ENHANCE PERFORMANCE, ELIMINATE THE BUDGET

Gordon T Edwards

RESEARCH PROJECTEnhance Performance, Elimination the BudgetViterbo University

The Problem

Overview• Background literature• Purpose of the study• Methods• Results• Discussion

• Implications• Limitations• Future Research

Corporate Budgeting• Overall dissatisfaction of current budget process• Consumes too many resources• Takes to long to prepare (out of date when done)• Undermines ethical foundation of organization• Illusion of control by robbing potential

However, finance management continue to believe budgets are indispensable (Rickards, 2008)

(Hope & Fraser, 2000)

Revise or Abandon

(Rickards, 2006)Potential number of users

Incr

easi

ng r

adic

al

chan

ges

Traditional Budgeting

Better Budgeting

Advanced Budgeting

Beyond Budgeting

A Radical Concept• Beyond Budgeting Framework

1. Targets relative to competition2. Rolling forecasts3. Rewards on relative performance4. Up to date/transparent information5. Give managers freedom to act6. Adaptive to changing environment

• A new management model, not just financial control structure

Budget

(Hope & Fraser, 2003)

Slow Adoption• Lack of empirical data on effectiveness• Lack of practical experience on implementation• Difficulty in managing without budgets• Governance concerns• Environmental factors• Fear of change

(Rickards, 2006)

Purpose of this studyA qualitative case study to explore the process that healthcare organizations undertook to eliminate the traditional budget.Specifically explored,

• Motivation• Governance• Internal controls• Financial tools• Expectations

Methods• Qualitative interviews• Interviews transcribed• Review of transcripts• Coding and themes• External peer review

Research QuestionsDescribe the process your organization undertook in transitioning away from the budgeting process for operating and capital.

Follow-up inquiries included:• Motivation to eliminate the budget• How concerns raised by others were addressed• The financial tools/reports provided to management to hold them

accountable for performance• Describe education process• Any changes to internal control policies• How are financial targets established• Benefits realized

Participants  Operating Revenues Leaders

Organization #1 Excess of $700 million Participant A, Male

Participant B, Female

Participant C, Male

Organization #2 Excess of $3 billion Participant E, Male

Organization #3 Excess of $2 billion Participant D, Female

Five Major Themes• Budget Wasteful• Gonna Go Forward• Quarterly Rolling Forecast• Financial Management• Easier in the Old World

Budget Wasteful“Wrong the day after we create it”“We’re just not really using them to manage anymore”“Spend all your budget or you’re gonna lose it”

“Cost us a million dollars to create it . . .and it was wrong”

Gonna Go Forward“CEO . . put it on [his] board performance plan”

“[driving] towards continuous improvement versus thinking every year is a new day and that January first, things magically change”

Organizational self confidence “this is the right thing to do. We’ll figure it out”

“Let’s get right and close and then will continue to improve it and modify it”

“At some point we had to leap”

“It wasn’t about eliminating the budget [but] replacing it with a better financial planning tool”

Quarterly Rolling Forecasts• High level forecast

• Basic economic inflation• Key revenue indicators• Major impacts

• At least 18 months into future• New management tool

• Senior leadership review• Forecast versus target• Establish action plans

“Every quarter we’re [senior team] having a pretty robust discussion and it’s never about the budget’s wrong”

Finance Management“Annually . . . [the Board] approve an operating margin target, maximum capital spend, and a price increase”

Hold management accountable through timely key metrics• “if the volume’s not coming in and you’re not adjusting your hours, you’re not gonna

hit your productivity target”• Productivity metrics were electronically delivered on a daily basis

Financial performance compared to “run rate” and prior year• “the only thing that changed was instead of . . . a budget, there was a run rate”

“We allow people a lot of leeway”

“We don’t micro-manage . . . People are accountable to year-over-year improvement and its on margin, its on productivity”

Avoiding the Inflexibility of Budgets

Easier in the Old World“99.9% of world still uses a very traditional management system and people

are comfortable with it and know how to do it . . . they don’t know what they’re walking into”

“front-line manager was struggling with what am I supposed to be accountable to . . . while they hate a budget in one way they like it”

“putting them [front-line managers] towards continuous improvement process was a bigger job than I anticipated”

“external world didn’t really know or care”

“People were pretty tied to their budgets as a safety blanket”

“I have this budget. I can spend it. Instead of if I don’t need it, then I won’t”

Discussion: Ideal Environment• Rapidly changing business climate• Organizational self-confidence• Cultural readiness to manage differently• Desire to encourage front-line decision making• Lean management may facilitate transition

Discussion: A Better Financial Management System

• Eliminated a “waste” of resources• Emphasized performance improvement• Clear accountability• Better communication across functional teams• Empowered front-line managers to run the business• Facilitated organizational nimbleness to changing

business climate

This researcher would recommend others adopt the alternative framework

Limitations• Size of the population

• Three organizations• Geographic location

• United States (west coast, east coast, and midwest)• Healthcare Industry• Researcher’s influence

• Educational and occupational background (e.g. CPA; Health System CFO)

Future Research• Link between Lean Management and Beyond Budgeting• Design of financial management systems and the

practical tools utilized• Performance outcomes of organizations that eliminated

traditional budgets• Relationship between organizational strategy and the

alternative financial management system

CASE STUDY

Two Visions for Improving Financenance

Vision A Vision BIncrease targets, measures, controls

Reduce targets, measures, controls

Improve financial and accounting expertise

Improve business analysis skills

Tighten top-down planning and control

Enable local managers to respond to events

Manage costs through tighter budgets

Eliminate costs that add no value

Measure to tighten accountability Measure to learn and improveManage risk through better procedures

Manage risk by raising competences

The Transformation

Consulting

Analysis

Transactions

Consulting

Analysis

TransactionsAccounts PayableCost AccountingPayrollAccounts Receivable

PricingCost EliminationFinancing

AcquisitionsProduct Line ProfitabilityRisk Assumption

Cunningham & Fiume 2003

Integrated Healthcare System• Located in the Midwest• Operating revenues in excess of $900M• Multi-specialty medical group, hospital operations, health

plan, nursing homes, retail pharmacy, and others• Roughly, 6,000 employees• Over 400 physicians

The Challenge• Existing Infra-structure

• Corporate Budget• Forecast Targets

• Board focus on corporate budget• Operating units compared to forecast• Forecast

• Too slow & detailed• Declining targets

• No traditional budgeting cycle in place• Educational effort

• No consistency in approach (different every year)

Readiness Assessment• Strong continuous improvement culture

• Quality Driven• Losing money

• Required immediate improvement from status quo• Managed cost reductions through attrition

• Many department felt under resourced• New finance leadership• Well respected peer operating without budgets (and Epic)• Confidence we could do something better

We Leaped

ObjectivesProblem we were solving

• Budget inaccurate and irrelevant over time• Budget not connected to daily management• Budget did not adjust to varying level of demand

Target state• Right information, right time for daily management• Financial forecast to enable management to proactively adjust

plans • Board to oversee outcomes versus detailed budgets

Board InvolvementBoard approved four targets

• Operating margin• Capital • Days cash on hand• Charge master increase

• Targets primarily driven based on capital plan and rating agency expectations

• Initial forecast• A $12M gap between targets and expected performance

• Discussions become more future orientated

Forecast Process• Best estimate of what will happen in the future, given what we

know today• Forecast 18 months into the future (6 quarters)

• High-level, not at a department level• Quarterly process, two weeks post quarter close• Evaluate accuracy

• Leverage past quarterly results as baseline• Adjusted for known projects• Utilized a few KPIs • No plugs

• Results discussed• Senior leadership team (on track, modify)• Finance Committee (with senior leadership team conclusion)• All management/Medical Staff

Management ReportsMetric Driven

• Cost per unit of service• Productivity (worked hours per unit of service)• Revenue (unit driven) per FTEs (medical practices)

Monthly Reporting• Actual compared to run rate (past three month average)

Future Intent • Daily productivity reporting• Improved financial reporting

Accounting Changes• Eliminated accruals at departmental level

Retained Aspects of Budgets• Capital

• Amount available to spend driven by forecasts• Managed under a “budget” approach

• Excluded specific subsidiary operations• Foundations, Health Plan, other decentralized operations• Stable business models• Incorporated into new approach once stable with largest operation

Semi-Annual Business Plan Reviews• Major business lines• Finance, quality, service, & people key metrics• Presented to senior leadership team• Key accomplishments, plans for improvement, & barriers

to achieving targets

OutcomesPositive• Management more focused on results versus budgets• Discussion became more future orientated• Operating results significantly improved

Negative• Managers wanted to know what they could “spend”• Reporting wasn’t adequate to support change• Change in leadership impacts sustained practice

Continued Challenges with Accountability Regardless of System

ComparisonsBudget New Planning Model

Board approved detailed budgets Board approved organizational targets

Annual Quarterly

Cumbersome, wasteful process Nimble, focused process

Slow to respond Quarterly discussion & course correction

Very detailed Focus on the significant few

Silo accountability System view / accountabilitySignificant resources to “balance” All hours redeployed to daily management

and quarterly forecastingVariance analysis to “budget” Variance analysis to continuous

improvement from previous periodStatic Dollar Focus Metric Driven

Better Alignment with Priorities

CONTINUED REFINEMENT

• A TON!• Think about language• Perceived ability to “control”

What’s in Name?

Foundational Change• Reduce targets, measures, controls

• Single measure rather detailed line item budgets• Consistency of measure between cost per and productivity per

• Enable local managers to respond to events• Manage within targeted costs per UOS

• Eliminate costs that add little value• Resources spent on improving performance versus negotiating budget

• Measure to learn and improve• Continuous feedback loop on performance• Action plans to improve current performance

• Focus is on responding to customer demand vs. anticipating demand

• How will managers know whether they are meeting financial performance goals?• Departmental Management reports are much the same as current reports for Flexing departments. Line item

detail data will be available for Actual compared to trend. Overall performance in Productivity and Exp/UOS will be compared to a target. Dollar variances for the period and YTD will be calculated. Bottom line: A manager will know “I am __ % and $_______ off my target.”

1003000 - OPERATING ROOM

Target Performance x

TargetCurrent Month

Run Rate (3 months)

Prior Year Month

Fiscal Year to Date

Prior Year to Date

Prior Year Total 4 Qtr Trend

IMPROVEMENT GOAL Total Operating Expense per Unit 26.18$ 27.99$ 27.60$ 22.13$ 27.60$ 22.13$ 25.93$ Total Revenue per Total Unit 136.53$ 136.17$ 139.75$ 128.11$ 139.75$ 128.11$ 128.80$ Total Hours per Unit 0.141 0.158 0.150 0.156 0.150 0.156 0.141

VariancesTotal Operating Expense per Unit (128,462)$ (1,333,205)$ Total Revenue per Total Unit (25,409)$ 732,465$

Hours Variances (1,206) (1,934) FTE Variance (6.8) (3.7)

STATS / ANALYTICS / METRICS

Salary & Wages per Unit 5.73 5.15 5.14 5.15 5.14 4.97Purchased Services per Unit 1.11 1.52 1.01 1.52 1.01 1.37Supplies per Unit 19.25 19.20 14.19 19.20 14.19 17.91Other Expense per Unit 1.89 1.73 1.79 1.73 1.79 1.69Total Operating Expense per Unit 26.18 27.99 27.60 22.13 27.60 22.13 25.93

IP Revenue per IP Unit 151.57 155.70 143.54 155.70 143.54 145.06OP Revenue per OP Unit 103.37 98.16 89.05 98.16 89.05 90.26Total Revenue per Total Unit 136.5 136.17 139.75 128.11 139.75 128.11 128.80

Productive Hours per Unit 0.131 0.124 0.131 0.124 0.131 0.119Total Hours per Unit 0.141 0.158 0.150 0.156 0.150 0.156 0.141

PRIMARY STATISTICIP Surgery Minutes - Primary 48,423 54,885 50,659 164,654 50,659 645,281OP Surgery Minutes - Primary 22,718 21,061 20,020 63,183 20,020 272,218

Total Primary Statistic 71,141 75,946 70,679 227,837 70,679 917,499

Common Questions

• How will leadership know if we are meeting overall and department targets? • Target Performance Report below has been developed in XYZ system to review performance by department in

all metrics by VP, Director, Community, or Network. Easily modified to add other columns of data or trending if required.

PeaceHealthTarget Performance Reports300 - Alaska UOS Revenue per UOS Expenses per UOS

MTD YTD Prior Yr MTD MTD YTD Prior YrDept Actual Actual Actual Actual Target Variance $ Variance Actual Actual

3001002000 INTENSIVE CARE 28 113 300 18,686 13,536 5,150 144,197 13,285 12,0673001002100 MEDICAL-SURGICAL 280 1,164 3,460 3,928 3,072 856 239,625 3,285 2,9143001002300 OBSTETRICS 81 359 1,091 8,831 6,670 2,161 175,071 7,196 6,2143001003000 OPERATING ROOM 9,340 36,761 115,378 121 108 14 127,381 105 1023001003020 ANESTHESIOLOGY 117 518 1,630 4,798 3,008 1,790 209,433 3,283 2,798

PeaceHealthTarget Performance Reports300 - Alaska UOS Revenue per UOS Expenses per UOS Hours per UOS

MTD YTD Prior Yr MTD MTD YTD Prior Yr MTD MTD YTD Prior Yr MTD MTD Hours YTD Prior YrDept Actual Actual Actual Actual Target Variance $ Variance Actual Actual Actual Target Variance $ Variance Actual Actual Actual Target Variance Variance Actual Actual

3001002000 INTENSIVE CARE 28 113 300 18,686 13,536 5,150 144,197 13,285 12,067 78,152 86,873 (8,720) (244,166) 78,357 3 32.0 33.6 (1.5) (43.0) 30.5 31.9 3001002100 MEDICAL-SURGICAL 280 1,164 3,460 3,928 3,072 856 239,625 3,285 2,914 8,383 7,719 664 185,947 8,162 1 17.5 15.4 2.0 571.0 17.6 17.0 3001002300 OBSTETRICS 81 359 1,091 8,831 6,670 2,161 175,071 7,196 6,214 27,976 23,253 4,723 382,549 25,595 2 27.2 21.5 5.7 463.4 26.0 24.0 3001003000 OPERATING ROOM 9,340 36,761 115,378 121 108 14 127,381 105 102 239 221 18 169,716 246 0 0.2 0.2 (0.0) (14.7) 0.2 0.2 3001003020 ANESTHESIOLOGY 117 518 1,630 4,798 3,008 1,790 209,433 3,283 2,798 18,332 15,067 3,264 381,896 16,738 0 0.9 0.8 0.1 12.3 0.9 0.8 3001003030 SHORT STAY UNIT 96 359 1,139 4,889 3,020 1,869 179,443 3,617 2,808 22,654 21,826 828 79,481 24,542 1 7.2 7.4 (0.2) (16.2) 8.3 7.6 3001003150 RECOVERY ROOM 3,998 14,013 42,056 115 78 37 148,215 90 73 538 575 (37) (148,011) 620 0 0.0 0.0 0.0 30.3 0.0 0.0 3001003200 EMERGENCY 689 3,295 9,172 1,391 1,009 382 263,387 1,080 927 3,349 3,100 249 171,758 2,807 0 4.6 3.2 1.4 946.9 3.4 3.4 3001003220 MEDICAL TRANSPORT AIR 12 87 401 35,616 7,084 28,531 342,374 13,096 6,741 178,114 58,933 119,181 1,430,170 99,456 0 - - - - - - 3001003300 EKG 52 262 821 9,171 4,556 4,616 238,160 5,014 3,963 41,509 32,215 9,293 479,537 33,068 0 2.0 1.7 0.2 11.6 1.6 1.7

Common Questions

• How will we be able to quickly react to performance issues at network and departmental level?

• Quarterly rolling Forecasts will give us the ability to act more prospectively to changing trends. • Department and Network target reports will allow network leadership identify which areas are under/over

performing compared to target & trend and implement action plans that will align with improvement plan.

• Will we lose a line of sight into overall revenue and volume performance with a metric based budget?

• Revenue and volume budgets will still exist at Network level based on LRFP. If we are falling below overall targets, trend reports of UOS and Revenue by department can show exactly where volumes are declining or increasing at a rate less than overall LRFP assumptions.

• How will we hold managers accountable to an overall metric as opposed to a line item budget?

• Target monitoring reports provide accountability and line of sight to department performance. A standard monthly process is implemented to trigger department reviews on a monthly basis.

• How can past performance help us when our future targets are so aggressive?• Targets are informed by a number of factors: past performance, internal and external benchmarking, future

performance. With the target modeling tool, we can assess level of change required of targets to achieve budgets.

• How does improvement plan fit into the new model?• It is similar to current process, but is no longer static for a fiscal year. Improvement plan is adjusted at each

quarterly forecast as needed, or more frequently at network discretion if metric targets are not being achieved. Baseline is actual performance as opposed to budget.

• What do we lose?• Line item budget amounts.

Common Questions

Finance Team Questions• How is variance analysis performed without targets at the natural class?

• It isn’t. Emphasis shifts from explaining variances to identifying improvements required to meet targets.

• What does Board reporting look like? How can we provide meaningful reports to Stewardship in a short timeframe without a detailed budget?

• Annually: Long-range financial plan• Quarterly: Rolling forecasts, projected gaps, and improvement plan adjustments• Monthly: Network and community performance to targets. Key Indicators trending.

Improvement Plan Performance

• How are 100% fixed costs handled? Why would we flex them (e.g. contracted services that will not shift with volume)?

• All expenses are monitored per volume, but performance is also evaluated to trending. Management discretion will be required in assessing and reacting to overhead expense variances that are driven by volume.

Finance Team Questions• How will the department volume budgets be determined?

• Volumes will only be set for high level drivers (Admissions, Patient Days, Surgeries, ER Visits). Department volumes and revenue will be monitored to trend. Significant volume targets will monitored in Improvement Plan and Rolling forecasts.

• How will targets be set? How will varying inflation factors be utilized to set targets (Drugs at 8%, Other Exp at 3%)?

• There is flexibility in how targets are set. A target could be set based on a benchmark, an improvement goal, or a detailed line item account analysis which could incorporate multiple inflation factors. Management judgment.

• How will seasonality be applied?• Significant seasonality can be applied to targets based on historical performance.

• How will a new department’s target be developed?• The same way a new department’s budget is currently set – a more detailed analysis may be

required for new departments.

• Endorse the proposed process and methodology, assuming leadership will allow managers to• Manage to an overall unit of cost per service• Ability to hire lower cost professionals to reduce overall costs, even if

hours are higher• Requires a level of trust with managers• Believe a manager would have everything they need to manage the

department• Concern about whether leadership will trust or allow manager the

flexibility to manage within the broad targets• Big change for overhead departments, not used to looking at costs

on a volume basis• Concern on how targets will be set.

Operation Leadership

What is the risk?• Lack of plan to achieve results

• Revisited quarterly through forecast• Clear improvement plans based on current performance

• Lack of accountability• Every manager will have a clear target on performance• Targets linked to productivity

• Lack of understanding• Consistent with Lean rollout this year and quality improvements

Questions

ReferencesCunningham, Jean & Fiume, Orest (2003). Real Numbers Management in a Lean Organization. Durham, NC: Managing Times Press.Hope, Jeremy & Fraser, Robin (2000). Beyond budgeting. Strategic Management, 82(4), 30-35.Hope, Jeremy & Fraser, Robin (2003). Beyond budgeting how managers can break free from the annual performance trap. Boston, MA: Harvard Business School Press.Rickards, Robert C. (2008). An endless debate: the sense and nonsense of budgeting. International Journal of Productivity and Performance Management, 57(7), 569-592.Rickards, Robert C. (2006). Beyond budgeting: boon or boondoggle?. Investment Management and Financial Innovations, 3(2), 62-76