Developing a

BALANCED
SCORECARD
to Implement Strategy at

St. Elsewhere Hospital

B Y R U S S K E R S H AW, P H . D . ,

28

WINTER 2001

AND

S U S A N K E R S H AW R N , O C N

n The Balanced Scorecard,1 Robert Kaplan and David Norton tell the story of how the CEO
of an undersea construction company guided senior managers to develop an explicit mission statement. This process lasted several months, after which the mission statement was
distributed throughout the company. Soon thereafter, the CEO received a phone call from a
manager on a drilling platform in the North Sea. The manager said, I want you to know that I
believe in the mission statement. I want to act in accordance with the mission statement. Im
here with a customer. What am I supposed to do? How should I be behaving each day, over the
life of the project, to deliver on our mission statement? In this company, there was clearly a disconnect between the words in the mission statement and the actions required to implement
them on a day-to-day basis. Kaplan and Norton suggest that this is a common problem in the
business world, and they propose the Balanced Scorecard as a means for linking strategic objectives with day-to-day activities.

The Balanced Scorecard provides a framework for

strategic management by transforming a companys
strategic goals into an integrated collection of objectives and performance indicators. In this framework, performance indicators are grouped into four
perspectives: financial, customer, internal business
process, and learning and growth. Objectives are
developed within each of the four perspectives, and
measures are chosen to create a scorecard that promotes the companys strategy. The objectives and
performance measures from each perspective must
be linked to one another. Once the measures used
in a Balanced Scorecard are identified and connected, a companys overall strategy should become
transparent to all members of the organization.
In recent years, the mission statement has taken
on greater importance in the healthcare industry.
Prior to the mid-1980s, healthcare providers operated on a fee-for-service basis. Hospitals and doctors
essentially could establish their own prices for services they provided. Under such a system, linking a
hospitals strategy to the activities of its employees
was less important because the hospital could cover
inefficiencies and escalating costs by increasing
prices. Also, managing patient mix (such as
Medicare vs. private insurance) was not critical
under this fee-for-service system. However, in
recent years, the reimbursement system for healthcare organizations has changed dramatically.
Medicare and Health Maintenance Organizations
(HMOs) have switched from fee-for-service to
reduced fee-for-service and capitation payment systems. Under these payment plans, healthcare
providers are paid either a lower fixed fee for ser-

vices provided or a fixed fee per plan member

regardless of the services.
Managed care provides healthcare organizations
with the incentive to clarify their strategy and to
translate it into objectives and measures of performance. Developing a Balanced Scorecard to link a
hospitals mission to employees day-to-day activities
is more important today because of the changes in
reimbursement.
THE BALANCED SCORECARD
H E A LT H C A R E

IN

The main purpose of a Balanced Scorecard is to connect employee behavior to the organizations mission. This is accomplished by translating an
organizations strategy into a collection of objectives
and performance measures for financial, customer,
internal business processes, and learning and
growth. Each of these perspectives should be linked
in a chain of cause-and-effect relationships that conveys the organizations vision and strategy.
Financial performance measures usually are
associated with profitability. Typical measures would
include operating profits, return on assets, and individual product line or customer profit margins. Other financial measures can be used, however,
depending on the nature of the industry and the
companys business strategy. For instance, a company following an aggressive growth strategy might be
more interested in market share and revenue growth
measures than traditional profitability indicators. In
order to achieve financial goals, companies need to
deliver products and services that fulfill their targeted customers needs.

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Customer satisfaction, customer retention, and

new customer acquisition are measures that indicate
how well companies are delivering value. Identifying what customers value (personal attention, ontime delivery, innovative products) is also part of the
customer perspective. Companies need to measure
what customers value because improving customer
satisfaction and loyalty should result in improved
financial performance. The next question is at what
internal processes must the company excel in order
to deliver what customers want?
Companies need to identify the internal
processes (product development, production, service) that have the greatest impact on what customers value. Once these critical processes are
identified, companies need to measure the key success factors for each process. Typical measures of the
internal business process would include quality, cost,
time to market, and response time.
Finally, measures from the learning and growth
perspective attempt to identify the skills and tools
needed to improve key internal processes. What
training, support systems, and working conditions do
people in the company need in order to provide
high-quality customer service? Indicators such as
employee skill level, training availability, and
employee satisfaction attempt to measure a companys ability to excel at key business processes.
A good Balanced Scorecard should form a chain of
objectives and performance measures that are linked
based on cause-and-effect relationships (see Figure
1). For example, highly skilled employees should
provide quality customer service, which should
cause customer satisfaction to improve, which
should affect financial performance positively. This
chain of performance measures should communicate
the companys goals and objectives to all members
of the organization.
S T R AT E G Y

AT

WINTER 2001

IN A BALANCED SCORECARD
Mission: To be the most successful company

FINANCIAL PERSPECTIVE
Financial success will be measured by:
Market Share
Revenue Growth
Operating Profits
Return on Equity

CUSTOMER PERSPECTIVE
To achieve financial goals, we need to meet
our customers needs as measured by:
Customer Satisfaction
Customer Retention
Quality Customer Service

INTERNAL BUSINESS PROCESS

PERSPECTIVE
To satisfy our customers, we must excel at
certain things internally as measured by:
Delivery Time
Cost
Process Quality

S T. E L S E W H E R E H O S P I TA L

St. Elsewhere Hospital is a 450-bed Catholic facility

in a southern city of about 300,000. The city has a
smaller, stable, relatively poor urban population and
a larger, growing, more affluent suburban population. General Hospital, which is county owned and
operated, is the other major healthcare facility in the
city, and it has about twice the capacity of St. Elsewhere. However, St. Elsewhere has more modern
facilities than General. A new building was constructed recently to increase capacity and services to
accommodate the suburban growth. St. Elsewheres

30

Figure 1: LINKING PERFORMANCE MEASURES

LEARNING AND GROWTH

PERSPECTIVE
To excel at key internal processes, we must
develop skills and tools as measured by:
Employee Skill Level
Training Availability
Employee Satisfaction

new facility is located on the site of the old hospital,

on the south side of the city, which is dominated by
older, low-income neighborhoods. Meanwhile, business expansion was occurring north of the city, and
new professionals were choosing to live on the east
and west sides of town.
Because the new facility had been open for three
years, St. Elsewhere expected its patient census
(number of beds occupied) to steadily increase giv-

The hospitals mission was modified

from providing
compassionate
care to being
patient focused.

pay. The hospitals patient mix was not what had

been expected because St. Elsewhere had failed to
attract the more affluent suburban professionals.
The task force then conducted surveys of
patients, doctors, and people in suburban communities to determine how St. Elsewhere was perceived.
The overwhelming impression was that St. Elsewhere was a hospital that provided care to the poor
and underprivileged. This perception would not be
helpful in promoting the hospital to the growing
suburban population, which was largely unaware of
St. Elsewheres modern facilities and expanded service offerings.
The surveys prompted the task force to recommend several initiatives, which hospital administration began to implement. First, the hospitals
mission was modified from providing compassionate care to being patient focused. The goal of
patient-focused care was to establish an environment that promotes customer satisfaction through
personal attention and quality service. The hospital
also implemented a promotional campaign that featured its modern facilities, expanded service offerings, and focus on personalized care. In addition, St.
Elsewhere acquired several physician groups that
were located in the more affluent, suburban neighborhoods. Finally, hospital administration identified
several units in the hospital that were critical to
improving the census and achieving a patientfocused reputation. Hospice was one of these units.
THE HOSPICE UNIT

en the population growth. Yet patient census

remained at the same level as it was prior to the new
facility. As a result, substantial excess capacity existed. A low patient census combined with the higher
costs of the new facility and the introduction of
managed care all negatively affected the hospitals
financial situation. St. Elsewhere focused its efforts
on reducing costs, but not much improved. Consequently, a special task force was created to examine
the situation.
First, the task force compared existing patient
populations of St. Elsewhere and General Hospital.
They found that St. Elsewhere had a higher proportion of Medicare/Medicaid patients than General
and a high and growing number of charity cases. As
a Catholic hospital, St. Elsewheres mission was to
provide compassionate care, which meant that
patients were treated regardless of their ability to

The purpose of an in-house hospice program is to

provide a caring environment for the physical and
emotional needs of the terminally ill and their loved
ones. Hospital administration at St. Elsewhere
determined that the death of a loved one was one of
the most traumatic healthcare experiences. If St.
Elsewhere could effectively meet the physical and
emotional needs of the terminally ill, friends and
family members would view the hospital positively
and be inclined to use its services in the future.
St. Elsewheres hospice unit was located in a separate, older building on the hospital campus. This
building had not been renovated when the new
facility was built, and it had older furniture, drapery,
and wallpaper. The facility did not provide a bright,
pleasant, and homelike environment. Patients and
their families viewed the hospice facility as dark,
gloomy, and depressing. In addition, the unit was
chronically understaffed and experienced a high

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31

degree of employee
Table 1: HOSPICE UNITS BALANCED SCORECARD
turnover. Many of the
caregivers (nurses and
Performance Measures
aides) did not have
much hospice experiFINANCIAL PERSPECTIVE
Patient census
ence or specialized
Unit profitability
hospice training, and
patients did not feel
Funds raised for facility improvements
they were receiving
high levels of personal
CUSTOMER PERSPECTIVE
Patient satisfaction (survey)
attention and quality
care. Also, the director
Patient retention
of the hospice unit and
Patient referral rate
the nurses did not have
a good rapport with the
doctors and nurses of
INTERNAL PROCESS PERSPECTIVE
Weekly patient complaints
feeder units like the
Employee turnover rate
oncology department
that referred patients
to them.
LEARNING & GROWTH PERSPECTIVE Employee satisfaction
These problems
Training hours per caregiver
resulted in a chronicalPatient loads
ly low patient census.
Without a reputation
for providing highen targeted reductions that managers were expected
quality care, many physicians refused to refer their
to achieve by improving efficiency and spending
patients to the St. Elsewhere hospice unit. This
less. Prior to the new strategic initiatives recommeant that patients being cared for in St. Elsemended by the special task force, hospital adminiswheres oncology unit were being referred to Genertration had been measuring management
al Hospitals hospice unit or other hospice programs
performance from a financial perspective only.
in the city. Alternatively, patients who did not want
This was counterproductive in the hospice unit.
to go to St. Elsewheres hospice unit were allowed
For example, the unit director was not about to
to remain in the oncology unit after their treatment
spend money on new furnishings to make the unit
had been discontinued. And because the demand
more homelike when he was expected to reduce
for oncology services exceeded St. Elsewheres
spending. The director also adopted a strategy of
capacity, physicians were referring new cancer
operating the unit with the smallest staff possible in
patients to Generals oncology unit. After analyzing
order to minimize the cost of providing care, and,
the situation, hospital administration determined
due to the budget constraints, there was very little
that many of these problems could be traced to the
money for providing the specialized hospice training
hospitals performance measurement system.
that was so badly needed. Operating with minimum
THE PERFORMANCE MEASUREMENT
staffing and few training opportunities created high
SYSTEM
employee turnover. This resulted in an unstable and
St. Elsewhere faced significant financial problems.
inexperienced staff of caregivers in the hospice unit,
Lower reimbursement rates from Medicare and
which led to poor relationships with their primary
managed care companies combined with the higher
feeder units in the hospital. The directors focus
costs of the new facility were forcing the administraon budget reductions was not compatible with the
tion to focus on cost reduction. As a result, the direcphysicians objective of high-quality care, further
tors of operating and support departments were
reducing patient referrals. It became clear to hospital
evaluated primarily on their ability to reduce budadministration that a more balanced approach to pergeted spending. Each department and unit was givformance measurement would have to be developed.

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WINTER 2001

THE HOSPICE UNITS BALANCED

SCORECARD

Previously, the hospitals performance measurement

system focused on improving short-term financial
results. These spending reductions did improve the
hospitals short-term financial performance somewhat but negatively affected the hospitals reputation for providing quality care. The hospice units
low patient census, negative patient perceptions,
poor referral rate, and high employee turnover evidenced this. But the task force determined that hos-

The scorecard
should guide the
daily actions of the
hospice unit staff to
achieve the
hospitals mission of
providing patientfocused care.
pice care was a critical patient service in the long
run, so a Balanced Scorecard that promoted patientfocused care was developed for the unit.
The unit director, along with two senior members
of the caregiver staff, worked with hospital administration to construct the units scorecard (see Table1).
They began the process by discussing the hospice
units role in achieving the hospitals goal of increasing market share (capturing a share of the growing

suburban population) by providing personal attention and quality care. They determined that the
scorecard had to be congruent with this strategy and
that the measures chosen had to be linked to form a
chain. This chain of performance measures would
have to communicate the units and hospitals goals
to all members of the hospice unit. The scorecard
should guide the daily actions of the hospice unit
staff to achieve the hospitals mission of providing
patient-focused care.
The group first focused on identifying the appropriate financial measures for the hospice unit. In the
short term, the goal was to utilize the units excess
capacity. This would improve the hospitals shortterm financial performance by increasing revenue,
and it also would support the goal of increasing market share. Improving the units patient census was
chosen as a key financial indicator. Hospital administration wanted the unit director and staff to initially focus on the revenue side of profitability rather
than on cutting costs. In the future, when the census had improved and stabilized, the plan was to
measure the units profitability (revenue minus controllable costs). In addition, it was determined that
the unit director should actively participate in fundraising activities for facility improvements. Because
the hospitals capital budget was limited, the hospice unit director needed to work with the hospitals
director of fundraising to provide money for renovating the facility. The amount of money raised for
facility improvements was chosen as another key
financial measure for the hospice unit.
In order to improve the units census and raise
money for facility renovations, the hospice unit
would have to significantly improve patient satisfaction, so a patient satisfaction questionnaire was
developed. The survey asked the patient and/or
family members to rate the quality of care and level
of personal attention they received on a scale from
poor to excellent. The surveys were conducted several times during a patients stay, and the director
and senior caregivers reviewed the results, personally resolving any problems. Family members also
completed a survey at the end of a patients stay,
which was used as a measure of customer satisfaction for the unit. Patient retention (percentage of
patients that remain in the unit once admitted) also
was used as an indicator of patient satisfaction. Previously, many patients would ask their doctor for a
transfer to General Hospital or other hospice units in
the city shortly after being admitted. Increased

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33

patient retention was believed to be an indicator of

improved patient satisfaction. Finally, a key measure
of patient satisfaction was the patient referral rates
from feeder units in the hospital. The oncology unit,
for example, historically referred fewer than 50% of
its patients to the St. Elsewhere hospice unit.
Improving the patient satisfaction in the hospice
unit was expected to translate into increased
referral rates.
To improve patient satisfaction, retention, and
referral rates, the hospice unit at St. Elsewhere had
to improve the quality of care and personal attention
it was providing patients. One indicator of quality
care was the number of patient complaints received
per week. Patients could lodge complaints in the

Figure 2: THE HOSPICE UNITS PERFORMANCE

MEASURE CHAIN
PATIENT
CENSUS
(PROFITABILITY)

PATIENT
RETENTION
RATE

One indicator of
quality care was the
number of patient
complaints received
each week.
weekly survey questionnaire or by speaking with
the director or senior caregivers. The long-term goal
was to eliminate patient complaints. To do this, the
unit director believed that the caregivers needed to
develop a closer, more consistent relationship with
each patient. If patients and family members
received care from the same nurses and aides on a
regular basis, patient satisfaction should improve. To
provide a more consistent level of quality care, however, employee turnover needed to be reduced significantly. Given the historically high turnover rates,
it was not uncommon for patients to receive care
from a variety of caregivers during their stay in the
unit. As a result, the employee turnover rate was
chosen as a measure of the units ability to deliver

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WINTER 2001

PATIENT
SATISFACTION

TRAINING
HOURS PER
CAREGIVER

FUNDS RAISED
FOR FACILITY
IMPROVEMENTS

FEEDER UNIT
REFERRAL RATE

NUMBER OF
WEEKLY
PATIENT
COMPLAINTS

EMPLOYEE
TURNOVER

EMPLOYEE
SATISFACTION

PATIENT
LOADS

high-quality care and personal attention.

The unit director and senior staff believed that
improving employee satisfaction was necessary to
reduce employee turnover. They decided to formally survey the units employees on a quarterly basis
to assess morale. The survey instrument asked
employees to express their feelings about such
things as support received from senior staff members, training availability, patient loads, and overall
satisfaction with their job. The thought was that
additional training and lower patient loads per caregiver would improve employee satisfaction. If the
units caregivers were provided more specialized
hospice training, they would be able to deliver better care to their patients, which should improve job
satisfaction. As a result, the number of hospice-related training hours attended was chosen as a performance indicator for the unit. This was measured for
the unit as a whole as well as on a per-person basis.
Much of this training could be conducted within the
unit by the director and senior staff members, or it
was available within the hospital in the form of seminars and special programs. Finally, the number of
patients per caregiver was chosen as an indicator of
employee satisfaction. The director and senior staff
determined the patient loads for providing a high
level of care and personal attention for the various
staff positions (RN, LPN, Aide). The goal was to
operate at these levels on a regular basis.
T H E R E S U LT S

Developing a Balanced Scorecard for the hospice

unit at St. Elsewhere took several months. Hospital
administration worked with the unit director and
staff to construct and refine the list of measures that
would be used to assess the performance of the unit.
As they developed the scorecard, they set goals to
ensure that:
1. The measures chosen were consistent with the
hospitals overall mission and the hospice units role
in their strategy.
2. The measures were linked to one another in a
chain of cause-and-effect relationships that communicated the units strategic objectives.
Figure 2 shows how the measures chosen form a
chain that conveys the key objectives of the hospice
unit. By increasing employees skills and by reducing
patient loads, employee satisfaction is expected to
improve. This should result in lower employee
turnover, increasing the quality of care provided,
reducing customer complaints, and increasing patient

satisfaction. This should increase patient retention

and referral rates, which should improve the units
census and ultimate profitability. Increased patient
satisfaction also should improve capital fundraising
efforts because patients family members are expected to be the most likely contributors.
After translating the units strategy into a Balanced Scorecard, the unit director and senior staff
met with the units employees to communicate the
hospitals vision for the hospice unit. They were given critical objectives that must be accomplished if
the hospitals strategy were to succeed. The next
step in the process was for the hospice unit director
and staff to establish specific targets for each of the
measures in the scorecard. They needed to set longterm targets (three to five years) that would represent the accomplishment of the units key
objectives. For example, the unit might establish
the target of a 95% referral rate from feeder units as
a long-term goal. This target could be derived internally or by benchmarking the best practices at other
hospitals. The hospice unit also needed to set shortrun milestones (six or 12 months). Because the
referral rate had been below 50%, the unit might
establish a target of 60% after one year to assess
progress toward achieving a 95% referral rate.
St. Elsewheres use of a Balanced Scorecard to
implement strategy demonstrates how a hospital can
link its strategy to the daily activities of its employees. In recent years, the introduction of managed
care has increased the competitive nature of the
healthcare industry. In this environment, it is more
important for hospitals and other healthcare
providers to clarify and translate their vision and
strategy into objectives on which they can act. The
Balanced Scorecard can be used to communicate
and link a hospitals mission statement to the actions
required to implement it on a day-to-day basis. In
todays dynamic healthcare industry, it may mean
the difference between success and failure.
Russ Kershaw, Ph.D., is an assistant professor in the
College of Business Administration at Butler University
in Indianapolis, Indiana. He can be reached at
(317) 940-9841 or rkershaw@butler.edu.
Susan Kershaw, RN, OCN, provided technical assistance
in the development of the article.
1 R. Kaplan, and D. Norton, The Balanced Scorecard, Harvard
Business School Press, Boston, Mass., 1996.

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