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Governance and Organizational Structure
This area deals with the development and analysis of the organizational structure and with delineating responsibility, authority, and accountability at all levels of the organization. Functions include the development and implementation of policies and procedures for the governance process.
Posted by: Cheryl Painter on August 20, 2009 at 9:25AM EST
Griffith and White (2007) presented the following questions regarding the balanced scorecard:
Boards use a balanced scorecard as a strategic control measure that analyzes four key dimensions or key performance indicators (KPIs): Financial performance (net income, ROI, ROA, cash flow), internal operations(project management, total quality management, Six Sigma), management performance / customer satisfaction (customer retention, profitability, satisfaction, and loyalty), and associate satisfaction / ability to adopt and improve (staff morale, training, knowledge sharing) (Griffith & White, 2007). The board evaluates these four dimensions based on trends, competitor and industry comparisons, benchmarks, and values.
The balanced scorecard is a performance management tool that aligns, communicates, and tracks progress against ongoing business strategies, objectives, and targets. The integrating power of the balanced scorecard provides a more holistic approach that positions an organization not only as a measurement system, but also as a management system. Pearce and Robinson (2004) affirmed, “The ‘balanced scorecard’ is a control system that integrates strategic goals, operating outcomes, customer satisfaction, and continuous improvement into an ongoing strategic management system” (p. 386). Healthcare boards can use this holistic approach to manage the organization more efficiently through continuous improvement efforts in all four KPIs.
Balanced Scorecard Institute.
Pearce and Robinson (2004) described a balanced scorecard as “a set of measures that are directly linked to the company’s strategy….it directs a company to link its long-term strategy with tangible goals and actions” (p. 194).
The Balanced Scorecard Institute created a nine-step process for building and implementing a balanced scorecard. Building a balanced scorecard entails assessment, strategy, strategic objectives, strategic mapping, performance measures, and strategic initiatives, while implementation involves automation, cascading, and evaluation (Rohm & Halbach, 2005b).”
Assessment involves analyzing the firm’s core beliefs – vision and mission, and appraising market opportunities, competition, financial standing, and short/long-term goals. This first step of self-assessment identifies the firm’s strengths, weaknesses, opportunities, and threats (SWOT).
The development of the overall business strategy is step two in the nine-step process. Pearce and Robinson (2004) declared, “…the general philosophy of doing business declared by the firm in the mission statement must be translated into a holistic statement of the firm’s strategic orientation” (p. 195). Oftentimes, especially in larger companies, several predominating strategic themes contain specific business strategies.
Specific business strategies need to broken down into smaller components called objectives. Formulating strategic objectives is the third step in the nine-step process. Rohm and Halbach (2005a) declared, “Objectives are the basic building blocks of strategy” (p. 5).
Developing a strategic map is step four. A strategic map creates the overall business strategy by “using cause-effect linkages (if-then logic connections) and the components (objectives) of strategy…. [which are used] to identify the key performance drivers of each strategy…” (Rohm & Halbach, 2005a, p. 5).
Step five – performance measures – tracks both operational and strategic progress. Performance measures need to specific, measurable, attainable, realistic, and attainable (SMART). Performance measures (metrics) must reflect desired outcomes of both internal and external customers and must measure processes from the process owner’s perspective and customer requirements (targets) (Rohm & Halbach, 2005a).
The final step in creating a balanced scorecard is to identify how new initiatives will be funded. This step is vital to ensure successful implementation of the strategy. Rohm and Halbach (2005) suggested, “Initiatives developed at the end of the scorecard building process are more strategic than if they are developed in the abstract” (p. 7). Developing initiatives in this manner helps to identify other possible initiatives to pursue to ensure successful implementation.
Automation, cascading, and evaluation are the steps of implementation. Automation involves selection of software to meet performance information requirements. Cascading entails “translating the corporate scorecard into department and division scorecards that are aligned with the corporate strategy” (Rohm & Halbach, 2005b, p. 3).
The evaluation step includes the following components: [a] Ensuring that organizational learning and knowledge building are incorporated into planning, [b] making adjustments to existing service programs, [c] adding new programs if they are more cost effective, [d] eliminating programs that are not delivering cost-effective services or meeting customer needs, and [e] linking planning to budgeting. (Rohm & Halbach, 2005b, p. 4)
Not only does the balanced scorecard need to constructed and implemented, but also managed. How does an organization or board manage a balanced scorecard? Rohm and Halbach (2005b) provided the following guidance:
Enron did not have a balanced scorecard. The company focused primarily on rewarding financial growth. “The unrelenting emphasis on earnings growth and individual initiative, coupled with a shocking absence of the usual corporate checks and balances [a balanced scorecard], tipped the culture from one that rewarded aggressive strategy to one that increasingly relied on unethical corner-cutting” (Byrne, France, & Zellner, 2002, p.1).
Jeffrey K. Skilling, a consultant/partner from McKinsey & Co., was hired by Enron Chairman Kenneth Lay to change Enron’s culture from that of a “sleepy, regulated natural-gas company” into “an asset-light laboratory for financially linked products and services” (Byrne, France, & Zellner, 2002, p.1).
Skilling’s plan to transform Enron’s culture from the Old Economy to the New Economy culture was thwarted because of a lack of tight controls. “At Enron, however, the pressure to make the numbers often overwhelmed the pretext of ‘tight’ controls” (Byrne, France, & Zellner, 2002, p. 2). Skilling introduced an unusual performance review system in which a select group of 20 people was named to serve on a performance review committee (PRC).
The PRC was responsible for ranking over 400 vice-presidents, directors, and managers based on their performance. Rewards were linked to ranking decisions from the PRC. For example, Managers judged “superior” - the top 5% - got bonuses 66% higher than those who got an “excellent” rating, the next 30%. They also got much larger stock options” (Byrne, France, & Zellner, 2002, p. 2). This bred a culture in which individual achievement was rewarded as opposed to teamwork. “That emphasis on the individual instead of the enterprize may have pushed many to cross the line into unethical behavior….that kind of culture has a subtle encouragement to cut corners and to cheat” (p. 3).
Pearce and Robinson (2004) pointed out,
“[The balanced scorecard recognizes] some of the weaknesses and vagueness of previous implementation and control approaches….the balanced scorecard approach provides a clear prescription as to what companies should measure in order to ‘balance’ the financial perspective in implementation and control strategies” (p. 383). ”
Boards needs to adhere to the nine-steps for creating and implementing a balanced scorecard as outlined by Rohm and Halbach. To manage the balanced scorecard, boards need (a) to anchor the management process in place, (b) to create a guiding coalition of cross-functional change agents that have permanent scorecard roles throughout the organization, (c) to get employees involved in the planning process from throughout the organization, (d) to use the balanced scorecard to drive budgeting and cost control, (e) to maintain and implement a communications strategy and plan, (f) to use change management principles, (g) to prioritize initiatives, and (h) to use a total rewards compensation system.
Risks /Risk Mitigation
Hansen and Smith (2003) asserted,
…the balanced scorecard [directs] managers to think about the firm’s value propositions within the framework of three factors: operational excellence, customer intimacy, and product leadership. When examined closely, it is apparent that none of these are [sic] customer focused, not even customer intimacy….Not one of them says anything about what the product or service does for the customers, how it addresses their needs, or how they are better off. (p.4)
When developing a balanced scorecard, the board and managers often start with an overreaching financial objective, then work downward to convince customers of the desirability of a product or service. The problem with this approach is that customer preference is often not fully considered. Customers can be external such as patients or internal such as employees. “Consideration of the customer, then the organization, and finally the offering is how strategy formulation should proceed” (Hansen & Smith, 2003, p.2).
The best way to mitigate this deficiency in the balanced scorecard is to use strategic surveillance in ascertaining the customers’ preferences. According to Hansen and Smith (2003),
In the customer area, the strategy formulation task is to identify the value propositions the firm will deliver to its customers [internal and external]. The bet is that those propositions will help differentiate the firm in customers’ minds and represent a benefit for which it can charge a premium. (p. 5)
~ Cheryl Painter
Byrne, J., France, M., & Zellner, W. (2002, February 25). The environment was ripe for abuse. BusinessWeek.
Griffin, J.R., & White, K. (2007).The well managed healthcare organization (6th ed). Chicago: Health Administration Press.
Hansen, F. & Smith, M. (2003, January/February). Crisis in corporate America: The role of strategy. Business Horizons.
Pearce, J. & Robinson, R. (2004). Strategic management (9th ed.). [University of Phoenix Custom Edition e-text]. New York: McGraw-Hill.
Rohm, H. & Halbach, L. (2005a). A balancing act. Performance Management in Action, 2(2), 1-8.
Rohm, H. & Halbach, L. (2005b). A balancing act: Sustaining new directions. Performance Management in Action 3(2),