Operations and budget

Operational and Budget Planning Learning Objectives After reading this chapter, you should be able to: •Describe broad operational issues such as systems and systems thinking, information\ systems, consensus building, and the role of policies.

•Evaluate the differences between operational planning and budget planning.

•Discuss how to involve everyone in the operational planning process.

•Assess the issues involved in getting operational planning done before the start of the new fiscal year. Chapter 8 Evgeny Tomeev/iStock/Thinkstock spa81202_08_c08.indd 223 1/15/14 3:50 PM Section 8.1 Broad Operational Issues No strategy is useful unless it can be implemented, and no strategy can \ be implemented with any degree of success without operational and budget planning (refer to Figure 1.1).

This chapter explains how to do such planning, why it is important, and \ other essential process issues. 8.1 Broad Operational Issues Operational planning involves preparing detailed organizational plans for the coming fiscal year. It includes programs, projects, and activities that the organization is already doing as well as new ones required by any change in strategy. Detailed plans by organi- zational unit are part of operational plans. Finally, it includes coordinating all these activi - ties to make sure they support stated strategies. Some aspects of operational planning are more encompassing than just planning programs, projects, and tasks for people to do. These include systems and systems thinking, management information s\ ystems, the need for consensus in decision making, and organization-wide policies. Not only are these issues more encompassing, but they also are determinants of effective strategy execution and should be taken into account.

Systems and Systems Thinking For the most part, our world is made up of systems—from the galactic solar system to the human body, which has many subsystems of its own, such as the immune, reproductive, digestive, and cardiovascular systems. Organizations are complex social systems, consist - ing of individuals and units that work together (or not) to produce services for their customers. Complex sys - tems are self-regulating systems; that is, they are self-correcting through feedback. HSOs must be responsive to feedback, such as the organiza - tion’s patient volume figures, quality performance results, and other met - rics important to success. Engaging in systems thinking means viewing your HSO as a system with interact- ing, interdependent components and realizing that what is done must ben - efit the integrated whole and not just a particular part at the expense of other parts.

The systems approach to understand - ing organizations also examines the nature of the boundaries between the organization and the outside world. The more permeable an organization’s boundaries, the more the organization is able to place its finger on the pulse of the competition, \ the Blend Images/SuperStock Organizations—including HSOs—are complex social systems, consisting of individuals and units that work together. spa81202_08_c08.indd 224 1/15/14 3:50 PM CHAPTER 8 Section 8.1 Broad Operational Issues marketplace, and industry trends. Boundaries may be created, for instance, by employer apathy toward staff member development. An HSO that does not send employees to con- ferences and training establishes a less permeable boundary between the organization and the industry. Open systems with permeable boundaries are preferred to closed sys - tems for their greater functionality and innovativeness. Viewing an organization as an open system requires strategic thinkers to consider the complex interactions the system has with its environment, as well as the ways in which the different units within the orga - nization (known as subsystems) import and export ideas, services, and \ other resources.

Additionally, systems are characterized by subsystem interdependence. For example, to add a new clinical service, the service director must interact with the finance department to learn about the costs and collaborate with physicians and other membe\ rs of the clinical team to create a development strategy. In some HSOs, functional units act as if they are isolated from the others. For example, a hospital materials department may order sup - plies without knowledge of inventory levels on the units or expected pat\ ient volumes. In both strategic and operational planning, managers must be cognizant that affecting one part of the system affects other parts. Furthermore, operational decisions must benefit the whole organization and not just a particular functional area to the detriment of others. The performance of any system, including an HSO, is thus never equal to the \ sum of the per - formance of its parts considered separately, but rather the product of their interactions (Ackoff, 1986).

In operational planning, tactics should be coordinated between functional units of the organization, especially those between which there is an output–input relationship. The higher one’s position in the organiza- tional hierarchy, the more emphasis must be placed on having a system- wide perspective and maintaining awareness of the purposes and goals of the entire organization. Even at a basic operational level, tremendous coordination is needed. As Russell Ackoff (1986), one of the most influ- ential management thinkers of our time, says, understanding how one unit’s activities affect and are affected by other organizational activities is a benefit that “cannot be realized unless the planning is comprehen - sive, coordinated, and participative” (pp. 202–203).

There is a class of systems thinking that has been applied to clinical healthcare systems that stemmed from James Quinn’s analysis of best-in-service companies such as Nordstrom and McDonald’s. He found that these companies organized around and continually improved frontline interactions with customers, which Quinn (1992) labeled as a m\ icrosystem, © Karen Kasmauski/Science Faction/Passage/Corbis A boy with cystic fibrosis takes a lung capacity test. The doctors, nurses, and other healthcare professionals who work with him form what can be called a “clinical microsystem.” spa81202_08_c08.indd 225 1/15/14 3:50 PM CHAPTER 8 Section 8.1 Broad Operational Issues the smallest replicable unit of the company. This concept has been applied to healthcare delivery with Dartmouth researchers defining a clinical microsystem as “the combina- tion of a small group of people who work together in a defined setting on a regular basis— or as needed—to provide care and the individuals who receive that care (who can also be recognized as part of a discrete subpopulation of patients)” (Foster, Johnson, Nelson, & Batalden, 2007, p. 336). A clinical microsystem has linked processes and shares informa - tion and technology to produce services that are measured as outcomes. In many HSOs, these systems are embedded in larger systems within the organization. Examples of clini - cal microsystems include primary care practice, specialty practice, brain trauma program, cystic fibrosis program, inpatient care unit, emergency department, and outpatient kid- ney dialysis unit. Some HSOs are using the clinical microsystem model or other system dynamics models to improve performance.

Management Information Systems Every day, at every level in the organization, decisions are being made. Earlier chapters focused on strategic decisions, while this chapter and the next focus on\ operational deci - sions. Simple decisions require a person’s knowledge and experience; however, in some organizations, an established policy may govern decisions in routine situations. Startup HSOs operate with the entrepreneur making all the decisions seemingly “off the cuff,” as speed is of the essence and the entrepreneur knows what he or she is doing.

The more complex decisions become, the less one person or even a group is able to act independently. Should local radio advertisements for our walk-in clinic be continued for another month? That would depend on how effective the advertisements had been in increasing revenue, and without those data the right decision could not be made. Sho\ uld the hospital hire another nurse case manager? Without knowing the patient volumes, costs, utilization data for targeted patient populations, and so on, that question also could not be answered. And these are operational decisions. We already know that strategic decisions need a lot of data to be analyzed and processed before they are made; opera - tional decision making is no different.

Cleveland Clinic Health System (CCHS), considered by some to be one of the best HSOs in the United States, has an extensive information system that supports \ strategic and operational decision making. Balazs Nemeth, head of Clinical Resource Management and Decision Support for East Region of CCHS, notes that being one of the be\ st is not enough:

“We want to be the best system” (PQ Systems, n.d., para. 3).

With the exception of startups, no organization can afford to be without a management information system (MIS) . Typically, MIS refers to a broad range of data-driven decision support systems that provide information about an organization’s administrative func- tions associated with the provision and use of patient care services (Sandefer & Seidl, 2013). These systems are crucial to the operation of the organization and include, but are not limited to, general accounting and finance systems, operations and p\ lant management systems, patient health record systems, and customer relationship management systems.

By definition, these systems must supply the basic information needed by\ managers for making decisions. The extent to which a system succeeds in doing this de\ termines the spa81202_08_c08.indd 226 1/15/14 3:50 PM CHAPTER 8 Section 8.1 Broad Operational Issues quality of decisions made (Mason & Hofflander, 1972). Even before the advent of computers, there were information systems, usually in the form of reams of paper and informa- tion stored in people’s minds.

An MIS is more than a stream of unprocessed data that people can access. Unprocessed data is a data - base, not an MIS. An accounting sys - tem is an example of a database. The data needed for day-to-day opera- tions in an HSO are stored in various databases, which should be acces - sible for later analysis during strate - gic and operations decision making.

Ideally, these databases are linked in a central data repository, or “data warehouse,” which is the source of information for various analyses: identification of areas of excess variances from best practices, cost accounting and case-based budgeting, studies of factors contributing to clinical outcomes, prediction of healthcare resource utilization, evaluation of the revenue stream and factors controlling it, and so on.

There are several types of data-driven decision support systems that support effective strategic and operations decision making, including predictive, action, and executive information systems.

Predictive Information Systems Predictive information systems permit decision makers to draw inferences and make predictions from the data. Asking the system “what if” questions given certain assump- tions gets a response in the vein of “if that were done, then this is what can be expected to occur.” The system cannot evaluate the outcome; it just provides the information. A financial-planning-simulation model is a good example; other examples un\ ique to health - care are models that predict mortality rates in patient populations and resource use among health plan enrollees.

Action Information Systems A more advanced type of decision-making system embodies the organization’s criteria for choice and actually makes decisions on which the organization can rely and act. A linear- program model for optimizing utilization of operating rooms to minimize costs and use available staff is a good example. So-called action information systems automatically make the correct decisions, like process-control applications, that are acted upon immedi - ately (Mason & Hofflander, 1972). One example is an automated inventory control system that generates an order to replenish supplies when an item reaches its reorder point. © Owen Franken/Terra/Corbis Even before the advent of computers, HSOs maintained information systems, usually in the form of paper- based files. spa81202_08_c08.indd 227 1/15/14 3:50 PM CHAPTER 8 Section 8.1 Broad Operational Issues Executive Information Systems An MIS specifically designed to support the decision making of senior ma\ nagers is often called an executive information system (EIS) . This system provides direct access to timely, accurate, and actionable information. Typically, the EIS is in a useful and navigable for - mat so managers can easily explore trends, identify broad strategic issues, and drill down into the data for answers to strategic questions. An EIS cannot simply be purchased and installed. Its implementation requires the integration of many databases and capabilities.

Kelly (2002) suggests that EIS capabilities include the following: • Design that is specific to manager ’s information needs • Ability to access data about specific issues and problems • Extensive online analytic tools including trend analysis, exception reporting, and data-mining capabilities • Ability to aggregate data into meaningful reports • Capability of accessing a broad range of internal and external data • Interface that is easily navigated • Capability of being used by executives without assistance • Ability to present data in a graphic form Enterprise Resource Planning Over the past few years, more HSOs have put in place administrative and clinical elec - tronic information systems to better support operations planning and strat\ egic manage - ment. The creation of enterprise resource planning (ERP) capabilities is a process that attempts to electronically integrate and manage all of the individual computer systems in an organization’s departments. ERP is often the term given to a variety of applications that support administrative functions, such as materials management, the general ledger, accounts payable, and payroll. Ideally, for strategic and operational planning purposes in HSOs, ERP capabilities can integrate data from back office, patient care, and support ser - vice systems (see Figure 8.1). In organizations with such integrated information systems, strategy formulation is facilitated using data from the system and is easily updated as conditions change. spa81202_08_c08.indd 228 1/15/14 3:50 PM CHAPTER 8 Section 8.1 Broad Operational Issues Figure 8.1: Overview of ERP in HSOs The enterprise resource planning capabilities in a healthcare services organization use a single software program to integrate and manage all of the organization’s departments and functions as well as serve each department’s specific needs.

Building Consensus Operational planning is, in essence, a string of decisions that have to \ be made quickly at whatever level that planning is done. Unless there is consensus—complete agreement— on a decision by a group of people, majority rule takes over. There is nothing intrinsically wrong with that, except that it introduces the possibility that a minority is not committed to the decision. So how can consensus be built when there are differences of opinion? Back Ofce Systems HR management Payroll management Accounts/Financial management Inventory managementSupplier management Patient Care Systems Diagnostics Pharmacy Physiological monitoring Electronic health records Automated care plans Personal health records Order entry Support Service Systems Patient billing Scheduling/appointments Dietary Linen/laundry Biomedical waste Transportation Charge capture spa81202_08_c08.indd 229 1/15/14 3:50 PM CHAPTER 8 Section 8.1 Broad Operational Issues If time allows, it is best to get more data on the alternatives to aid in the decision-making process; however, that is not always possible. It may be that the lack of consensus is due to different positions and political ploys, not just different opinions. It is frequently easier to get managers and people to agree first that con- sensus is desirable (as well as pos- sible) than it is to obtain it (Ackoff, 1986). The additional time and effort it takes to achieve consensus is more than compensated for by the surge in motivation after agreement has been reached. Role of Policies A policy is an organizational directive designed to guide the thinking, decisions, and actions of managers and their subordinates (Pearce & Robinson, 2005). A policy plays several roles and serves several purposes. First, it saves higher management from wasting time making decisions that could be handled just as well lower down the \ hierarchy. Sec - ond, it empowers people lower in the organization to make those decisions, often where they should be made. Third, policies address issues that crop up frequently, so the amount of time saved is considerable. Finally, the decisions themselves could save the organiza- tion money, for example, by limiting the insurance plans accepted by the HSO.

In addition, policies • establish indirect control over independent action immediately; • promote uniform handling of similar activities; • ensure quicker decisions through using standardized answers; • institutionalize basic aspects of organizational behavior; • clarify what is expected and facilitate smooth execution of strategy; • provide predetermined answers to routine problems (Pearce & Robinson, 2005).

Examples of policies include the customer recovery policy at University of Wisconsin Hospitals and Clinics that allows registration staff to offer complaining patients some compensation to relieve their concerns, such as free parking or a vendor retail coupon (Berkowitz, 2010, p. 248). ZoomCare (2013) has a strict policy of not accepting patients covered by Medicare, Medicare Advantage, Medicaid, and Tricare insurance because of the low reimbursement rates. Interfaith Community Health Center (2013) in Belli\ ngham, Washington has a policy of not prescribing narcotics or controlled substances. Patients requiring such treatment are referred to a specialist for pain management. West Rock/The Image Bank/Getty Images When consensus is not achieved, a decision is often based on majority rule. spa81202_08_c08.indd 230 1/15/14 3:50 PM CHAPTER 8 Section 8.2 Operational Planning and Budget Planning Discussion Questions 1. All organizations are systems, yet they themselves contain many systems. Is this possible?

Explain. 2. How might one manage the microsystems to improve the functioning of the larger system? 3. How can “systems thinking” improve operational decision making? 4. If some management information systems are simply databanks, are they really systems?

Explain. 5. Can an information system provide an HSO with a competitive advantage? If so, how? 6. The point was made that consensus in decision making means total buy-in to the decision and smoother implementation. How might you tell the difference between real consensus and several people just “going along” with the majority? 7. If consensus is desirable to achieve, whatever happened to dissent? Isn’t dissent also con- sidered a spur to better decision making? Discuss. 8. A downtown physician clinic has a policy of not validating a patient’s parking receipt unless the patient was there for an office visit. One day, a patient of the clinic came in to see a nurse who happened to be off that day. When he asked to have his parking permit vali - dated, the front desk registrar refused. What should the registrar do—stick to the policy and risk angering or perhaps losing a patient or make an exception? Policies should be developed in written form, widely distributed throughout the HSO, and discussed at all meetings once finalized. In written form, employees can constantly refer to them as an authoritative source until they become second nature. 8.2 Operational Planning and Budget Planning In most organizations, operational and budget planning are combined into the same process. However, because the two are significantly different, they will be discussed separately.

Operational Planning At the conclusion of the strategy for - mulation process, the vice presidents and physician leaders of the different functions, in functionally organized HSOs, take the strategic decisions to their departments and, with their key managers, draft functional objectives to be achieved by the end of the next fiscal year. In other types of organi - zations, key operational units get to do the same thing. For example, in\ finance, exam - ples of operational objectives (with the addition of the quantitative e\ lement) might be to meet or exceed budgeted net income, maintain cash collections at or abov\ e net revenue, © Artur Gabrysiak/iStock/Thinkstock The operating units in an HSO must decide how to meet the objectives given to them by the end of the fiscal year. spa81202_08_c08.indd 231 1/15/14 3:50 PM CHAPTER 8 Section 8.2 Operational Planning and Budget Planning and increase annual fee-for-service insurance revenue. Quality objectives could be built around issues of clinical and service performance and even patient satisfa\ ction.

The directives then go to the actual operating units that must meet those objec\ tives. Their challenge is to decide what must be done to meet the objectives by the e\ nd of the fiscal year. This may mean continuing to do what they have already been doing, changing what they have been doing, or even changing an objective if it appears to be \ impossible. They must develop a series of tasks and specify who will be accountable to do\ what, when, and for how much, with a clear output and summary of their efforts.

The operating units then submit their draft plans to their managers, who\ coordinate with other plans in the functional area and modify, if necessary, the objectives and budgets.

These then go to top management, who reviews them with knowledge of other plans from the other functional areas. Because no first draft is ever perfect and usually goes over budget, the plans are sent back down for revision. The iterative nature of the opera- tional planning process means that, in practice, draft versions of plans could go up and down the hierarchical chain more than twice (see Figure 8.2). The revision process takes place in a succession of meetings, at the end of which planning document\ s are revised.

After one or two more iterations, top management approves and finalizes the operational objectives, budgets, and tasks before the fiscal year begins. Only if they have changed significantly might the board get involved again.

Figure 8.2: Operational planning process During the operational planning process, draft versions of plans could go up and down the hierarchical chain more than twice before final approval. This figure incorporates budget planning, which will be discussed later in the section. CEO and Board Functional VP Level and PhysicianLeaders Managers, Employees, and Physicians Approve chosen strategies and organization-wide objectives, programs, and contingencies Review functional plans and adjustments made to match available resources Set unit objectives,activities, budgets, and accountabilities Negotiate adjustment to plans to match allocated budget Final approval Set functional objectives Consolidate functional plans and budgets Final approval spa81202_08_c08.indd 232 1/15/14 3:50 PM CHAPTER 8 Section 8.2 Operational Planning and Budget Planning Project Management Tools For smaller companies, project management software exists to help in operational plan- ning at the department or unit level. This software is especially useful for initiatives with lots of smaller tasks that must be done both sequentially and in parallel. PERT (Project Evaluation and Review Technique) has been around for a long time and is an operational tool used in project management to analyze and represent the tasks involved in complet - ing a given project.

The most valuable use of PERT is helping project managers determine when a project will be finished and the likelihood that it will be completed on time. E\ ach task is mapped on a network diagram clarifying which tasks must be completed before others can be started and which tasks can be done simultaneously. For instance, suppose one of the operational plans of a community health center is to implement a colon cancer screening initiative. There are three major tasks that need to be completed: changes to the comput - erized patient record system to allow for data mining to identify patients needing to be screened, staff training in the use of the data mining capabilities, and creation of a patient notification system. First, the record system software changes must be planned with pro - grammers and updates completed. Staff training can start before the computer updates are completely finalized. Last, the system can begin generating patient no\ tifications. Each of the three major tasks might include 10 or 20 substeps. By using a PERT chart, the health center can interconnect the substeps in a sequential timeline that allows them to see th\ e minimum and maximum time frames for the major tasks and all the different substeps that are required.

Online project management solutions are widely available. Most Web-based project man - agement tools offer the same basic options, including task allocation and tracking, resource allocation and management, risk management, scheduling timelines and dea\ dlines, doc - ument archives, and communication. Online project management solutions offer users transparent, easy access to files and communications, which in turn enables impr\ oved teamwork, enhanced time management, and improved task efficiency.

Reward Systems Once the detailed departmental plans are finally approved, it is important to put in place a reward system that will motivate the achievement of operational, and hence strate - gic, objectives. This system of rewards incentivizes people to excel and achieve beyond expectations. Rewards are primarily (but not exclusively) financial and vary by hierarchi - cal position.

Incentives make up approximately 10% of CEO pay at HSOs, according to a 2012 survey of 262 leaders from a variety of organizations, including hospitals and health systems (HealthLeaders Media Intelligence Unit, 2012). Hospital CEOs listed operating margin (67%), patient satisfaction (60%), clinical quality (54%), and fin\ ancial efficiency (44%) as the four top factors for their current incentive payments.

The rewards given to middle managers are typically tied to functional or operational objec - tives such as productivity, cost savings, quality improvements, and myriad others. The rewards include performance bonuses, promotions, raises, profit sharing, and possibly stock options. Employees’ and supervisors’ rewards are generally tied to contributing to the achievement of functional or operational objectives as team players and may include spa81202_08_c08.indd 233 1/15/14 3:50 PM CHAPTER 8 Section 8.2 Operational Planning and Budget Planning some combination of profit sharing, bonuses for exceptional and timely work, and raises.

Monetary reward possibilities, however, are much more limited in nonprofit organizations because the use of financial rewards such as ownership incen- tives, stock-based pay, and profit sharing is impos - sible or inappropriate, due to the non-distribution constraints (Brickley & Van Horn, 2002). Other rewards, while nonfinancial, are nonetheless important. Intangible rewards range from fre - quent words of praise (or constructive criticism), to special recognition at organizational gather - ings or in its newsletter, increased autonomy, and more opportunities for continuing education.

Both financial and nonfinancial rewards require accurate measurements of the organization’s per - formance that, in turn, typically depend on a reli - able and up-to-date MIS. In creating the reward system, executives have to guard against the temptation of functional departments to set their operational objectives too low in order to increase their rewards for achieving those objectives. Some experts maintain that organizations should never offer a promotion as a reward for two reasons: It destroys the organization’s carefully constructed compensation system, and promotions should be given only to individuals who are ready to assume the greater responsibility of the higher position. Case Study: Geisinger Physician Compensation Tied to Strategic Priorities illustrates how one HSO links rewards with goals. © Mark Airs/iStock/Thinkstock In creating a reward system, executives should guard against the temptation of functional departments to set their operational objectives too low in order to increase their rewards for achieving those objectives. Case Study: Geisinger Physician Compensation Tied to Strategic Priorities Geisinger Health System, an integrated delivery system in Pennsylvania, has a national reputation for delivering high-quality, cost-efficient healthcare. Achieving this reputation has been enabled, in part, by how the salaried physicians are rewarded. Geisinger Health dedicates approximately 20% of total expected physician compensation to achievement of strategic priorities.

Geisinger employs more than 800 primary care and specialty physicians. Each month, these physi - cians receive a paycheck representing 80% of their base salary, which is calculated according to workload and other factors such as skills, training, intensity of services, and other activities such as research, teaching, and administrative duties. It is expected that employed physicians meet defined work unit requirements. However, Geisinger is not just focused on productivity. Thus, approximately 20% of the salary of employed physicians is tied to achievement of strategic quality, efficiency, and patient volume goals. Physicians receive these incentive payments twice a year—in March and September. The March payment reflects the physician’s July–December performance, and the September payment reflects the physician’s January–June performance.

(continued) spa81202_08_c08.indd 234 1/15/14 3:50 PM CHAPTER 8 Section 8.2 Operational Planning and Budget Planning The following is a useful checklist for designing a financial incentive-\ compensation (reward) system: • The performance payoff should be significant—perhaps 10%–12% of base pay, while 20% will command the attention of the potential recipient. • Incentives should extend to all workers, not just the top executives. • The reward system should be administered with scrupulous care and fairness. • All individuals should know what the reward system is at the beginning of the year or else they won’t be appropriately motivated. • Incentives and the performance targets on which they are based should not be impossible to achieve. • Payoffs should occur as soon as possible after results have been acknowledged. • Confine payoffs only to results achieved. Payoffs should not be made for behav- iors such as putting in long hours for a long period, or even going the \ extra mile but coming up short. Once an exception is made for one person, they will\ be made for more, and the reward system will quickly get out of hand (Thompson, Strickland, & Gamble, 2008).

Financial rewards should never be made when the organization’s revenue is below a level to make them possible or for average or below-average performance. Case Study: Geisinger Physician Compensation Tied to Strategic Priorities (continued) Goals that support the strategic aims of Geisinger Health are defined at the service-line level, and physicians are financially rewarded for achieving the goals in their service area. For instance, a goal for emergency department (ED) physicians is to reduce the percentage of patients who leave without being seen to less than 1.5% of all ED patients.

Specialty physician incentive payments are determined by work in the following areas: quality, innovation, legacy (educational and research missions), growth (increase in populations served by Geisinger), and financial (units of work for patients in fee-for-service contracts). The areas are weighted, with approximately 40% of a specialty physician’s incentive payment based on four to five service-line-specific measures of quality that have been jointly agreed to by physician leader - ship and Geisinger senior management. Only 25% of specialty physician incentive payments are based on meeting financial goals.

Primary care physician incentive payments are based on work in similar areas. System-wide strate- gic goals such as improving care for patients with chronic diseases (e.g., diabetes) and improving patients’ satisfaction are examples of quality expectations tied to incentive payments for pri - mary care physicians. The physician’s citizenship—collaboration and teamwork with colleagues— accounts for 6% of incentive compensation (Lee, Bothe, & Steele, 2012). spa81202_08_c08.indd 235 1/15/14 3:50 PM CHAPTER 8 Section 8.2 Operational Planning and Budget Planning Discussion Questions 1. Some HSOs are content to keep doing what they have always done. In fact, the strategy and organization-wide objectives eventually comprise their operational plans added together.

How would you persuade such organizations to do planning the other way around? 2. How does an organization specifically benefit from doing operational planning? (Contrast with an organization that might do no operational planning.) 3. Some HSOs operate “on the edge” and are forever “putting out fires.” Operational planning isn’t even in their lexicon. If you had an opportunity to talk to the CEO of such an organiza- tion, what would you say? How might the conversation go? 4. If you were the CEO of a hospital, what type of rewards would you offer managers for stay- ing within budget and meeting operational goals? Are financial rewards the best way to motivate people to excel and achieve beyond expectations? Explain the advantages and drawbacks of different types of incentive rewards. Budget Planning Budget planning is the process of matching available organizational financial resources (cash on hand, a line of credit or loan, and any investment) with what the organization needs to spend to implement its strategies. It includes revising requests for money from organizational units until their requests and available resources match. What each organi - zational unit is finally approved to spend constitutes its budget.

The finance department begins the process by coming up with a comfortable estimate of financial resources that is the sum of what the HSO has and could obtain (through additional borrowing or equity investment). Given knowledge of each department’s current spend- ing and the spending implied by the new strategic initiatives, it further arrives at a tentative budget total for each department or cost/profit cen - ter. That budget figure is given to each departmental manager as they do their planning for the year. When they come up with their initial plan to meet the functional objectives, they itemize every dollar it might cost to do so. If their estimate equals or comes in under the budget figure, there is no problem. If their estimate exceeds the budget figure, they try to adjust as much as they can but more often will say that the job can’t be done for the budgeted amount. © leungchopan/iStock/Thinkstock Making precise financial resource predictions is often a difficult task, given the perpetual uncertainty of regulations and reimbursement in the healthcare industry. spa81202_08_c08.indd 236 1/15/14 3:50 PM CHAPTER 8 Section 8.2 Operational Planning and Budget Planning The perpetual uncertainty of regulations and reimbursement in the healthcare indus- try makes precise financial resource predictions a difficult task. HSOs often base future resource predictions on historical financial relationships—volume versus revenue, and volume versus expenses. For instance, Fairview Park Hospital in Dublin, \ Georgia “deter - mines their budget based on prior year usage, gauging future treatment and service usage on percentages from the previous year to project future volumes” (Fruitticher, Stroud, Laster, & Yakhou, 2005, p. 174).

As Figure 8.2 shows, departments may get their plans back from an upper-management review with a mandate to reduce spending in some way to match the budget. Either departmental members become creative and find a way to deliver the mandated reduc - tions or they respond that the only way to get the two numbers to match is to modify th\ e objectives. Of course, the latter reply must include their reasoning for the position, and their supervisor then becomes their advocate.

The revised plans are resubmitted so that the CEO and top management have the ben - efit of looking at all the departmental plans and budgets. At this point, they can be per - suaded that implementing the strategy will indeed take more money than they thought and see whether they can raise the additional capital. If they can, then\ higher budgets are approved that match the estimated spending from all departments, and the budget- planning process ends. If they can’t, then some or all departments are told that they must meet their objectives with the available budget. For example, if adding \ two people was in the business office plan to help reach its customer service objectives, then it might have to get the same objective accomplished with existing staff. The process ends when depart - mental budgets finally match available financial resources together with their commitment to achieve their functional objectives.

Normally, operational and budget planning should be enough to enable each organizational unit and, by extension, everyone in the organiza- tion, to know what they have to do and accom - plish during the coming fiscal year. However, some organizations also engage in profit plan- ning, which is the process of arriving at an esti - mate, month by month, of the profit the whole organization intends to achieve. For each month, the total company budget is subtracted from esti- mated revenues; the sum of the monthly profits equals the overall profit objective for the coming year. Profit planning is not widely used and is con - sidered unnecessary by some strategic planners.

The budget planning process can also be thought of as a process for reducing costs. Not only does it ensure that spending will be covered by projected financial resources, but it also is a forcible func - tion for reducing costs. It is human nature to take the easy route or continue doing what you have Corbis/SuperStock Costly “sacred cows”—such as shoe covers—are not unique to healthcare, but they may be especially prevalent in hospitals. spa81202_08_c08.indd 237 1/15/14 3:50 PM CHAPTER 8 Section 8.2 Operational Planning and Budget Planning always done. That will happen unless someone requires it to be done for less. The very requirement forces the consideration of alternatives.

For-profit business entrepreneurs are often faced with this problem when writing their business plan and trying to seek startup capital: Their first pass at a cash-flow projection often shows that the business might not make enough money, or even make any money at all, which is certainly not what the entrepreneurs or potential investors want to hear.

All the assumptions must be reexamined and, with more research and thought, revised figures should be produced of both the revenue model and the expenses. If the revised business plan looks better but still doesn’t come close to achieving \ the 20%–40% ROI required by typical investors, at this point the entrepreneur should consider any and all alternatives for achieving the targeted revenues for less cost. More attractive margins, at least on paper, won’t be possible until he or she is forced to consider lower-cost alterna- tives. Having had to put so much thought into the revised estimates also makes defending them easier.

The budget planning process is an ideal time to force people to examine ways of reducing costs, which might not happen any other way. David Kaczmarek, director at the Chicago- based consulting firm Huron Healthcare, notes that costly and wasteful “sacred cows are not unique to healthcare. But they do seem to have a special affinity to hospitals” (2011, para. 8). Kaczmarek suggests that operating room practices such as using shoe covers and requiring hospital-laundered scrubs are needless “resource-consuming anachronisms” (2011, para. 36).

Discussion Questions 1. What risk is the organization running when it approves expenses that exceed anticipated financial resources? 2. Departments in publicly funded (city, state, and federal) HSOs are well known for trying to spend their entire budget allocations so that they will be funded again the following year at least at the same level. If they do not, they might be viewed as not “needing” their budget allocation and so be allocated a lesser amount. What is wrong with this process? 3. What do you think might happen when, midway through the year, expected financial resources fail to appear (for example, Medicare rates are lowered or funding from a govern- ment agency is slashed)? What options might an organization in this position have? 4. Whose responsibility is it in the organization to reduce costs? 5. What would prompt an individual or departmental unit to investigate how something done in its area could be done at lower cost? 6. In your opinion, what “sacred cows” in healthcare delivery could be eliminated or done at a lower cost? spa81202_08_c08.indd 238 1/15/14 3:50 PM CHAPTER 8 Section 8.3 Involve Everyone 8.3 Involve Everyone Just as it is a mistake to do strategic planning with the participation \ of only the top manage- ment group, so also is it a mistake to do operational planning with just middle\ managers.

To be sure, middle managers bear the brunt of the responsibility for operational planning because they will be called upon later in the year to implement the plan\ s. But make no mistake, everyone in the organization is and ought to be involved, not only in operational planning but also in carrying out the plans.

By virtue of their size, small HSOs have no option but to involve everyo\ ne. Yet exceptions abound. The manager for a small medical equipment provider complained of being left out of the planning process entirely. The company was being squeezed by its large cus - tomers, who were forcing the price down to maintain their own profitability. The custom - ers said that if this firm could not supply medical equipment at the des\ ired price, there would be lots of other suppliers that would. The president and co-owner of the company was the one who negotiated with these large clients for future business. Time and again, he approved a price point that was below cost, because he was convinced that he\ wouldn’t get the business otherwise, and he never checked first with the manager, who could have advised him of current costs and margins. The result was that it put enormous additional pressure on reducing costs while margins all but eroded. This scenario was repeated many times, and this was a management team of only three people.

In large HSOs, it is all too common not to involve the rank and file in operat\ ional planning.

In many organizations, information is divulged or passed down only on a “need t\ o know” basis. People at the bottom just do what they are told. This is not what happens at health - care organizations recognized by the American Nurses Credentialing Center (ANCC) as magnet facilities. The Magnet Recognition Program (MRP) recognizes healthcare orga - nizations for quality patient care, nursing excellence, and innovations in professional nursing practice (ANCC, 2013). One criterion that applicants must meet is involvement of nurses in budget development. A 2008 MRP recipient, Wheaton Fran - ciscan Healthcare–St. Joseph in Mil - waukee, Wisconsin, has a shared governance operations council where direct care nurses are provided an opportunity to tell management what resources they need to be effective in their job. These resources may include requests for new equip - ment, additional education time, and staffing changes. This input is used by unit directors and patient care supervisors to prioritize operating and capital budget planning needs.

At St. Joseph’s Hospital, informa- tion related to departmental budgets and overall organizational finances is shared with nurses through staff and leadership meetings (Erny, 2009). Cultura Limited/SuperStock One reason to involve everyone in an HSO is that it makes it easier to get people to stop doing things that either block new initiatives or hinder the organization’s productivity. spa81202_08_c08.indd 239 1/15/14 3:50 PM CHAPTER 8 Section 8.4 Get It Done on Time As the discussion of organizational change in Chapter 2 made clear, smooth and enthusi- astic implementation of any task is not possible unless those who are to do the work are involved in the planning. This is much easier said than done. It depends\ to a large extent on the kind of culture that exists in the organization. Cultures that are command-and- control or bureaucratic are by their very nature not inclined to involve everyone as they should. Open, adaptive, innovative, nimble organizational cultures as discussed in Chap - ter 2 would not be able to progress without involving everyone and seeking their input, especially in planning and suggesting new ideas. This culture of openness requires the implementation of participative leader–member behavior, which encourages supportive- relationship behavior and the open sharing of ideas during decision makin\ g and strategic and operational planning. As noted in Section 8.1, building consensus is important during operational planning and is also important for organizational change.

Another reason to involve everyone in the organization is to make it easier to get people to stop doing things that either get in the way of new initiatives or ar\ e no longer useful in helping the organization be more efficient and productive. Change involves dropping old habits if new ones are to take their place. Change will stall or not take hold to the extent that people cannot or will not forget what they used to do. It is therefore wise to involve everyone and make sure they understand what they have to do and why; how their jobs, roles, and expectations are changing; and how and why they will benefit from the changes. They should also have a mechanism for repeating the new imperatives often until force of habit takes over and the changes and improvements become second nature.

Discussion Questions 1. The ease with which everyone in the organization can be involved in operational planning depends on the organization’s culture. Might involving everyone actually change the cul- ture? Comment. 2. This section advocated involving everyone. Surely not everyone? Would this include the people loading supplies on the receiving dock? The maintenance staff? The mailroom clerk?

The secretaries? Comment. 3. If you don’t agree that everyone should be involved, where might your cutoff be? Give rea- sons for your answer. 4. If you advocate a cutoff, explain why that might be superior to involving everyone. 8.4 Get It Done on Time The operational planning process should be timed so that by the time the new fiscal year starts, all the strategic decisions, operational plans, and budgets are completed. Final approval of the plans and budgets should be completed within a couple of wee\ ks of the start of the fiscal year. Bear in mind that both strategic and operational planning takes place in addition to people’s regular daily activities. But how long should the strategic and opera - tional planning processes take? There is no simple answer. Consider four scenarios—among many—beginning with the best or ideal situation: spa81202_08_c08.indd 240 1/15/14 3:50 PM CHAPTER 8 Section 8.4 Get It Done on Time Case Study: Strategic Planning Process at Henry Ford Health System Henry Ford Health System, headquartered in Detroit, Michigan, is a nonprofit integrated healthcare deliv- ery and insurance system that offers services across the care continuum through nine business units with a diverse network of facilities throughout southeast Michigan. The health system’s strategic planning pro - cess, which is repeated annually, spans an entire year.

During the first 6 months scheduled, facilitated meet - ings are held with the board of trustees, the system performance council, senior leaders in the business units, and key community stakeholders. These discus - sions result in identification of short-term (1-year) and long-term (3-year) strategic initiatives and orga - nization-wide measures of success.

Each strategic initiative owner creates detailed action plans that include estimated revenue, expense, and capital projections. This information is used by the finance department to refine the system’s 3-year operating and capital budgets. The system strategic plan for the next 3 years is approved by the board of trustees each October. The system and business unit level strate - gic plans and budgets are then communicated to all leadership, employees, partners, and suppli - ers through meetings, newsletters, and emails/podcasts. System and business unit action plans and performance targets are communicated to departments and integrated with departmental and individual performance management plans. As action plans are implemented by the assigned strategic initiative owners, progress is reviewed at biweekly organizational performance review sessions. Progress toward achieving system-wide strategic initiatives is evaluated at least twice a year. What is learned during these reviews becomes part of the strategic discussions at the start of the next cycle (Henry Ford Health System, 2011). Pixtal/SuperStock If one runs out of time with the operational planning process, one can shorten the approval cycle. Instead of going all the way up the hierarchy, plans should go up to the next higher level where they can be refined.

• The HSO is used to formulating strategies, and much of the required research is done throughout the year. It is performing well and is used to transforming stra- tegic decisions into operational plans and can get those plans approved in one cycle. The two processes together, especially for small to mid-size companies, take no more than 2 months. • Like the scenario just described, but for a well-performing larger HSO with more divisions and vertical layers, coordinating operational and budget planning takes longer but still gets done within 2 to 3 months. • This HSO is not performing very well and has financial problems, but because it has some experience with strategic and operational planning, operatio\ nal and budget planning takes no longer than 3 months. • This HSO is constantly putting out fires, lurching from crisis to crisis; strategic and operational planning take back seats, if done at all. If anything is\ done, it will probably be done badly, with changes continuing to be made after “approvals” have been given. The time frame needed for planning is impossible to est\ imate.

The ideal situation is illustrated in Case Study: Strategic Planning Process at Henry Ford Health System. spa81202_08_c08.indd 241 1/15/14 3:51 PM CHAPTER 8 Section 8.4 Get It Done on Time There are organizations, of course, that are run autocratically, with the CEO telling every- body what to do and being the only one to approve anything. In this situation, the com- bined processes should not take long at all, perhaps 2 to 4 weeks. This was not included as a scenario in the preceding list because, although it might take the least amount of time, it doesn’t qualify as a “best” or “ideal” scenario. Howev\ er, it often works in that kind of organization.

Sometimes, the process takes longer than anticipated, and the deadline of the new fis - cal year is missed. What usually happens is that the full operational planning process is aborted, and whatever stage it has reached is hurriedly approved. After all, the start of the new fiscal year cannot be changed. One way around this dilemma is to shorten the approval cycle. Instead of going all the way up the hierarchy for every approval cycle, as shown in Figure 8.2, plans should go only to a higher level, where they are refined much further. This will shorten the operational planning cycle.

For an organization that has not previously done operational planning, 2 months is a rea - sonable allowance for the first time. In each successive year, familiarity with the process and everyone’s ability to produce better plans should enable the HSO to be more accurate in scheduling the process without any drop in quality. It is best to start strategy formula - tion as late in the fiscal year as possible while leaving enough time for decent operational and budget planning. The time frame of 3 months, mentioned earlier, is a whole quarter and, really, too long to devote to planning, mainly because conditions will have changed during such a long planning process. For a large organization that has many layers and planning units, operational planning does take more time than anyone would like.

Should a company ever abandon the operational planning process if time is running out?

The short answer is no. As long as management approves what should be allocated and achieved during the first month of the fiscal year, there will be that additional month to finish the process properly. In the next chapter, we consider some tools that large organi - zations can use to speed up both strategic and operational planning and keep the “intru- sion” of planning in people’s busy lives to a minimum.

Discussion Questions 1. Suggest one way in which operational and budget planning could suffer if the process were rushed. 2. Imagine that the operational planning process was well into its third month and already extant conditions had changed (for instance, Medicare reimbursement rates are unexpect - edly slashed). What should the HSO do? For example, should plans at the lowest levels be changed first or only those plans most affected by the changed conditions? 3. Should just the plans in question 2 be changed or should the budgets be changed as well? 4. With more experience in operational and budget planning, it should be possible to get it done in less time each year. Exactly how important is getting it done quicker? spa81202_08_c08.indd 242 1/15/14 3:51 PM CHAPTER 8 Summary & Resources Summary & Resources Chapter Summary •Operational planning focuses on planning the projects, programs, tasks, and activities the organization needs to implement its strategies and includes both what it already does as well as additional programs it must do the next year.

•Budget planning focuses on getting all operating units to spend what the\ y need to spend to do what they must do without exceeding the total financial r\ esources that the HSO has or may have at its disposal for the coming year. As plans take shape for each operational or functional unit, they inevitably undergo changes until their estimated costs match the estimated financial resources allocated to that operational unit.

•Operational planning is carried out more effectively when everyone involved in the process understands that everything is part of a larger system, that anything they do affects other parts of the system, and vice versa. That understanding, called systems thinking, is critical in operational planning.

•Having access to the right information for management decision making an\ d action is vital—HSOs could not operate without such information. Many\ such systems are nothing more than databanks, forcing the user to make sense of and interpret the data. Transforming them into systems such as ERP (enterprise resource planning) makes such data far more useful, but they require consider - able investment, not only in capital, but also in transforming the way p\ eople work and learn.

• Operational decisions should be based on consensus at each decision-maki\ ng level, which means complete agreement. Getting a majority vote, for example, means there is a minority that disagrees with the decision, which in turn means that implementation will be that much more difficult.

•The policies in an organization are in effect the rules that guide behavior in often- encountered situations. That way, in such situations people will make the correct decision all the time. Having the policies in writing allows people to r\ efer to them at any time and gives them the force of law (which, in the HSO, they are). Policies can cover, for example, how consumers and the environment and vendors are treated, as well as mundane subjects like what can and cannot be included \ in an expense report. Operational planning must take into account the organization’s current policies.

•Operational planning is the process by which objectives are translated into proj - ects, programs, tasks, and activities that get progressively more detailed the fur - ther down in the organization the process goes. Budget planning is done at the same time. Operational units must develop their plans while staying with\ in the budget allocated to each one, requiring first drafts to undergo several revisions in order to balance these two requirements as they go up and down the organiza - tional hierarchy. One of the unheralded benefits of budget planning is the creativ - ity unleashed in order to reduce costs. spa81202_08_c08.indd 243 1/15/14 3:51 PM CHAPTER 8 Summary & Resources •Everyone in the organization should be involved in operational and budget plan - ning, not just managers and supervisors. When this happens, new ideas ha\ ve a chance to surface, consensus is more likely, and implementation goes more smoothly.

• Operational and budget planning have to be done fairly quickly just befo\ re the start of the new fiscal year. Doing this is difficult without compromising the process and because involvement is an additional burden on top of day-to-day responsibilities. The risk with taking up to 3 months to do operational a\ nd bud - get planning is that conditions will change during the process, requiring plans to be further changed as a result. Experience helps, as does revising plans first before submitting them up the ladder for approval. Web Resources http://www.clinicalmicrosystem.org The Dartmouth Institute Microsystem Academy is a globally recognized leader in research, education, and development of healthcare systems of care based in clinical microsystem applied research.

http://www.naccho.org/topics/infrastructure/accreditation/strategic-plan-how-to.cfm This is a National Association of County and City Health Officials booklet titled Strategic Planning: A How-To Guide for Local Health Departments.

http://www.nursecredentialing.org/Magnet/ The Magnet Recognition Program - sponsored by the American Nurses Credentialing Center provides a model for involving staff in accomplishing organizational goals to achieve desired outcomes. Key Terms action information system A system that automatically makes (the right) decisions that are acted upon immediately. budget planning The process of matching available organizational financial resources (cash on hand, a line of credit or loan, and any investment) with what the organiza- tion needs to spend to implement its cho- sen strategies. It includes revising requests for money from organizational units until their requests and available resources match. What each organizational unit is finally approved to spend constitutes its budget. clinical microsystem The combination of a small group of people who work together in a defined setting on a regular basis—or as needed—to provide care and the individuals who receive that care. enterprise resource planning (ERP) A process that attempts to electronically integrate and manage all of the individual computer systems in an organization’s departments. executive information system (EIS) A system that supports the decision mak- ing of senior managers. spa81202_08_c08.indd 244 1/15/14 3:51 PM CHAPTER 8 Summary & Resources management information system (MIS) A system that must supply the basic information managers need for making decisions. operational planning A process that involves preparing detailed organizational plans for the coming fiscal year. It includes programs, projects, and activities that the organization is already doing, as well as new ones required by any change in strat- egy. It includes detailed plans by organiza- tional unit. Finally, it includes coordinating all these activities to make sure they sup- port stated strategies.

PERT (project evaluation and review technique) An operational tool useful in planning, scheduling, costing, coordinat- ing, and controlling complex projects. policy An organizational directive designed to guide the thinking, deci- sions, and actions of managers and their subordinates. predictive information systems Permits decision makers to draw inferences and make predictions from the data. reward system A system that incentivizes people to excel and achieve beyond stated objectives. systems thinking The realization that affecting one part of the system affects other parts and that what is done must benefit the whole and not just a particular part at the expense of other parts. spa81202_08_c08.indd 245 1/15/14 3:51 PM CHAPTER 8 spa81202_08_c08.indd 246 1/15/14 3:51 PM