Enhance performance, Eliminate the budget

1. Enhance performance, Eliminate the budget Gordon T Edwards

2. Research project Enhance Performance, Elimination the Budget Viterbo University

3. The Problem

4. Overview • Background literature • Purpose of the study • Methods • Results • Discussion • Implications • Limitations • Future Research

5. 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Budgeting • Overall dissatisfaction of current budget process • Consumes too many resources • Takes to long to prepare (out of date when done) • Undermines ethical foundation of organization • Illusion of control by robbing potential (Hope & Fraser, 2000) However, finance management continue to believe budgets are indispensable (Rickards, 2008)

6. Revise or Abandon Increasing radical changes Beyond Budgeting Advanced Budgeting Better Budgeting Traditional Budgeting Potential number of users (Rickards, 2006)

7. A Radical Concept • Beyond Budgeting Framework • Targets relative to competition • Rolling forecasts • Rewards on relative performance • Up to date/transparent information • Give managers freedom to act • Adaptive to changing environment • A new management model, not just financial control structure Budget (Hope & Fraser, 2003)

8. 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)

9. Purpose of this study A 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

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

11. Research Questions Describe 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

12. Participants

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

14. 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”

15. 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”

16. 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”

17. 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”

18. Avoiding the Inflexibility of Budgets

19. 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”

20. 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

21. 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

22. 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)

23. 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

24. Case study

25. Two Visions for Improving Financenance

26. The Transformation Acquisitions Product Line Profitability Risk Assumption Consulting Consulting Pricing Cost Elimination Financing Analysis Analysis Transactions Accounts Payable Cost Accounting Payroll Accounts Receivable Transactions Cunningham & Fiume 2003

27. 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

28. 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)

29. 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

30. We Leaped

31. Objectives Problem 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

32. Board Involvement Board 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

33. 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

34. Management Reports Metric 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

35. 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

36. 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

37. Outcomes Positive • 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

38. Comparisons

39. Better Alignment with Priorities

40. Continued Refinement

41. What’s in Name? • A TON! • Think about language • Perceived ability to “control”

42. 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

43. Common Questions • 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.”

44. 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.

45. 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.

46. 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.

47. 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.

48. Operation Leadership • 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.

49. 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

50. Questions