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Balanced Scorecard

The balanced scorecard is a new management concept which helps managers at all levels monitor results in their key areas. An article by Robert Kaplan and David Norton entitled "The Balanced Scorecard - Measures that Drive Performance" in the Harvard Business Review in 1992 sparked interest in the method, and led to their business bestseller, "The Balanced Scorecard: Translating Strategy into Action", published in 1996. There's nothing new about using key measurements to take the pulse of an organization. What's new is that Kaplan and Norton have recommended broadening the scope of the measures to include four areas:
financial performance, customer knowledge, internal business processes, learning and growth.

This allows the monitoring of present performance, but also tries to capture information about how well the organization is positioned to perform well in the future. Kaplan and Norton cite the following benefits of using the balanced scorecard:
Focusing the whole organization on the few key things needed to create breakthrough performance. Helping to integrate various corporate programs, such as quality, re-engineering, and customer service initiatives. Breaking down strategic measures to local levels so that unit managers, operators, and employees can see what's required at their level to roll into excellent performance overall.

Similarity to Hoshin Planning The balanced scorecard has strong similarities to Hoshin Planning or hoshin kanri, the organization-wide strategic planning system used widely in Japanese companies. Both seek breakthrough performance, alignment, and integrated targets for all levels. The balanced scorecard suggests which specific areas should be measured for a balanced picture, but this isn't contradictory to Hoshin Planning. One thing that the Japanese emphasize is "catchball", the process of give and take between levels that helps to define strategy in Japanese companies. The balanced scorecard method seems to be more of a one-way street -- the executive team creates the strategy, and it cascades down from there. One cautionary note You tend to get what you measure for, since people will work to achieve the explicit targets which are set. Dr. Deming feared this effect, noting that people would skew their work to meet particular incentive pay targets. For example, emphasizing traditional

financial measures tends to encourage short-term thinking - like rigging shipping schedules to make the monthly sales look good, or aggressively discounting to meet yearend targets. Kaplan and Norton, recognizing this, urge a more balanced set of measurements, which is good. Even so, people will work to achieve their scorecard goals, and may ignore important things which are not on the scorecard. Or, if the scorecard is not refreshed often enough, what looked like an important goal in January may not be very germane in June. Kaplan and Norton recognize these risks, and they don't pretend that they have said the final word on scorecards.
MOBIL OIL (now Exxon Mobil) leaped from last to first in profitability within its industry from 1993 to 1995a rank it maintained for the next four years. Cigna Insurance was losing $1 million a day in 1993, but within two years it was in the top quartile of profitability in its industry. Then in 1998 it spun off a $3.5 billion division. What's the key to these dramatic turnarounds? These companies attribute at least part of the solution to having implemented the Balanced Scorecard. Developed in the early 1990s, this valuation methodology converts an organization's value driverssuch as customer service, innovation, operational efficiency and financial performanceto a series of defined metrics. Companies record and analyze these metrics to help determine if they're achieving strategic goals. A fully implemented Scorecard cascades from the top levels of a company all the way down. Ultimately, each member of the organization works off a personal Scorecard, striving to achieve personal objectives based on measurements directly linked to the corporate strategy. It is ideal to implement the Balanced Scorecard throughout the enterprise because that framework helps foster alignment between business and IT, says David Norton, cocreator of the Scorecard and president of the Balanced Scorecard Collaborative in Lincoln, Mass. Still, the concept can work within an IT organization specifically. (See "Can IT Keep Score by Itself?," right.) The key difference when the Scorecard is implemented within IT as opposed to the entire company, says Norton, is that the "customer" is a user within the corporation, not an external consumer. Because the Balanced Scorecard requires every action to answer to established corporate goals, using the Scorecard within

IT can still help promote alignment and eliminate projects that contribute little or no strategic value. "It really changes the conversation between IT and business," says Linda Bankston, CIO of DuPont Engineering Polymers, a $2.5 billion division of DuPont Chemicals in Wilmington, Del. "The conversation is around strategy and impact, rather than just whether you can or can't do something." Nevertheless, installing the Balanced Scorecard within IT is a challenge. It changes the job approach of all employeesnot to mention how they're evaluated. CIOs need to take a number of necessary steps to properly lay the groundwork for a successful implementation. Prepare the organization for change. Devise the right metrics. Get buy-in at all levels. Plan to follow through to completion.
For Linda Bankston, CIO of DuPont Engineering Polymers, the Balanced Scorecard helps promote alignment.

Before jumping in and developing all sorts of metrics, sit down with the rest of the leadership team and define the overall strategy, says Norton. Strategy is typically articulated by four or five value drivers, or broad strategic goals, for the organization. The Hilton Hotel Corp., for example, gears its strategy and Scorecard framework around financial performance, customer service, efficient business processes, innovation, learning and growth. (See "Why Full Rollout Isn't Necessary," right.) It's also critical to designate a Scorecard champion, says Norton. When implementing the Scorecard within an IT department, that champion should be someone other than the CIO. "The CIO is responsible for using and driving the Scorecard," says Norton. "But you need an individual from within ITmaybe whomever's responsible for planning within IT, or someone responsible for preparing your finance or budgeting systemto be assigned responsibility [for the Scorecard]." To succeed in the role, the Scorecard champion must be capable of strategic thinking, understand the strategic view of the company and have the ear of the CIO, says Al Grasso, former senior vice president and CIO of The Mitre Corp., a nonprofit systems development group based in Bedford, Mass. "When he has the ear of the decision maker in the organization, he can effect change," says Grasso, who implemented the Scorecard at Mitre's New Jersey operations facility.

Why Full Rollout Isn't Necessary

The Scorecard can help IT by providing strategic guidelines, even if IT isn't directly subjected to its scrutiny Read More

Bill Schiemann, CEO of Metrus Group, a Somerville, N.J., consultancy that works with the Balanced Scorecard, emphasizes that implementation has to start at the top with the CIO (if done within IT) or CEO (if done companywide) and the most senior levels of that person's group. "We find it critical to [agree] upon a set of drivers and results of their business strategy that can be measured," he says. "What we've seen not work at all is delegating the whole thing to a committee to go off and work out measures and come back for a blessing."

Set the Right Metrics

Once the groundwork is set, the next step is to identify both the right metrics and the right amount of metrics with

which to track the company's progress toward its organizational goals. At FirstEnergy's $5 billion utilities division in Morristown, N.J. (formerly GPU Energy), one strategic goal is to create "raving fans" among its customers. Its other value drivers are reliability, finance and creation of a winning culture. For FirstEnergy's IT group, raving fans mean internal customers, so CIO Rick Fidler and Senior Process Analyst Mel Brinkman, who is in charge of FirstEnergy's IT Scorecard, have devised three metrics to determine whether they're meeting customer demand. Percentage of projects completed on time and on budget. Percentage of projects released to the customer by the agreed-upon delivery date. Client satisfaction as indicated by customer surveys completed at the end of a project.
Al Grasso, former CIO of The Mitre Corp., feels the Scorecard "champion" has to have the ear of the CIO.

FirstEnergy evaluates project managers based on how well they achieve their target percentages. Brinkman says that has improved the customer experience. "[The Balanced Scorecard] puts our project managers under a microscope and forces them to look more closely at themselves and their methodology," he says.

At Dupont Engineering Polymers, a major value driver is fostering new business models. For Bankston's IT group, that means streamlining e-commerce. Because avoiding manual transactions is a primary goal of ecommerce, Bankston established a metric for her global program manager and e-commerce technology manager to reduce the number of transactions that require human interface. "This metric gets to the real strategic purpose of having the Internet," she says. "Having someone place an order online only to get a human involved is really not the goal." Metrics should also relate to softer, less technical strategic goals such as workforce development and retention. At Mitre, Grasso's managers are graded on their ability to keep low attrition rates. Other companies grade managers on how many of their workers have comprehensive development plansand how those are progressing.

The Scorecard puts our project managers under a microscope.


It's important to measure the right factors, but Bankston warns against getting metric-happy. Pursuing too many metrics dilutes the strategic purpose, reducing it to an exercise in information-gathering. "You'll spend too much time reporting measures rather than making a change," she says.

Even with the right number of metrics, you shouldn't phase them in all at once, cautions John Nordin, vice president and CIO of Franklin Park, Ill.-based metal distributor A.M. Castle. When Castle implemented the Balanced Scorecard two years ago, his company identified 13 metrics and focused on all If you pick things of them simultaneously at the onset. "That's 13 events of discussion, you've measured measurement and debate," he says. If he could do it over, he says, he'd take two or three at a time, debate them and see if they work. before and "It's the idea of creating small deliverables along the way," he says. expect different "You get quick wins for the organization. Otherwise enthusiasm results, you'll be wanes as the world changes too fast."

sadly disappointed.

Metrus Group's Schiemann also warns against selecting the easiest -BILL SCHIEMANN, CEO measures to implement. "If you just pick the things you've always OF METRUS GROUP measured before and expect different results in the future, you'll be sadly disappointed," he says. "All too often, there's the tendency to

grab the easiest, most readily available measures, missing the more important ones that may be crucial to delivering high value to your customers."

Get Buy-In at All Levels

Implementing an established valuation program like the Balanced Scorecard is a significant change in the way employees view their job. The natural paranoia that comes with change is bound to surface, so it's important to ensure that everyone is into it at every level of the company, from the senior executives all the way to the entry-level employees. To make that happen at Castle, Nordin relied on systematic, organizationwide communication of the Scorecard concept. Initially, Nordin and five other top-level execs trained on the Scorecard and agreed it was worth a look. Then, instead of emerging from the mountain holding a pair of tablets and an edict for the organization, they grabbed the next 12 managers down the chain, trained them on the Scorecard and solicited their feedback. They continued this process until 80 people were involved. Only at that point did they commit to the Scorecard, sending those 80 managers back to their business unit to talk it up with their employees. "We told them to go back and tell their employees what they'd been working on for three days, and to say, 'I'm not sure I'm convincedwhat do you think?'" says Nordin. This tactic involved everyone in the entire organizationa critical factor in the Scorecard's success. Once the staff was ready to go, A.M. Castle hired a training company that developed visual "learning maps" for employees to better understand the Scorecard concept. The company also developed a board game on the Balanced Scorecard that was similar to Monopoly and sent managers to play the game with their business unit. "We laminated them, stuck 'em on a wall and gave out game cards," says Nordin. "It was a huge success." Balanced Scorecard Collaborative's Norton says that approach is the most effective way to implement the Balanced Scorecard, adding that the Monopoly game is a cool idea. "What this tells me is they understood that to make this work, they had to push it all the way down to the bottom of the organization and to make strategy everyone's job," he says. Susan Dallas, research director at Gartner in Stamford, Conn., says the best way to tell if the Balanced Scorecard is working for your company is if you set higher measurement goals every year and continue to meet them. Obviously, it takes time to make this type of assessment. In the short term, however, you should be able to see anecdotal evidence that the approach is working, such as whether or not the organization is meeting budgetary and project goals. Bob Sheridan, head of market support systems at Hartford, Conn.-based health insurer Aetna, says you know it's working if after you ask people what they do, they define their job in the perspective of where it fits in with the strategic business goals of the organization, rather than simply saying, "I write code." Finally, says DuPont's Bankston, you should see vastly improved alignment between business and IT. "We're now seeing real joint decision making around what we do or don't do because of how it fits in around the work of the Scorecard."

Merging Six Sigma And The Balanced Scorecard

By Bradley Schultz In an era of complexity and contradiction, many healthcare organizations are seeking bold strategies for leading and managing change. While concepts behind the Balanced Scorecard and core Six Sigma methodologies are not new, a powerful management tool can be crafted through the unification of these two proven strategies. An approach that combines the targeted performance indicators of a Balanced Scorecard with the statistical rigor of Six Sigma can be used to effectively focus an organization on the achievement of strategic goals in essence, creating the ultimate "management cockpit." Adopting this structured approach to planning, managing and monitoring improvement brings cohesion to conflicting constituencies and builds confidence in proposed process improvements. In turn, this confidence can have a measurable impact on the organization by accelerating the implementation of change, often viewed as a delicate balance between cost, quality and efficiency. The Case for Change Healthcare today is experiencing both the best and worst of times. Countless lives are saved daily by medical breakthroughs, dedicated practitioners and state-of-the-art technologies. Yet, within this trillion-dollar industry amazing medical feats are juxtaposed against systemic failures and disgruntled stakeholders. Workforce shortages further constrain a system facing a rising demand for services. Advanced technology is often overlaid on archaic processes. As some emergency departments are forced to close, others find themselves overcrowded and understaffed. Especially frustrating are reimbursement challenges that continue unabated. These challenges are now accompanied by significant changes in the payer mix, moving steadily away from government toward private or industry payers, as illustrated in Figure 1. History indicates that the combination of this shift in payer mix with the rise in healthcare premiums will trigger a market reaction. Figure 2 illustrates this anticipated reaction by comparing the annual percent change in healthcare premiums to the annual percent change in the consumer price index as an indicator of general inflation.

Figure 1: US Healthcare Coverage and Spending

Figure 2: Healthcare Premiums vs. General Inflation

The market began its reaction, in the form of managed care, to the wide gap existing prior to 1990. This gap decreased significantly until the implementation of the Balanced Budget Act (BBA), and by 2002 it had widened again to nearly 10 percentage points with further market reaction anticipated. There are two significant risks associated with the next market reaction: 1) Government intervention, 2) Industry consequently recasting providers as mere vendors. The industry is at a critical juncture, facing a growing need for systemic change but lacking the infrastructure and digitization that could provide a clear line of sight from strategy to execution and impact. Under mounting pressure to provide better care using fewer resources, some organizations are seeking alternative management models, realizing they can no longer conduct "business as usual." One solution to help organizations truly align strategic objectives with a clear measurement of impact may be combining the rigor of Six Sigma with the Balanced Scorecard approach. A Balanced Scorecard approach provides the mechanisms to drive organizational alignment, sustain improvements and maintain equilibrium across the enterprise. Based on statistics and aspects deemed most 'critical to quality,' Six Sigma could further focus the organization's improvement efforts. Such an approach that identifies and statistically

quantifies the impact of causal factors on healthcare's value chain would provide organizations with a solid foundation for change. Healthcare's Value Chain Understanding healthcare, from a business perspective, is critical to insuring the longterm viability of a delivery system. It is also a prerequisite to applying both the Balanced Scorecard approach and Six Sigma methodology. Six Sigma originally grew from a setting that was primarily industrial and product-focused. Within this environment, operations are performed on raw materials and as a result they become more valuable component parts. These component parts are then built into higher-level assemblies and ultimately products of progressively increasing value. The value chain for healthcare differs significantly from this model and is illustrated below in Figure 3.
Figure 3: Healthcare's Value Chain

The value chain for healthcare begins with highly satisfied, dedicated and wellmotivated care providers. This produces high internal quality, which relates to process steps that are felt by the institution and are not directly felt by the patient or referring physician. An example of an internal quality metric is the cycle time for the transcription of a radiology report. This represents an interim step in the process that begins with the recognition of need for the exam and ends with the authenticated report in front of the clinical decision maker. Naturally then, high external quality follows from high internal

quality. In other words, quality in those steps that are felt by the customer leads to high customer satisfaction and loyalty. This, in turn, leads to revenue and margin, completing the value chain. When appropriate performance metrics are aligned along the value chain, they provide greater insight into how the system is performing today, and what it may anticipate in the future. This concept is illustrated in Figure 4. In this illustration the organization under consideration is operating well in its financial and customer satisfaction metrics as indicated by the upward pointing green arrows. Employee satisfaction and internal quality are poor as indicated by the downward pointing red arrows. As a result, external quality felt by the customer is beginning to decline as indicated by the yellow arrow pointing sideways. It is intuitive that if this trend continues, customer satisfaction and financial performance will begin to decline as well.
Figure 4: Cause and Effect on Performance of Value Chain

The Balanced Scorecard approach is based upon understanding healthcare's value chain and aligning both strategy and the extended delivery teams' behavior to focus on those activities necessary for the sustained creation of value. Six Sigma methodology is based on statistically quantifying the impact of causal factors on the variability of results. When applied in concert, they represent powerful tools that can be effectively deployed to align

the organization's vision, mission, strategy and specific behaviors toward the sustained creation and delivery of value. Creating Organizational Alignment Most healthcare delivery systems in the United States publish a vision or mission statement. Most institutions also undergo a rigorous annual planning process. Fewer organizations take one more step by translating the resultant strategic imperatives into families of clear, simple metrics aligned to the value chain. Even fewer have made these metrics appropriately visible and actionable at all levels. Generally written at the 30,000-foot level, vision and mission statements are designed to elicit basic agreement from all team members. When vision and mission are translated into specific behaviors, however, agreement is less immediate and conflict may arise among various stakeholder groups. Translating strategic imperatives into a network of clear, simple metrics is the first step in the Balanced Scorecard approach. Alignment of these metrics along the value chain is Step 2, and is illustrated in Figure 5.
Figure 5: Making Vision and Mission Actionable

The remaining steps in using the Balanced Scorecard approach to create organizational alignment include the following:

Step 3 - Assessment of the Organization's Capabilities Step 4 - Cause Analysis Step 5 - Resource Deployment Step 6 - Alignment of Systems and Structures Step 7 - Monitoring Progress and Continually Raising the Bar Many of the statistical tools and process improvement techniques associated with Six Sigma lend themselves well to the accomplishment of these subsequent steps and are illustrated in the following sections.

A Six Sigma Primer The philosophy that underlies the Six Sigma process begins with the fundamental assumption that unless we understand a process mathematically, we know little about it. If we know little about it, we are not in a position to control it. If we are not in a position to control it, then we are at the mercy of chance variation. In the simplest of terms, Six Sigma is a quality improvement methodology that provides a systematic approach to the elimination of defects that affect something important to the customer. Those aspects of service that are of importance to the customer are termed "Critical To Quality," or CTQs in Six Sigma jargon. The tools associated with Six Sigma are qualitative, statistical and instructional devices for "observing" process variables, "quantifying" their impact on outcomes, as well as "managing" their character. Six Sigma is based upon three simple principles:
1. What is important to the customer? A customer is defined as anyone who receives a product, service or information. Therefore, when coupled with the Balanced Scorecard approachinternal quality impacts internal customers and external quality impacts external customers. 2. What is an opportunity? An opportunity is represented by every chance to get something rightor get it wrong. 3. What defines success? Every result of an opportunity either meets the customer's CTQs and is a success, or fails to meet the customer's CTQs and is a defect. In Six Sigma, an indicator of success or failure is referred to as defects per million opportunities Every human activity contains variation. The term "Sigma" is a symbol for standard deviation, a measure of variation. Six Sigma refers to the idea of being able to achieve six standard deviations between the mean performance of the process and the customer-determined specification limit. If Six Sigma performance is achieved in a process, then that process will generate less that four defects (occurrences of getting it wrong) per one million opportunities.

The idea of measuring the number of standard deviations that fit between the mean performance of a process and the customer's expectation (translated into specification limits) is referred to as the process "Z-Score." The Z-Score allows for comparative analysis of the performance of dissimilar processes, based upon the tendencies of each to either satisfy or disappoint their respective customers, the higher the Z-Score the less probability of customer disappointment. Making Quality the Operating System Each metric in the value chain is assessed based upon its ability to satisfy or disappoint its customer. Referring back to Figure 4, this is the method whereby the status of each

link in the chain is evaluated. Employing this approach allows the institution to essentially make quality the operating system. A top level institutional Scorecard must be translated to the department level. At the department level, those factors that have the greatest impact on the top level Scorecard must be identified and rigorously controlled. This is another significant opportunity to employ Six Sigma methodology. A typical Six Sigma project will focus on a specific metric referred to as the project's "response variable" or Y. The variation in this Y is a function of one or more causal factors, referred to as Xs. The idea is to mathematically understand the contribution of causal factors to variability of the project's response variable or Y, before specific solutions are designed, thereby maximizing the impact of the solution. By creating statistical linkages between the Y, metrics on the Balanced Scorecard and the X(s), causal factors, the Six Sigma methodology augments the Balanced Scorecard approach in two important ways. First, every link in the value chain is a causal factor to the subsequent link. Referring back to Figure 4, each link may be thought of as a Y in and of itself, and as an X to the next downstream link in the chain. Second, as the value chain metrics at an institutional level are flowed-down to departments, quantification of the causal Xs at a department level will pinpoint specific processes and behaviors that have the greatest impact on the value chain. This provides the foundation for Step 4 (Cause Analysis). In Cause Analysis, two strategies are deployed with the same objective - focusing limited resources on those activities that represent the greatest return on investment. First, by retaining performance data month to month along the value chain, a regression model may be built indicating the potential impact of changes in one link of the value chain on performance in successive links. This model also can highlight where there is no verifiable statistical linkage, leading to three critical outcomes:
1. Insuring the right metrics have been selected. 2. Insuring these metrics are measured properly. 3. Focusing senior level management on one overall deployment strategy During the analysis phase, the team identifies the factors or Xs likely to have the greatest impact on the response variable. These factors are classified as either controllable or uncontrollable. If a causal factor (X) is controllable and contributes significantly to variability in the response variable (Y), then an opportunity to achieve a better result presents itself by controlling the causal factor. By focusing on causal factors that have a statistically proven impact on a process, the organization gains an important advantage in being able to predict the effect of proposed changes and create an easily understood family of value propositions.

Aligning Systems and Structures So far, we have translated the organization's strategy to the value chain, assessed the organization's capabilities and discovered which projects will have the greatest impact. In the analysis phase, we explored the underlying factors that actually drive results. Each phase is integral to the overall process and ensures that the team is using the right techniques to focus on the right objectives for the right reasons. Taking an improvement initiative to the next level, however, also requires a careful examination of existing systems and structures. In many cases, the way an organization's systems and structures are aligned fundamentally conflicts with the objectives they are

trying to achieve. It's important to begin by making sure appropriate resources are deployed where they will have the greatest impact. It is also necessary to look at seven additional elements that are key to the success of the initiative, and critical questions that must be answered: Organizational design: Is your quality program contained within a single department or is the concept of quality spread across every part of the business? Staffing: Are you selecting the "best and brightest" from your staff to lead quality and process improvement efforts? Development: Have you provided options for continuing education, experiential or project-based training and cross-functional capabilities? Measurement: Are your projects supported by the right metrics and aligned with your strategic objectives? Are your performance measurements designed to drive organizational success? Rewards/recognition: Is there a consistent process in place for rewards and recognition linked to key metrics? Communication: Does the organization understand the importance of clear and consistent communication? Information Technology: Are there sufficient IT solutions in place for project funnel management, financial linkage and program monitoring? Gaining Control The last and continuing step in this process involves monitoring changes and key metrics. That's the purpose of the Balanced Scorecard itself - to serve as a tool that assures the achievement of the organization's strategy on an ongoing basis. The Balanced Scorecard should have a top level appearance similar to the illustration in Figures 3 and 4, along with the ability to drill down in each one of the five top level sections and review the metrics associated with those activities that create the greatest organizational leverage. The challenges confronting healthcare are complex, and no overnight solution will make the problems disappear. Taking a calibrated approach to performance improvement, however, can help hospitals and health systems regain control and realize substantial benefits. Combining Six Sigma with the Balanced Scorecard may be the best way to reach and sustain a new level of organizational excellence. About The Author Bradley J. Schultz has more than 10 years experience in process design and improvement, organizational development and change management. He also is a Six Sigma Master Black Belt with more than 18 years experience at General Electric. He is currently a senior consultant within the Performance Solutions group at GE Medical Systems. His educational background is in business and engineering with a BS in

business quantitative/finance and an MBA from Marquette University. He is an experienced speaker and author on subjects including Six Sigma and change management. He can be reached at Bradley.Schultz@med.ge.com.