Balanced Scorecards Revealed

The following is reprinted with permission from strategicplanningMD.

As simple a concept as balanced scorecards are, organizations still have difficulty implementing them effectively. Although the fundamental purpose of a balanced scorecard is to increase the organization's focus on execution and results by measuring those things that truly matter to the organization, some balanced scorecards become so crammed with data that they lose all meaning.

The four original balanced scorecard categories are: finance; internal business processes; learning and growth; and customer. The critical category is finance, which provided Robert Kaplan, PhD, and David Norton, DBA — the creators of the balanced scorecard, which is now a staple of any strategic planning methodology — the impetus for creating the tool in the early 1990s. According to Drs. Kaplan and Norton [in their book, "The Balanced Scorecard: Translating Strategy into Action:"]

"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

The financial category of the balanced scorecard encourages the identification of a few relevant high-level financial measures. In particular, you should choose measures that help answer the question, "How do we look to our stakeholders?" In general, you should have no more than five financial measures in your balanced scorecard.

Measures for this category might include:

•    Days of cash on hand
•    Days in accounts receivable
•    Return on capital
•    Net operating margin
•    Gross to net ratio
•    Bad debt

Today, with such an emphasis on maintaining financial stability, it is easy to create an "unbalanced" situation with regard to the other perspectives. As such, it is easy for the financial category to overwhelm the others if you load it up with all sorts of irrelevant metrics. Choose your measures carefully and make certain that your financial category in your balanced scorecard truly represents the top-level financial performance measures.

Internal business processes
The internal business processes category of the balanced scorecard is all about key performance indicators. A KPI is a metric associated with a key business process. For a KPI to be included in the balanced scorecard, it must help answer the question, "What must we excel at?" In general, you should have no more than five internal business process measures in your balanced scorecard.

Measures for this category might include:

•    Average length of stay
•    Core measure compliance
•    Readmission rates
•    Adverse events
•    Harm events
•    Operating room utilization
•    Emergency department left without being seen

Key performance indicators differ from strategic plan objectives in that KPIs are being monitored for consistent performance, while objectives list a target that the organization is trying to achieve. For instance, average length of stay can be a key performance indicator or an objective, depending on the organization's focus. Let's say that the current ALOS is 4.65 days and that the hospital has established an upper specification limit of 4.75 days. In other words, as long as the ALOS is 4.75 days or less, the hospital is satisfied with the organization's performance. The hospital is not actively trying to reduce ALOS; rather, it is monitoring ALOS performance to ensure it doesn't rise to an unacceptable level. In this scenario, average length of stay is a key performance indicator.

But now let's say that the organization has established a new target for ALOS and wants to reduce this metric to 4.25 days. The hospital is no longer monitoring performance; it is actively seeking to improve performance. Thus, average length of stay is now an organizational objective.

More often than not, the internal business processes category of your balanced scorecard will be populated by key performance indicators, rather than objectives. It is these KPIs in the internal business processes category that lets you know that the hospital is running well.

Learning and growth
The learning and growth category of the balanced scorecard focuses on the people in the organization and answers the question, "Can we continue to improve and create value?" In general, you should have no more than five learning and growth measures in your balanced scorecard.

Measures for this category might include:

•    Employee turnover
•    Employee satisfaction
•    Premium labor costs
•    Training and learning opportunities
•    Internal promotion rate
•    Absenteeism  

Learning and growth includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people — the only repository of knowledge — are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization.

Drs. Kaplan and Norton emphasize that "learning" is more than "training;" it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call "high performance work systems."

The customer category of the balanced scorecard examines metrics related to patients and physicians. Specifically, this category answers the question, "How do customers see us?" In general, you should have no more than five customer measures in your balanced scorecard.

Measures for this category might include:

•    Inpatient satisfaction
•    Outpatient satisfaction
•    ED satisfaction
•    Physician satisfaction
•    Likelihood to recommend
•    Market share

These are leading indicators of future performance; if customers are not satisfied, they will eventually find other health care providers to meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good.

For many hospitals and healthcare providers, the customer category has become the most important category in the balanced scorecard, particularly as it relates to physicians, as the economic engine is often driven by the hospital's ability to attract a quality medical staff and create referrals from primary care providers. As such, many strategic plans have robust objectives, strategies, and tactics aimed at growing the physician base.

Nonetheless, successful organizations realize that it takes balance to achieve long-term positive results, which means that they can't allow other balanced scorecard categories to take a back seat to the customer category any more than the customer category can take a back seat to the finance category.

After all, the balanced scorecard is all about balance. Each of the four categories — no matter what you call them — is no more or less important than the others.

More Articles on strategicplanningMD:

Do You Know Your Strategic Planning Terminology?
The Purpose of Strategic Planning

The Definition of Strategic Planning

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