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Concept Overview & Implementation Guidance

BALANCED SCORECARDS FOR SMALL RURAL HOSPITALS: Concept Overview & Implementation Guidance
Produced by the Mountain States Group, Inc. via funding provided by the United States Department of Health and Human Services, Program Support Center, Contract Number #282-98-
0010, Task Order #8

BALANCED SCORECARDS FOR SMALL RURAL HOSPITALS: Concept Overview & Implementation Guidance



A. Introduction


B. Brief History of Balanced Scorecard Efforts


C. Background


ƒ Definition of Balanced Scorecard


ƒ Traditional Perspectives


ƒ Balances


D. Modifying BSC Approach


ƒ Basic Assumptions


ƒ Principles – Readiness Assessment


Engaging/Involving Leadership


Education of Internal/External Stakeholders


Data: Gathering, Processing, & Benchmarking


Building Long-term Sustainability


E. Essential Components of Rural BSC Model


ƒ Readiness Assessment


ƒ Planning


ƒ Technical Implementation


ƒ Organizational Integration


ƒ Operations/Modification


F. Conclusion


Appendices 1. Tools/Performance Aids 2. BSC Example 3. Terminology Definitions 4. Additional Resources


BALANCED SCORECARDS FOR SMALL RURAL HOSPITALS: Concept Overview & Implementation Guidance
A. INTRODUCTION The purpose of this publication is to describe the process of implementing a Balanced
Scorecard (BSC) initiative in a small rural hospital setting, including how to identify if an organization is ready for the implementation phase, what the various steps are in the process, what key principles need to be considered that are common to rural hospitals, and what a rural hospital Balanced Scorecard would look like.
This effort was undertaken because of the belief that the Balanced Scorecard can be useful and adaptable to small rural hospitals, but that the process and approach must be tailored to their requisite resources (time, expertise, money) in order for implementation to be practical and successful. Additionally, this publication is an attempt to describe a more relevant implementation model designed to better fit the needs of rural hospitals.
B. BRIEF HISTORY OF BALANCED SCORECARD EFFORTS Since the early 1990s when Robert Kaplan, a professor at Harvard University and David
Norton, a consultant from the Boston area, developed the Balanced Scorecard, there have been many different Balanced Scorecard applications in all types of industries both in the United States and internationally. Several articles and books have been written on the Balanced Scorecard methodology and there are a variety of software products to assist and expedite implementation of this performance measurement process. Historically, performance improvement systems have focused on measurements and indicators alone. What is unique about the Balanced Scorecard approach, in contrast to other methods, is that it links strategy with

performance and goes beyond the traditional financial metrics in determining whether or not an organization has been successful. Integral to BSC is the notion that an organization’s strategies and their execution are among the most important factors in performance improvement.
The shift from an industrialized economy to a knowledge/information economy has necessitated a change in how value is determined. According to management researchers, value is now associated more with intangible assets (employees/knowledge) than traditional tangible assets (equipment/plant). Instead of focusing solely on historical financial data, new management concepts were needed to more effectively assess how well an organization was performing. Only 35percent of respondents to a Performance Measurement Survey rated their current performance measurement systems as effective or very effective (American Institute of Certified Public Accountants and Lawrence S. Maisel, 2001).
In 1999, a Fortune magazine story suggested that 70 percent of CEO failures came not as a result of poor strategy, but of poor execution. In addition, it is estimated that nine out of ten organizations fail to implement their strategies1.
Over the past twelve years, several methodologies have been developed in various industries to address the need for a more “balanced” way to assess and manage performance (e.g. Six Sigma, TQM, CQI, etc.). The fields of organizational development and human performance technology have blossomed in this decade, all focused on better methods to assess and manage performance in organizations.
The Balanced Scorecard (BSC) now has a documented history of successful implementation in several industries including healthcare. Benefits of implementation have included:
1 Balanced Scorecard: Step-by-Step: Maximizing Performance and Maintaining Results; Paul R. Niven; 2002; John Wiley & Sons, Inc., New York.

• increased financial returns; • greater employee alignment to overall goals; • improved collaboration; and • unrelenting focus on strategy. Most healthcare BSC implementations, such as those profiled in Kaplan and Norton’s literature, have occurred in urban centers that have larger and more specialized staff, IT capacity, and resources. Smaller hospitals in Arkansas, Michigan, Minnesota, Mississippi, and Pennsylvania have also used the BSC with promising outcomes. The challenge is to find a way to implement the Balanced Scorecard in small rural hospitals that is meaningful, relevant, and affordable.
C. BACKGROUND Definition of Balanced Scorecard
The Balanced Scorecard is a tool that translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system.2 The Balanced Scorecard is an approach for driving organizational improvement toward pre-selected goals which keeps track of progress through carefully selected measures. The Balanced Scorecard is also an integrated management system consisting of three components: 1) strategic management system, 2) communication tool, and 3) measurement system.3 It results in a carefully selected set of measures derived from and linked to an organization’s core strategies. The measures selected for the scorecard represent a tool for
2 Balanced Scorecard Collaborative. 3 Balanced Scorecard: Step-by-Step: Maximizing Performance and Maintaining Results; Paul R. Niven; 2002; John Wiley & Sons, Inc., New York.

leaders to use in communicating to employees and external stakeholders the outcomes and performance drivers by which the organization will achieve its mission and strategic objectives.
Companies are using the scorecard to: • clarify and update strategy; • communicate strategy throughout the company; • align unit and individual goals with strategy; • link strategic objectives to long term targets and annual budgets; • identify and align strategic initiatives; and to • conduct periodic performance reviews to learn about and improve strategy. Traditional Perspectives
There are a number of “balances” in the BSC, among which are the balance or equilibrium between four historical domains or perspectives considered to be mutually linked in terms of strategy and performance:
1. Learning and Growth Perspective 2. Internal Process Perspective 3. Customer Perspective 4. Financial Perspectives Paul Niven’s analogy of the Balanced Scorecard is that of a tree (see Figure 1). The Learning and Growth perspective are the roots, the trunk is the Internal Process perspective, Customers are the branches, and the leaves are the Financial perspective. Each perspective is interdependent on those below as well as those above. It is a continuous cycle of renewal and growth. Leaves (finances) fall to fertilize the ground and root system, which stimulates growth throughout the organization. In this analogy, learning and growth is the foundation on which all

other perspectives are built. For example, if a hospital assesses patient satisfaction and discovers patients aren’t satisfied (Customer Perspective), one of the strategies might be the implementation of employee training in the area of customer service (Learning & Growth Perspective). Improved customer service through a reduction of wait time in the emergency room (Internal Process Perspective) can ultimately improve utilization (Financial Perspective). Refer to Figure 2. There are definite cause and effects between and among each of the four perspectives. The key is to identify the right strategies.
Figure 1
Figure 2

Balances One of the reasons the Balanced Scorecard has been so successful is that it is a balanced approach. This balance includes: 1. Balance between financial and non-financial indicators of success 2. Balance between internal and external constituents of the organization 3. Balance between lag and lead indicators of performance Internal constituents might include employees whereas external constituents might include physician groups or insurers. Lag indicators generally represent past performance and might include customer satisfaction or revenue. Although these measures are objective and accessible, they lack any predictive power. Lead indicators are the performance drivers that lead to the achievement of lag indicators and often include the measurement of processes and activities. For example, ER wait time might represent a leading indicator of patient satisfaction. A Balanced Scorecard should contain a variety of different measures.
D. MODIFYING THE BALANCED SCORECARD APPROACH As stated earlier, a modified Balanced Scorecard approach is probably necessary for
small rural hospitals because of a lack of infrastructure in terms of information technology, staff time and expertise, resources to pay for consultants and ongoing expenses, and the practicality and meaningfulness of existing measures. The remainder of this document will focus on the basic assumptions and principles entailed in modifying the process, the actual components of a modified Balanced Scorecard process, and suggested performance indicators that could be incorporated into a rural hospital Balanced Scorecard. Figure 3 is an example of the Balanced Scorecard model described in this publication and adapted from Kaplan and Norton.

Figure 3
Financial Perspective “If we succeed, how will we
look to our community?”

Internal Process Perspective
“To satisfy our patients, which business and medical processes must we excel at?

Customer Perspective
“To achieve our mission, how must we look to our patients, medical staff, and community?”

Learning & Growth Perspective
“To achieve our mission, how must our organization learn and improve”

Basic Assumptions How does a rural hospital know that its strategies give attention to all aspects of performance? Do they overemphasize expense management versus revenue generation? Do they address the needs of all customers, including patients, physicians, and the community atlarge? Are internal processes improved to support quality and patient satisfaction goals? Are resources applied to filling the gaps in skills and knowledge among the staff?
Rural hospitals have many initiatives running concurrently, and at any point in time, it is often difficult to know the progress (percent completion) and even if they are continuing to move in

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