Millions discovered in equipment and labor costs that are now accurately attributed to specific surgeries. By integrating case cost data with financial data in its decision support system, Augusta University Health System can now gain a clear picture of the true cost of a single patient case. This big-picture view also helps leaders better leverage data…
CREATING CHANGE IN HEALTHCARE WITH 12 BUDGET PRINCIPLES
It’s hard to abandon a ritual.
That’s one reason why organizations continue to hang on to the traditional annual budgeting process. They hang on even though the tough and resource-intensive budget process ultimately produces results of questionable value.
For example, a 20-hospital system with locations in four states, was spending seven months on its annual budget, while a 3-campus academic institution in the Southeast was spending $10 million on their budget process, only to find it to be $30 million off target just six months into the year.
Other reasons include the strong opinion that annual budgets are out of date soon after they are completed, or that they are prone to a “use it or lose it” gamesmanship with each silo tenaciously holding on to everything it had the year before while attempting to grab a little bit more for the year ahead.
Some organizations see not only the process, but the budget itself becoming less and less relevant. But, instead of doing away with it, they think the solution is to devote more time and resources to making the budget even more detailed–even as it becomes more obvious that the additional detail is not helpful.
This is leading the financial leadership teams of many organizations to question whether or not they should continue with the annual routine.
One solution is to replace the annual ritual with a process called “Beyond Budgeting,” a management approach that uses rolling forecasts, relative performance targets, and increased management accountability to create a culture of continuous improvement.
The Beyond Budgeting Institute, established in 1998 in response to growing dissatisfaction and frustration with traditional budgeting, says Beyond Budgeting is about rethinking how we manage organizations in a post-industrial world where innovative management models represent the only sustainable competitive advantage. That it is also about releasing people from the burdens of stifling bureaucracy and suffocating control systems, trusting them with information and giving them time to think, reflect, share, learn and improve.*
The Process is Winning Converts
In 2015, about 5 percent of Strata’s client base was using a Beyond Budgeting approach. That number has doubled within the last 12 months, and is expected to double again within the next 12 months.
One convert was Ron Paulus, M.D., president and CEO of Mission Health, a $1.4 billion integrated delivery system covering the western regions of North Carolina. What Paulus did was challenge his executive team to answer this question about Beyond Budgeting: “Why shouldn’t we do this?”
Therefore, they decided to redeploy the millions of dollars in resources spent annually on the budget and bring into focus a needed culture change of continuous improvement. They have shifted their mindset from “meeting their budget” to improvement over prior periods. While they continue to measure key metrics for operating entities including growth year over year, productivity improvement (hours/UOS) and total expense/UOS, they operate under the expectation of continuous improvement.
The process paid off for Mission. They identified the margins they wanted, set targets for each of its hospitals and baked those targets into their operating plan. As a result, they now feel they have the agility needed to adjust to changing business conditions and achieve desired margins.
Introducing a Beyond Budgeting Approach
To implement Beyond Budgeting, an organization needs to select targets that reflect where it wants to be and a set of metrics to help establish where it currently stands on that path. Eventually, within most organizations a gap will emerge between where it wants to be and where it is.
That’s where management happens, such as doubling down on cost reduction, analyzing potential acquisitions or implementing growth strategies, can be initiated to address the disparity.
C-suite buy in, plus board and employee support are also key in making the shift to Beyond Budgeting. Leaders can make removing the safety net more palatable by:
Educating up and down the organization, telling people what’s going on and why.
Piloting the approach in one area of the organization to show it can work.
Choosing the pilot based on the branch of the organization led by a strong supporter of change.
Organizations need to be sure though, that they don’t straddle the past process and a Beyond Budgeting approach. Organizations shouldn’t move to a rolling process while maintaining the full account and department detail that had been loaded into the traditional budget. They also shouldn’t push out too many metrics or demand too many performance-tracking reports as it will just cause confusion.
The challenge that some executives see in the process is figuring out what they must do to hold folks accountable. The key is to re- frame the question from “Am I meeting budget?” to “Am I doing better? or Am I making the right decisions?”
To do this, executives must solicit feedback from their service line managers and key stakeholders. Then, together, determine what is most important. Pick the five most-meaningful metrics and unleash them.
Follow up by explaining to people the targets they are expected to meet, what they mean and how they will be used. The targets then are seen as realistic and based on fresh and actionable information.
This puts both the ownership of the targets and the onus of meeting them on the shoulders of the line managers. The difference between this and the prior way of doing business is that they will now feel empowered to handle the responsibility.
Ultimately, organizations will see that a Beyond Budgeting approach provides a greater line of sight allowing them to more quickly take advantage of new opportunities or adjust to looming challenges.
12 Beyond Budgeting Principles*
1: Engage and inspire people around bold and noble causes; not around short-term financial targets.
2: Govern through shared values and sound judgment; not through detailed rules and regulations.
3: Make information open for self-regulation, innovation, learning and control; don’t restrict it.
4: Cultivate a strong sense of belonging and organize around accountable teams; avoid hierarchical control and bureaucracy.
5: Trust people with freedom to act; don’t punish everyone if someone should abuse it.
6: Connect everyone’s work with customer needs; avoid conflicts of interest.
7: Organize management processes dynamically around business rhythms and events; not around the calendar year only.
8: Set directional, ambitious and relative goals; avoid fixed and cascaded targets.
9: Make planning and forecasting lean and unbiased processes; not rigid and political exercises.
10: Foster a cost conscious mind-set and make resources available as needed; not through detailed annual budget allocations.
11: Evaluate performance holistically and with peer feedback for learning and development; not based on measurement only and not for rewards only.
12: Reward shared success against competition; not against fixed performance contracts.