WEEK 4

FEATURE STORY

Susanna E. Krentz Aaron M. DeBoer SashaN.Preble

AT A GLANCE

> Providers need to

understand the various

types of metrics, the

importance of each

type, and how to use

them eHectively.

> Providers should use

strategic metrics to

monitor implementa-

tion of their organiza-

tion's strategic plan.

> To overcome obstacles

to successful use of

strategic metrics,

providers should com-

municate the organiza-

tion's strategic intent,

establish accountability

for achieving the tar-

gets, and ensure buy-in

through review of met-

rics and involvement of

appropriate people.

staying on course with strategic metrics Are you using strategic metrics? If not, you might be straying off course and not know it.

Metric Cnie-trik) Function: noun. A standard of measurement.

—Merriam-Webster Online Dictionary

Charting a suecessful course in today's competitive market requires health- care organizations to employ a rigorous strategic planning process. At the same time, the uncertainty that characterizes the future of health care means that course corrections inevitably will be required as the plan is implemented. To monitor progress, most organizations have developed extensive and numerous performance metrics and dashboards focused on operational or tactical activities. These metrics are useful, hut they do not provide manage- ment and the board with meaningful ways to gauge strategic performance. To get the results the organization demands, providers need to understand the various types of metrics, the importance of each type, and how to use them effectively.

Metrics, a combination of a measure (the criterion used as the hasis of measuring success) and a target (the value associated with a measure that the organization wants to achieve), can he developed for tactical and strategic planning. Metrics are divided into two major categories, management and strategic, each with specific characteristics and uses. Understanding that the board's job is to govern and management's joh is to manage is key to differ- entiating among these types of metrics.

Management metrics, although not part of the strategic plan, can he developed for strategies and tactics. Strategies identify where an organization's resources are deployed, w-hile tactics go one step further to identify specific work plans that will help realize the strategies. Management metrics are more discrete than strategic metrics. Management metrics, especially at the tactical level, are useful for implementation teams but are much too detailed for reporting to the board or senior leadership. In general, these types of metrics should he clear and measurable, and can numher upwards of loo. Remember, achievement of the target does not ensure arrival at the

86 MAY 2006 healthcare financial management

Strategic Metrics

organization's desired vision or end point.

Strategic metrics focus on achievement of the organization's vision or goals, which iden- tify strategic direction. Metrics at the goal level work well for communicating with senior leadership regarding progress along specific goal areas. Like manage- ment metrics, strategic metrics need to he clear, meaningful, objective, and measurable, but they should be relatively limited in number, e.g., 15. Strategic and management metrics can be devel- oped on the same issue; however, they differ on the degree of detail, depth, and freijuency of review.

FOCUS OF STRATEGIC METRICS AND MANAGEMENT METRICS

Management Metrics

Strategies (Projects 8.

Operations Plan)

Destination/Vision Metrics

Tactics {Work Plans)

Strategic metrics focus

on the organization's

vision and goals, helping

senior management

monitor progress, while

management metrics

locus on strategies and

tactics, which is useful for

implementation teams.

Destination metrics, a type of strategic metric that focuses on the achievement of the vision, answer the question: Howwillweknowwhenwe have arrived? Metrics at the vision level may be too broad to be meaningful in terms of plan implementation, but they can help indicate when you have achieved your desired future position. They can be used to communicate to the board

The table compares and

contrasts strategic and

management metrics and

describes v/hen and how

they should be used.

USING STRATEGIC METRICS AND MANAGEMENT METRICS

Definition

Characteristics

Number

Accountability

Review cycle

Organized around

Applicability

Examples

Strategic Metrics

Vision Level Goal Level

Indicates broad success, usually across multiple goals

3±

Board/senior management

Annually

Vision/desired future state

Entity

> Top 100 hospital > Aggregate market

share

Indicates progress along a specific goal

15±

Board/senior management

Semi-annually or annually

Core goals

Entity

> Annual NIH funding awards

> Operating margin > Hospital top of

mind awareness

Management Metrics

Strategy Level Tactic Level

Indicates progress along a strategy

30 ±

Senior/middle management

Weekly/monthly/ quarterly

Strategy

Entity/programs/units

> Market share in oncology service line

> Patient satisfaction > Employee satisfaction

Indicates progress along an action

100±

Middle management

Daily/weekly/ monthly/quarterly

Tactic

Entity/programs/units

> Operating expense per adjusted discharge

> Daily census > Billing cycletime > Visits and procedures

by physician

Mm MAY 2006 87

FEATURE STORY

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and senior leadership the organization's broad success, usually across multiple goals, and can

provide better clarity in terms of what the strate - gic plan is trying to achieve. Destination metrics should be representative of the organization's aggregate performance, limited in number, and encompass multiple attributes of performance.

Selecting Measures for Strategic Metrics

The first step in developing strategic metrics is selecting a finite set of measures, which can be a challenging task, particularly since that set will be different for each organization. To balance objec- tivity and accuracy of the metric, use a mix of internal and external criteria. For additional sug- gestions to develop effective, strategic measures, keep m mind the following six principles,

Limii ihe number and type of measures. Measures

should be restricted to those that most directly reflect the achievement of your vision and goals. They should be specific and focus on key areas of concern. Using too many measures will dilute the effectiveness of measuring and cause confusion on which measures are most important.

Select the right mix of measures. Identify a group of

measures that address a broad range of dimen- sions, such as community benefit, profitability, stewardship, performance, service, quality, tech- nology, people, process, and systems. In so doing, you ensure your measures are diversified. which makes for a more successful implementa- tion of your plan. It is also important to identify measures with a cause and effect relationship, which can he difficult in health care. How do you identify the link between quality and volume? Patient satisfaction and financial performance? Pick measures that have a high causal relationship.

What you measure is what you get. It is imperative

that you set measures that focus on what you want to achieve. For example, don't measure what you don't care about, as this will be wasted effort pro- ducing meaningless results. Ensure that the measures you set are congruent with your organi- zation's mission. Subordinating organizational goals to those of departments or divisions will

disrupt the link between mission, strategy, and its implementation. Finally, understand that the usefulness of the measure is only as good as the data used to measure it. The principle of "junk in. junk out" applies.

Emphasize outcome measures over process measures.

When implementing a strategic plan, trying hard isn't the same as achieving the desired result. A common mistake is to use the "A for effort" approach, which focuses on whether a process was completed. To illustrate the difference between outcome and process measures, con- sider the following examples where measures are identified for the need for additional physicians. An example of an outcome measure is "Recruitment of additional physicians (net of losses)." In contrast, a process measure could he "Development of a medical staff manpower plan." To he effective, strategic measures should be oriented toward outcomes, not processes. However, process measures maybe appropriate for management metrics.

Ensure clarity and availability of measures. Useful

measures should be both conceptually appealing and easily measured (i.e.. relatively simple to collect and calculate). Be sure that you have the means to measure what you care about. Examples of criteria that are not easily measured include:

> Recognition as the top children's hospital (according to NIH funding? inpatient volume? overall ranking? etc.)

> Recognition as the premier provider (hased on quality? outcomes? service offerings? etc.)

> Outpatient market share leader (data are fre- quently poor as not all entities report, data lag in time, etc)

Be aware that some data are not possible to track, most hospitals and health systems don't have credible cost accounting systems in place, and the measurement and comparison of quality and out- comes data are still a challenge. On the other hand, don't wait until your measures are perfect because perfect measures don't exist. Sometimes you have to take a leap of faith, pick a measure, and go with it.

66 MAY 2006 healthcare linancial management

FEATURE STORY

Keep in mind that measures can lag. You need to

recognize and accept the intrinsic delay and limi- tations in obtaining data in the healthcare indus- try. Some measures have a shorter lag time (e.g.. internal utilization, staffing/productivity, and financial performance), while others have a longer one (e.g.. medical records data, consumer or physician survey response, and market share). Again, understand that data will never be perfect and/or timely. At some point, you need to roll up your sleeves and get started.

Setting Targets for Strategic Metrics

Once you have decided on measures, it's time to set targets. When setting targets, consider your organization's culture. Do you want to set the bar where you know you will make it? Do you want all goals to be stretch goals? Be sure that your targets are consistent with your organizational culture to avoid clashes with plan implementation. Consider the following tips to setting good targets.

STRATEGIC METRICS FORECASTING TRAPS

Past Now Future Overconfidence Trap

Past Now Future Prudence Trap

Past Now Future

Anchor Trap

Past Now Future

Smiley Face Trap

Four types of forecasting traps can hinder the setting of feasible targets

for an organization's strategic metrics.

When your operating costs continue to climb. RIGHT TIME.

FEATURE STORY

Avoid forecasting traps. Do not be overconfident,

expecting improved performance when previous years have been stable. Conversely, do not fall

into the prudence trap by trying to he "on the safe side." anticipating a drop in performance when previous years have been stahle or increasing. Avoid anchoring or limiting your vision based on past performance in predicting past trends that will continue into the future. Finally, do not suh- mit to the smiley face trap when you set targets based on unfounded turnarounds.

Use the "bull's-eye"method. Abull's-eye target is a specific performance expectation for a particular time in the future and is most appropriately used with metrics at the vision and goal levels. Using these specific targets enables the organization to identify whether a metric was achieved and by how much it was over/under-realized. In the following example, bold text indicates the bull's-eye.

By year-end 2010:

> Our primary service area market share bas increased from 60 percent to 65 percent

> Our annual National Institutes of Health fund- ing awards have increased from $15 million to $30 million

Set target corridors. Target corridors are best used for management metrics at the strategy and tactic levels. Because the market is uncertain, sometimes it is better to identify a range for wbich a target should be achieved. Indicate a low and a high "score" for which performance within that range would he acceptable. Once the measurement has heen made, re-evaluate and establisb new tar- gets, as appropriate. This method also provides a historical picture of the organization's progress, which you can use to evaluate performance and make neeessaiy adjustments, even if you're performing within the defined corridor.

EXAMPLE OF SETTING TARGETS FOR STRATEGIC METRICS

Strategic metrics can be

combined to help attain

the organization's

desired future state or

Goals

National

Recognition

Market

Performance

Financial

Performance

Desired Future State/Vision

By 2 0 2 0 , become a nationally recognized hospital.

Strategic Performance

Measures

Ranking in L/.S. News & World Report

Annual NIH funding

Percentage of admissions from outside the core service area

Overall satisfaction of patients, physicians and employees

Market share for the core service area

Unaided awareness in core service area

Wait times for appointment scheduling

Operating margin

Annual fund-raising rate

Size ol endowment

Current

Performance

#23 overall #5 in region

$100M

26%

85%

55%

35%

Up to four weeks

2%

$10M

$200M

#10 overall #1 in region

$150M

32%

95%

75%

60%

< 2 weeks

4%

$20M

$300M

90 MAY 2006 healthcare financial management

FEATURE STORY

Some metrics are intrinsically better if they are bigber than the range, such as market share, out- comes indicators, and operating margin. Some metrics are better if they are lower than the range, such as managed care denial rate and nosocomial infection rate. Finally, some metrics are best wben found witbin the range, such as the debt-to-capitalization ratio.

Avoid measure creep. Measure creep, or "gamingthe system," focuses on manipulating tbe calculation/formula of the metrics. Measure creep can include any number of methods, including eliminating outliers arbitrarily wben calculating, continuously improving self-assessments, or changing peer groups or benchmarks to look more attractive. Although these methods may appear to make the attainment of targets more successful, they do not truthfully identify what is occurring, which undermines the metric's usefulness and ulti- mately the implementation of tbe strategic plan.

Barriers to Development and Use of Metrics

Although the development and use of metrics is strategically imporfant to the organization, sev- eral barriers to their success exist. These harriers center on organizational culture, structure, and strategy.

One cultural barrier is the overemphasis on con- sensus. Wben everyone bas to agree on a particu- lar measure and/ortarget, inevitably, low-hall results ensue. Another cultural barrier is a corpo- rate culture that supports fear of failure and/or a culture of hlame. Leaders who fear taking risks or who are afraid to fail are reluctant to measure strategic objectives or take action regarding underperformance. A third cultural harrier is that of the executive leadership fearing heing held accountable, which leads to measures not heing developed at all and obscuring of tbe origi- nal strategic intent.

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FEATURE STORY

Four structural barriers are:

> A lack of linkage of organizational objectives to senior management incentive compensation, which results in no penalty if the objective is not achieved

> Confusion about who is in charge, which could trigger a mismatch of accountability, responsi- bility, and authority

> Unclear or imperfect measures and/or data sources, which can make it difficult to identify actual performance against the measure and can portray an inaccurate picture of performance, also leading in either case to the metric being abandoned

> Lack of a designated individual to measure organizational performance, which could cause the assessment to go off schedule or he com- pleted incorrectly

Barriers to the development and use of metrics occur for strategic reasons as well, for example, treating all products, services, or customers equally. Wben this happens, measures are often difficult to define. No priority is set among dif- ferent areas, and tbe number of measures

increases to account for the "importance" of all tbe areas, hindering the ability to focus efforts.

Anotber strategic harrier is a lack of clarity about organizational strategy. The resulting measures lack specificity, making it difficult to know how progress is being made toward achievement of the vision or goals.

Altbough numerous barriers to successful use of strategic metrics exist, steps can be taken to overcome these obstacles. One step is to commu- nicate the organization's strategic intent so that everyone is on the same page. Once everyone knows wbere the organization is headed, it will be easier to develop metrics to fit tbat destination. Anotber step is to establish accountability for achieving tbe targets to ensure that progress toward acbievement will be made. Guarantee buy-in througb review of metrics and involving the "right'" people, including senior management {highlights importance of metrics and increases visibility), groups accustomed to measuring (brings experience to tbe process), and groups not accustomed to measuring (facilitates

THE DO'S AND DON'TS OF DEVELOPING A STRATEGIC METRIC PLAN

Do > Tie the metrics to the strategic planning process.

> Make sure everyone in the organization, from senior management to individual employees, understands what is being measured and why.

> Limit the number of measures to optimize understanding and usefulness. Focus only on the truly crucial strategic variables.

> Identify the correct drivers of the desired organizational outcomes.

> Use a graphic format to display results to ease recognition of interrelationships, trends, and outliers.

> Link metrics to reward system, where and when appropriate.

> Accept uncertainty of the future, and anticipate some "failures."

> Secure the commitment of senior management in the development and selection of measures and targets.

Don't

> Limit metric development responsibilities to senior executives. Everyone in the organization should under-

stand the process and contribute to it.

> Treat metric development as a one-time event.

> Wait for perfection of every detail.

> Introduce metrics only lor compensation.

> Underestimate the cause and effect relationship between your metrics and desired outcome.

92 MAY 2006 heahhcare (inancial management

FEATURE STORY

learning). These suggestions should help diminish tbe challenge associated with tbe development and use of strategic metrics.

Do's and Don'ts of Metrics

Witb so many resources invested in developing a sound strategic plan, providers sbould ensure tbat the plan's implementation is monitored and adjusted as necessary. Strategic metrics are an effective way to ensure tbat your strategic plan has suhstance and is able to turn on a dime. Do not be afraid to develop metrics simply because it is difficult to do. You won't know where you are headed if you can't clearly define your destina- tion. By following tbese suggested do's and don'ts. you will he well on your way toward accomplishing your strategic initiatives and bringing your strategic plan to life.*

About the authors

Susanna E. Krentz

is a senior principal and national director,

Strategy Practice, Mitreiek Healthcare,

Chicago, and a member of HFMA's First

Illinois Chapter (susie.krentz<i*

mitretek.org).

Aaron M. DeBoer is a consultant, Mitretek Healthcare,

Chicago, and a member of HFMA's Iowa

Chapter ([email protected]).

Sasha N. Preble

is a senior associate, KaufmanHall,

Chicago.

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