
Lost work incidents down from 150 to 30 per year

Environmental
Number of incidents reduced by 63%

Motivated & Prepared Workforce

Strategic Awareness
Annual employee survey shows awareness of strategy increased from 20% to 80%
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Case Study: St. Marys/Duluth Clinic Health System

SMDC Health System Overview

Merged Several Organizations Merged Cultures

St. Marys Medical Center- 380 beds Miller Dwan Medical Center 166 beds St. Marys Hospital of Superior 55 beds Pine Medical Center- 30 acute beds, 86 skilled nursing beds 25 community clinics throughout northern Minnesota, Wisconsin, and Upper Michigan

More than 4,000 employees 352 employed physicians representing 40 medical specialties Catholic and non-Catholic hospitals

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SMDC Developed A Strategic Plan As A First Step As A Newly Merged Organization

A very comprehensive plan 350+ initiatives! People not clear on their roles to execute the strategy:
Executive Leadership Team mired in operational fire-fighting and day-to-day details Board of Directors unfocused and confused about their role Management and employees did not understand the strategic direction of the organization

Gradual decline of margin

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The CEO Read The BSC Book And Decided To Implement SMDCs BSC By Themselves

Progress
Began tracking organizational performance on more than a financial basis

Pitfalls
Functioned primarily as a new kind of dashboard report Rather than a new way of running the organization, BSC became one more thing to do

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FY1999 CORPORATE LEVEL BALANCED SCORECARD

Financial
Indicator
Adjusted Discharges

Customer
Indicator
Patient Satisfaction Employer Satisfaction HEDIS Indicators

Operational
Stat -us C Indicator Target Stat -us C
Arranging Determine outpatient phone model, Care
conduct pilots

People
Indicator
Cultural Development

Technical
Stat -us C Indicator
Quality Improvement

Target
23,890

FY99 Final
23,592

Target
Choose key focus areas for improvement Complete survey development in CY 1999 Select indicators for development plan Complete reporting process and inventory Complete survey in CY 1999

Target
Complete communications strategy Complete physician survey Complete employee survey Complete plan to maintain Catholicity Accomplish pay equity

Target
Implement system-wide governance structure Complete external quality report in CY 1999 Meet or exceed standards for SMDC accreditation

Status C

Encounters 912,188 892,243

CY

Determine outpatient model for registration & scheduling

CY

Cost per Adjusted Discharge Cost per Encounter

6,964

7,535

Providing Determine model for patient delivery Care

system for clinical divisions

215

252

Community Service Community Awareness Market Share

Complete system strategy for ambulatory surgery

Information Technology

Complete IT strategic plan in CY 1999 Complete Y2K compliance by 12/99

CY

Operating Margin

2.0

1.3

CY

Excess Margin

3.8

3.3

Complete baseline

Days Cash on Hand Days in Accounts Receivable Return on Investment

103.6 77.7

108.6 82.8

Documenting and Tracking Care Innovation and Program Development

Complete plan for decentralized coding and charge entry

Employee Relations Strategy

CY

Complete feasibility study for a womens health center

Synchronize employee benefits

Medical Education & Research Facilities Planning

Complete report of funded grants and publications Complete Perkins & Will plan

Complete plan for a geriatrics program

3.4

2.9
C = task completed; CY = Calendar Year 1999 task; M = task modified Finance section: Target met; Target not met

The Strategy Map Evolved The BSC Process...and Drove SMDC Results

Value propositions provided clarity

Specialty Care Patients Referring Providers

Primary Care Patients

Payers

Customer Intimacy

Product Leadership

Operational Excellence

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The Strategy Map: Cause and Effect Relationships

What will drive margins?
Managed growth in high margin programs/service lines Attract targeted patient population through targeted referring physicians who value leading edge technology & expertise Ensure clinical excellence through leading edge programs and techniques in focused specialty areas Align research priorities to support leading programs and stay out front in treatment methods

Financial
Maximize High Margin Opportunities Implement Managed Growth

Strong Financial Base

How?

Customer
Leading Edge Technology

Specialty Care Patients Referring Providers Leading Edge Expertise Continually Develop Clinical Excellence

What will the internal focus be?

Internal
Develop Leading Edge Programs/ Techniques

Align Research Priorities

Will our people be prepared to do that?

Yes, with appropriate technology Yes, by recruiting critical expertise

Learning & Growth

Implement Technology to Support Processes and Programs
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Develop Critical Staffing Resource Plans

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FY 2002 Strategy Map

Vision: SMDC is a values-driven, integrated organization which will be recognized for excellence in customer service, quality patient care, financial strength, and support of community health
FINANCIAL
To financially sustain our Mission, on what must we focus?

Build a Strong Financial Base to Sustain our Mission and Achieve our Vision Implement Managed Deliver Cost Efficient Care Growth

Maximize High Margin, Market Opportunities 1

CUSTOMER
To achieve our Vision, how should we appear to our customers?

Primary Care Patients

Excellent service Personal relationships

Specialty Care Patients / Referring Physicians

Leading edge technology Leading edge expertise Innovative programs

Payers
Low cost service

Provide Outstanding Customer Service

Continually Develop Clinical Excellence

Strive for Operational Excellence

INTERNAL
To satisfy our customers, at which operational processes must we excel? Easy Access
On-Time Service Align research priorities with targeted growth areas

Clinical Practice Management

Optimize Staff Efficiency

Redesign operations for efficiency and effectiveness Develop state of the art techniques and programs

Strategic Program Development

LEARNING & GROWTH

How will we sustain our ability to change and improve?

Instill a Climate for Change

Clearly communicate expectations and accountabilities aligned with strategic priorities Instill a climate of pride in the organization & commitment to the mission

Implement Technology
Implement technology to support internal processes

Skill & Competency Development

Develop Critical Staffing Resource Plans Develop a Quality Mindset

SMDC Ensured Alignment Between Their Planning Process and Balanced Scorecard Program At budget time, the Executive Team:

Revisits the strategy map to reaffirm strategic

objectives Reviews measures to assure they are truly measuring progress against the objectives Sets targets for next fiscal year Develops and funds initiatives to deliver the targets

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The Balanced Scorecard Introduced A New Era Of Accountability and Strategic Direction at SMDC Monthly executive leadership Strategic Operating Review

meetings: review monthly performance indicators discuss progress against initiative completion majority of the meeting spent discussing strategic issues VP-level weekly initiative progress meetings Line management and employees attend weekly management briefing meetings

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SMDC Achieved Outstanding Results Using the Balanced Scorecard

Aligned the entire organization through a common set of well understood objectives Created a platform for developing a single organizational culture Increased executive, management, and physician/staff accountability with clearly defined targets Utilized as an effective communication tool for governance, administration, management, and employees $20 million dollar financial turnaround and return to profitability

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Implementing the Balanced Scorecard At Your Hospital

BSCol Offers The Brand, Know-How, and Proven Track Record To Help Organizations Achieve Results
Conferences Create Awareness Standards & Certification Management Consulting Publications

Ensure Integrity Partner Programs Enhance the Approach

Support the Use Training

Design Communities

Best Practice Program

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Rapid Deployment Case Study: Major Federal Organization

Need Definition of Corporate strategy Rapid roll-out and broad reach Develop internal capabilities to sustain momentum Approach Develop Corporate Balanced Scorecard Define template for rolling out BSC Train subordinate units Streamline project management Quality checks Online education Benefits Clear guidance from Corporate Active involvement from client teams Rapid deployment with minimal resources Quality control
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To Learn More About The Balanced Scorecard, Join BSC Online at www.bscol.com
Benefits

Educate yourself on the Balanced Scorecard Learn from Best Practice Companies Keep informed of cutting edge thinking from the experts

What you get

Balanced Scorecard e-learning modules by Dave Norton Multi-media cases featuring our Hall of Fame success stories Free Monthly Netconferences addressing BSC issues Answers to Frequently Asked Questions A monthly e-mail briefing from Drs. Kaplan and Norton

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Questions and Comments