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

1. Using the Balanced Scorecard to Build A Strategy-Focused Healthcare Organization For more information, contact: Kate O’Brien 781.402.1143 Kobrien@bscol.com

2. Today’s Agenda • Introduction to Balanced Scorecard Collaborative • Overview of the Balanced Scorecard – Background and Concepts • Case Example – Saint Mary’s/Duluth Clinic Health System • Implementing the Balanced Scorecard At Your Hospital • Questions and Answers

3. Introduction to Balanced Scorecard Collaborative

4. 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 age’s 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 isn’t [bad strategy]…. It’s bad execution.” Why CEO’s Fail Ram Charan and Geoffrey Colvin Fortune (6/21/99)

5. 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)

6. Conferences Publications Create Awareness Standards & Certification Management Consulting Ensure Integrity Support the Use Training Partner Programs Enhance the Approach Design Communities Best Practice Program 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”

7. 2000 1992 1996 • Articles in Harvard Business Review: • “The Balanced Scorecard — Measures that Drive Performance” January - February 1992 • “Putting the Balanced Scorecard to Work” September - October 1993 • “Using the Balanced Scorecard asa Strategic Management System” January - February 1996 • Acceptance and Acclaim: • “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.“ 1996 2000 Balanced Scorecard History Enterprise-wide Strategic Management Measurement and Reporting Alignment and Communication

8. The Results are Widespread CIGNA Property & Casualty Chemical Bank 1993 – $275 loss 1998 – Top Quartile – $3b spin-off Profits 1993 – X 1998 – 20X Brown & Root Engineering (Rockwater) ATT Canada 1993 – Losing money 1996 – # 1 in Niche (growth & profits) 1995 – $300M loss 1998 – Customer base doubles 1999 – $7b spin-off Saint Mary’s/ Duluth Clinic Health System 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 Children’s Hospital Mobil US Marketing & Refining Competitive Rank (out of 7,profit) 1993 1995 1996 1997 1998 #6 #1 #1 #1 #1

9. Overview of the Balanced Scorecard

10. Organizations Often Have A Gap Between Strategy and Action Strategy Is a Step In a Continuum MISSION Why we exist VALUES What’s important to us VISION What we want to be STRATEGY Our game plan STRATEGIC OUTCOMES SatisfiedSHAREHOLDERS Delighted CUSTOMERS Efficient and EffectivePROCESSES Motivated & PreparedWORKFORCE

11. MISSION Why we exist VALUES What’s 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 SatisfiedSHAREHOLDERS Delighted CUSTOMERS Efficient and EffectivePROCESSES Motivated & PreparedWORKFORCE The Balanced Scorecard Is A Bridge To Close That Gap Strategy Is a Step In a Continuum

12. 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.

13. The Balanced Scorecard Provides a Four Perspective Framework to Translate Strategy Into Operational Terms The Vision Financial Perspective • Profitability • Growth • Shareholder Value “If we succeed, how will we look to our shareholders?” Customer Perspective • Measurement is the language that gives clarity to vague concepts • Measurement is used to communicate, not simply to control “To achieve our vision, what customer needs must we serve?” • Price • Service • Quality Internal Perspective “To satisfy our customers and shareholders, at which business processes must we excel?” • Cycle Time • Productivity • Cost Learning and Growth • New Skills • Continuous Improvement • Intellectual Assets “To excel in our processes, what must our organization learn?”

14. A Good Balanced Scorecard Strategy Map Tells the Story of Your Strategy The Revenue Growth Strategy The Productivity Strategy “Improve stability by broadening the sources of revenue from current customers” “Improve operating efficiency by shifting customers to more cost-effective channels of distribution” Improve Returns Financial Perspective Improve Operating Efficiency Broaden Revenue Mix 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 Align Personal Goals Access to Strategic Information

15. A Good Balanced Scorecard Tells the Story of Your Strategy Through A Set of Linked Cause and Effect Hypotheses Strategic Measurements StrategicObjectives (Lag Indicators) (Lead Indicators) • Return on Investment • Revenue Growth • Deposit Service Cost Change • Revenue Mix F1 - Improve Returns F2 - Broaden Revenue Mix F3 - Reduce Cost Structure Financial C1 - Increase Customer Satisfaction With Our Products & People C2 - Increase Satisfaction “After the Sale” • Share of Segment • Customer Retention • Depth of Relation • Satisfaction Survey Customer I1 - Understand Our Customers I2 - Create Innovative Products I3 - Cross-Sell Products I4 - Shift Customers to Cost-Effective Channels I5 - Minimize Operational Problems I6 - Responsive Service • New Product Revenue • Cross-Sell Ratio • Channel Mix Change • Service Error Rate • Request Fulfillment Time • Product Development Cycle • Hours with Customers Internal • Strategic Job Coverage Ratio • Strategic Info Availability Ratio • Personal Goals Alignment (%) L1 - Develop Strategic Skills L2 - Provide Strategic Info L3 - Align Personal Goals • Employee Satisfaction • Revenue per Employee Learning

16. Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives Statement of what strategy must achieve and what’s critical to its success How success in achieving the strategy will be measured and tracked Strategic Theme: Operating Efficiency The level of performance or rate of improvement needed Key action programs required to achieve objectives Financial Profitability Lower Costs Increase Revenue Customer Flight is on time Lowest prices Objectives Measurement Target Initiative Internal • On Ground Time • On-Time Departure • 30 Minutes • 90% • Cycle time optimization • Fast ground turnaround Fast ground turnaround Learning Ground crew alignment Theme Example from Southwest Airlines’ Balanced Scorecard

17. 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 Shorter Term (Annual) View Vision Mission Themes/ Goals Objectives Initiatives Milestones Accountable Targets Measures Resource Alloc. • Grow revenue from patient care • % patient care revenue growth • ‘02 xx% • ‘03 xx% • ‘04 xx% Financial • Meet access expectations • 3rd available appointment (% met) • Access project • Meet monthly target • Mkg. Team • $ xxxx • ‘02 xx% • ‘03 xx% • ‘04 xx% Customer 1. Strengthen innovation 2. Improve customer satisfaction 3. Assure consistent high quality 4. Provide operational excellence ABC Hospital System will provide excellent care in our selected specialty areas while maintaining margin and growing share Serve the needs of patients excellently • Assure optimum patient mix • % patient mix • ’02 = 39% • ’03 = 40% • ’04 = 41% • Mix Margins Project • Complete by 2003 • Dept. Chairs • $ xxxx Internal • Promote ABC Culture Model • Employee Satisfaction Survey • ‘02 xx% • ‘03 xx% • ‘04 xx% • Evaluate survey response • Deadline met • HR Committee • $ xxxx Learning Tactical Strategic

18. The Mobil Story (US Marketing & Refining): 1993-1998 Productivity Strategy Maximize utilization of existing assets and integrate the business to reduce total delivered cost. Growth Strategy Improve quality of revenue by understanding customer needs and differentiating ourselves accordingly. Financial Perspective Return on Capital Increased from 6% to 16% Competitive Position(profitability) From last (1993)to first (95, 96, 97, 98) Volume Growth Reduce Cash Expenses Improve Cash Flow Exceeds industry by 2-2.5% annually Down by 20% From -$500 M/Yr to +$700 M/Yr Customer Perspective Customer Satisfaction Continuous improvement for 3 consecutive years Internal Perspective Product Innovation Customer Management Speedpass Active Dealer Quality Perfect Orders Increasing at rate of 1M per year Continuous improvement for 4 consecutive years Continuous improvement for 4 consecutive years Operational Excellence Good Neighbor Quality Capacity Utilization Safety Environmental Lost work incidents down from 150 to 30 per year Continuous improvement for 4 consecutive years Annual value of lost yield reduced from $175m to $50m Number of incidents reduced by 63% Learning & Growth Perspective Motivated & Prepared Workforce Strategic Awareness Annual employee survey shows awareness of strategy increased from 20% to 80%

19. Case Study: St. Mary’s/Duluth Clinic Health System

20. Merged Several Organizations St. Mary’s Medical Center- 380 beds Miller Dwan Medical Center - 166 beds St. Mary’s 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 Merged Cultures More than 4,000 employees 352 employed physicians representing 40 medical specialties Catholic and non-Catholic hospitals SMDC Health System Overview

21. 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

22. The CEO Read The BSC Book And Decided To Implement SMDC’s 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

23. FY1999 CORPORATE LEVEL BALANCED SCORECARD Financial Customer Operational People Technical Indica- Tar- FY99 Indica- Target Stat Indica- Target Stat Indica- Target Stat Indica- Target Stat- tor get Final tor -us tor -us tor -us tor us 23,890 23,592 Choose key Determine outpatient Complete Implement Adjusted Patient Arranging Cultural Quality C C C C focus areas phone model, communi- system-wide Discharges Satis- Care Develop- Improve- for conduct pilots cations governance faction ment ment improve- strategy structure ment 912,188 892,243 Complete Determine outpatient Complete Complete Encounters Employer CY C C CY survey model for physician external quality Satis- develop- registration & survey report in CY faction ment in CY scheduling 1999 1999 6,964 7,535 Select Determine model for Complete Meet or exceed Cost per HEDIS Providing M C C C indicators patient delivery employee standards for Adjusted Indicators Care for system for clinical survey SMDC Discharge develop- divisions accreditation ment plan 215 252 Complete Complete system Complete Complete IT Cost per Com- Informa- C C C CY reporting strategy for plan to strategic plan Encounter munity tion process and ambulatory surgery maintain in CY 1999 Service Technol- inventory Catholic- ogy ity 2.0 1.3 Complete Complete plan for Accom- Complete Y2K Operating Commun- Docu- Employee CY C C CY surve y in decentralized coding plish “pay compliance by Margin ity Aware- menting Relations CY 1999 and charge entry equity” 12/99 ness and Strategy Tracking Care 3.8 3.3 Complete Complete feasibility Synchro- Complete Excess Market Innova- Medical C C C C baseline study for a women’s nize report of Margin Share tion and Education health center employee funded grants Program & Research benefits and Develop- publications ment 103.6 108.6 Complete plan for a Complete Days Cash Facilities C M geriatrics program Perkins & Will on Hand Planning plan 77.7 82.8 Days in Accounts Receivable 3.4 2.9 Return on Investment “C” = task completed; “CY” = Calendar Year 1999 task; “M” = task modified Finance section : Target met ; Target not met

24. The Strategy Map Evolved The BSC Process...and Drove SMDC Results Value propositions provided clarity Primary Care Patients Specialty Care Patients Referring Providers Payers Customer Intimacy Product Leadership Operational Excellence

25. The Strategy Map: Cause and Effect Relationships Financial Strong Financial Base • What will drive margins? • Managed growth in high margin programs/service lines • How? • Attract targeted patient population through targeted referring physicians who value leading edge technology & expertise • What will the internal focus be? • 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 • Will our people be prepared to do that? • Yes, with appropriate technology • Yes, by recruiting critical expertise Implement Managed Growth Maximize High Margin Opportunities Customer Specialty Care Patients Referring Providers Leading Edge Technology Leading Edge Expertise Continually Develop Clinical Excellence Internal Develop Leading Edge Programs/ Techniques Align Research Priorities Learning & Growth Implement Technology to Support Processes and Programs Develop Critical Staffing Resource Plans

26. 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 Deliver Cost Efficient Care Implement Managed Growth Maximize High Margin, Market Opportunities 1 Primary Care Patients Specialty Care Patients / Referring Physicians Payers CUSTOMER To achieve our Vision, how should we appear to our customers? Excellent service Personal relationships Leading edge technology Leading edge expertise Innovative programs Low cost service Provide Outstanding Customer Service Strive for Operational Excellence Continually Develop Clinical Excellence Clinical Practice Management Optimize Staff Efficiency INTERNAL To satisfy our customers, at which operational processes must we excel? Align research priorities with targeted growth areas Redesign operations for efficiency and effectiveness Easy Access On-Time Service 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 Implement Technology Skill & Competency Development Implement technology to support internal processes Develop Critical Staffing Resource Plans Develop a Quality Mindset Clearly communicate expectations and accountabilities aligned with strategic priorities Instill a climate of pride in the organization & commitment to the mission

27. 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

28. 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

29. 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

30. Implementing the Balanced Scorecard At Your Hospital

31. BSCol Offers The Brand, Know-How, and Proven Track Record To Help Organizations Achieve Results Conferences Publications Create Awareness Standards & Certification Management Consulting Ensure Integrity Support the Use Training Partner Programs Enhance the Approach Design Communities Best Practice Program

32. 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

33. 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

34. Questions and Comments