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St. Mary’s/DuluthClinic Health System

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Executive Summary

Industry

Health Care

Key Company Stats

An innovative leader in health care within northeastern Minnesota and Wisconsin, St. Mary’s/Duluth Clinic Health System encompasses 20 clinics, a 350-bed tertiary medical center, 2 community hospitals, and a specialty care facility. SMDC’s medical team of more than 380 physicians and 200 allied health care providers work with an experienced staff of over 6,000 to provide primary care, specialty services, and medical technology to families in their own communities. SMDC’s operating margin is $500 million.

Background/Business Problem

SMDC Health System began using the Balanced Scorecard when it was a newly merged organization facing decreased revenues due to financial constraints in the health care environment, such as the Balanced Budget Act. Operating in the red, the newly merged company lacked a focused strategy.

The Change Undertaken

Realizing that the old “health care formulation” strategy wasn’t working, SMDC was ready for a new approach. The merger of St. Mary’s Hospital with the Duluth Clinic was expected to bring economic stability and strength by reducing duplication and enabling the new entity to better compete on quality and range of services. When SMDC’s CEO, Peter Person, read The Balanced Scorecard by Robert S. Kaplan and David P. Norton, he found an approach to help accomplish these goals. He informed the board that the BSC was the way he planned to strengthen SMDC’s margins and better serve its patients.

Role of the Balanced Scorecard

The process of implementing the Balanced Scorecard—and building their strategy map in particular—helped SMDC view itself as a business. They targeted areas that they could grow and, with that growth help, support nongrowth areas. This would allow SMDC to maintain needed but less profitable services for its patients. The BSC process also helped SMDC define its three sets of customers and identify the correct value proposition for each.

After development and rollout of the corporate Scorecard and Strategy Map, SMDC cascaded the Balanced Scorecard across the organization, aligning all of its service lines (both growth and nongrowth areas), community clinics, and key support departments. The BSC team implemented a strategic awareness campaign to communicate across the organization. SMDC has also linked strategy to the budgeting process, and used the BSC to focus their monthly strategic operating review meetings. SMDC is now in its third year of BSC implementation, an ongoing process that continues to evolve.

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Executive Summary (cont’d)

Financial Results

SMDC achieved the following after implementing the BSC:

• $23 million increase in profitability since implementing the BSC to the end of FY01

• $18 million turnaround in the first year of implementation (from 7/1/00-6/30/01, went from negative $7 million to +$11 million)

• Stabilized costs/adjusted discharge and cost/encounter in light of increasing drug and salary costs

• Average hospital margin is 2%; at the end of FY01, SMDC was operating with a 2.5% margin

Nonfinancial Results

In FY01, SMDC achieved the following:

• 15% improvement in overall hospital patient satisfaction

• 11% improvement in overall clinic patient satisfaction

• Continued decrease in length of stay: 10 days for clinics and 8 days for hospitals

Testimonials

“Building the strategy map was a turning point for the executive team in fully understanding the organization as a business, defining our customers, and translating this into a clearly focused strategy. This resulted in a performance management tool that could focus the entire health care system.”

“Our monthly scorecard review sessions are incredibly valuable to me as CEO. The scorecard enables us to easily scan and digest overall organizational performance and to identify any necessary course corrections. The balance of our discussion time has definitely shifted from day-to-day operations to strategic issue decision making.”

Dr. Peter Person, CEO

St Mary’s/Duluth Clinic Health System

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Background

In January 1997, St. Mary’s Hospital merged with Duluth Clinic, a large multispecialty clinic. Both St. Mary’s Hospital and Duluth Clinic were financially sound at the time of the merger. However, the Balanced Budget Act, combined with unexpected financial burdens from the merger, put the newly merged organization in the red. Nevertheless, the merger was expected to bring economic stability and strength by reducing duplication and, in the long term, to enable the new entity to better compete on quality and range of services.

The goal was to provide residents of northeastern Minnesota and Wisconsin with a broad menu of health care services close to their homes. The resulting St. Mary’s/Duluth Clinic Health System (SMDC) has a mission that states: “SMDC is a regional health care system committed to enhancing the health status of the people we serve by:

• Promoting the personal health and total well-being of all people

• Providing expert medical services supported by compassionate care and innovation

• Creating value for our patients and customers through teamwork and continuous improvement

• Demonstrating leadership in medical education and research

• Regarding every person with dignity and respect”

The newly merged SMDC turned to the Balanced Scorecard at a time when healthcare in general was facing tremendous financial challenges—such as the Balanced Budget Act. The Balanced Scorecard helped the organization define and focus in on its strategy. Three years after launching its BSC effort, SMDC has garnered some significant results. In FY01, it achieved:

• A $23 million increase in profitability, including an $18 million turn-around the first year of implementation

• Stabilized costs/adjusted discharge and cost/encounter despite increasing drug and salary costs

• A continued decrease in length of stay: 10 days for its clinics and 8 days for its hospitals

• A 13% improvement in appointment access availability for primary care clinics

• A 15 % improvement in overall hospital patient satisfaction

• An 11% improvement in overall clinic patient satisfaction

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Mobilize

SMDC entered its scorecard implementation with a burning platform. Not only was it coping with the instability of a newly merged entity, but decreased revenues had put it financially in the red.

SMDC’s entire leadership structure and processes have been transformed by the Balanced Scorecard. The Balanced Scorecard has become the framework for presenting information to the Board of Directors and it is the touchstone for SMDC’s quarterly leadership sessions and service line and department meetings.

Both Dr. Person and Mary Johnson, SMDC’s COO, visit every site on an annual basis. These site visits are designed create excitement and energize employees around the scorecard by demonstrating that SMDC’s executives “walk the talk.”

“I carry the Balanced Scorecard with me at all times,” says Dr. Peter Person, CEO. “I have every indicator—and we have a number of them—assigned to every senior VP and when I meet with them; that is the first order of business.” In addition, each member of the senior team is accountable for one initiative, and his or her compensation is tied to performance, which is reported to the Board of Directors on a monthly basis.

To ensure that the organization remains mobilized around its scorecard effort, SMDC has a full-time Balanced Scorecard coordinator. Barbara Possin, Director of Strategic Alignment, is in charge of keeping SMDC’s scorecard on track. Barbara makes sure that action items discussed at executive meetings become a reality by clarifying who is responsible and helping set deadlines. According to Barbara, a successful BSC coordinator must:

• Have a defined role and title

• Possess outstanding project management skills

• Enjoy credibility within the organization

• Be able to communicate with all levels of the organization

• Have solid executive support

• Work closely with the senior team on a regular basis

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Translate

SMDC was ready for a new approach. Realizing that the old “healthcare strategy formulation” wasn’t working, it began building its strategy map. This process helped leaders to view their organization as a business and identify high-margin market opportunities, which shaped the financial dimension of their strategy map.

By increasing its margin, SMDC would be able to reinvest in its nongrowth areas that provided vital services to patients. For example, by maximizing profit opportunities in cardiac services, it would be able to help support the less profitable behavioral health services. This intentional growth strategy also helped SMDC’s leadership be more honest with themselves about where the organization needed to grow.

“This was the first time, as a healthcare organization, that we used the terminology of ‘our business.’ We found the business terminology to be very refreshing. This new language forced us to think about ourselves differently than we had in the past. The Collaborative, in helping us build our strategy map, asked us about our profit, supply chain, and throughput—questions that businesses ask themselves all the time. It forced us to think differently about who we were,” remembers SMDC’s Chief Operating Officer Mary Johnson.

SMDC has three sets of customers. Defining the value proposition for each provided clarity when they were fleshing out their strategy. For example, primary care patients require a “customer intimacy” strategy. “These patients need to know that they won’t have to repeat their entire history every time they come to see us or call it,”notes Mary Johnson.

Specialty care patients and referring providers and physicians are grouped together because at times specialty care patients come to SMDC on their own and at other times they are referred by their provider. “This group values clinical excellence and leading edge technology and expertise,” says Johnson. For that reason, SMDC approaches this group with a “product leadership” strategy.

SMDC’s final customer group are payers; those who buy services from SMDC. This group wants low-cost service and innovation. SMDC wants to be able to offer its employees and customers the most value for their money. This translates mainly into an “operational excellence” strategy.

SMDC reviews and refreshes its strategy map each year at budget time. It is then that it readjusts its targets and initiatives and makes sure that the right things are being measured.

SMDC’s corporate strategy map and Balanced Scorecard are in the third year of implementation. The Balanced Scorecard is the cornerstone for all strategic decisions and provides direction for daily decision-making.

“This is the one document that we use over and over again every month so that people understand what our corporate strategy is and can track our performance,” says Mary Johnson.

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Align

SMDC has developed strategy maps and scorecards for each of its 6 growth-area service lines that support the overall strategy map. All 20 Regional Community Clinics and nongrowth-area service lines have BSCs aligned with SMDC’s strategic themes. Key support departments Marketing/Public Relations, Human Resources, and Nursing all have Strategy Maps and Balanced Scorecards.

Within Operations there are eight divisions, and each division has its own Balanced Scorecard. Growth areas developed their own Strategy Maps, each with very specific initiatives for their area. Nongrowth divisions developed initiatives based on the corporate strategy. An example of a growth area strategy map is below.

Initiative leaders meet biweekly to report on major milestones. Financial and process initiatives are reviewed monthly. The executive team also meets monthly to review the corporate scorecard and creates action plans when they aren’t meeting their targets. Finally, the entire management team meets quarterly to review results.

OPERATIONAL PROCESSES

PRODUCT LEADERSHIP AND OPERATIONAL EXCELLENCE

*1Surgery Growth Area - Strategy Map

Manage Our Growth

Vision:SMDC is a values-driven, integrated organization which will be recognized for excellence in

customer service, quality patient care, financial strength, andsupport of community health

Maximize Operating Margins

Internal Perspective

Learning and Growth

Customer

Perspective

A MOTIVATED AND PREPARED WORKFORCE

Provide state of the art technology

and facilitiesDeliver high quality,

timely care

Increase general surgery

in targeted growth areas

Develop further specialization

The right people with the right skills

Implement Technology to provide state of the

art services and efficient care delivery

Achieve Operational Excellence

Implement next generation

surgical techniques

Design state of the art facilitiesDefine general

surgery growth opportunities

Provide full continuum of care

Sustain superior position in trauma

care

Develop outreach & communication

processes

Coordinate & integrate services

Financial

Perspective

Improve care across

continuum Develop surgical

critical care

Redesign operations for efficiency and effectiveness

Build positive relationships with

primary & referring MDs

*1 Trauma & Surgical Care, Vascular, General Surgery

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Motivate

SMDC has created strategic awareness through the following activities:

• Creation of a video explaining SMDC Strategy Map to convey a consistent message to its 6,000 employees in remote locations

• A BSC intranet site with the corporate map with definitions, monthly BSC results/explanations, and quarterly updates on corporate initiatives

• A process to celebrate BSC successes including a pre-arranged “spontaneous” visit by a senior level VP to work groups to acknowledge BSC accomplishment; a personal letter from the CEO; and an article in SMDC’s employee newsletter

• Annual visits to each geographical site by the CEO and COO to review the strategy map, discuss revisions, and the upcoming year’s measures and initiatives

• Quarterly leadership meetings for all SMDC managers and physician leaders to reinforce the strategy, structured around SMDC’s Strategy Map and BSC

“In a complex organization with so many moving parts, the BSC provides the basis for conveying to everyone what it takes to be successful. That story is critical for winning people’s enthusiasm to change, which in healthcare is known to happen quite slowly. We have aggressively taken the BSC to the front-line worker through presentations, video, newsletters, and Q&A sessions. And we have helped our people see their place on the strategy map,” says CEO Person.

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Manage

Since implementing the Balanced Scorecard, SMDC’s executive team has held monthly strategic operating review meetings where they briefly review their monthly BSC results and then focus on strategic issue decision making. These meetings are truly focused on strategy and long-term success rather than operational issues.

SMDC has also linked its strategy to the budgeting process and uses the BSC to determine what initiatives and projects receive financial resources. SMDC uses a criteria modeling software system that helps the organization prioritize projects. Balanced Scorecard strategies are the key criteria for the system. “The investments and the growth that we have prioritized align with our strategy. In doing that, you don’t necessarily always invest in the biggest, fastest, and the best race car, but you invest in those initiatives that as a whole help reinforce or accomplish the set of strategies we have prioritized off the scorecard. So the alignment between our capital investment and our scorecard is very tangible.” notes Thomas Klassen, executive vice president of SMDC.

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Results

Three years after launching its BSC effort, SMDC has garnered some significant results:

• A $23 million increase in profitability, including an $18 million turnaround the first year of implementation

• Costs/adjusted discharge and cost/encounter stabilized in light of increasing drug and salary costs

• A continued decrease in days length of stay: 10 days for its clinics and 8 days for its hospitals

• A 13% improvement in appointment access availability for primary care clinics

• A 15 % improvement in overall hospital patient satisfaction

• An 11% improvement in overall clinic patient satisfaction

“Our monthly scorecard review sessions are incredibly valuable to me as CEO. The scorecard enables us to easily scan and digest overall organizational performance and to identify any necessary course corrections. The balance of our discussion time has definitely shifted from day-to-day operations to strategic issue decision making.”

Dr. Peter Person, CEO

“The Balanced Scorecard has created a new era of accountability for our organization.”

Mary Johnson, Chief Operating Officer

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BSCol Hall of Fame

Balanced Scorecard Collaborative Hall of Fame winners have achieved breakthrough performance largely as a result of applying one or more of the five principles of a Strategy-Focused Organization: Mobilize Change Through Executive Leadership; Translate the Strategy to Operational Terms; Align the Organization to the Strategy; Make Strategy Everyone’s Job; and Make Strategy a Continual Process.

Other selection criteria include: implement the Balanced Scorecard as defined by the Kaplan and Norton methodology; present the case at a public conference; achieve media recognition for the scorecard implementation; produce significant financial or market share gains; and demonstrate measurable achievement of customer objectives. Hall of Fame honorees are nominated by the Collaborative’s in-house experts and are personally selected by Balanced Scorecard creators Dr. Robert Kaplan and Dr. David Norton.

Balanced Scorecard Collaborative, Inc.

Balanced Scorecard Collaborative, Inc. (BSCol) is a new kind of professional service firm dedicated to the worldwide awareness, use, enhancement, and integrity of the Balanced Scorecard (BSC) as a value-added management process. Led by Balanced Scorecard creators Drs. Robert Kaplan and David Norton, BSCol provides consulting, conferences, training, publications, action working groups, software certification, and online services. For more information, please call us at 781.259.3737, or visit us on the web where you can join Balanced Scorecard Online for the latest insight and resources at bscol.com.

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