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Merging Six Sigma and the Balanced Scorecard

In an era of complexity and contradiction, many healthcare organizations are seeking bold strategies for leading and managing change. While concepts behind the balanced scorecard and core Six Sigma methodologies are not new, a powerful management tool can be crafted through the unification of these two proven strategies.

An approach that combines the targeted performance indicators of a balanced scorecard with the statistical rigor of Six Sigma can be used to effectively focus an organization on the achievement of strategic goals – in essence, creating the ultimate “management cockpit.” Adopting this structured approach to planning, managing and monitoring improvement brings cohesion to conflicting constituencies and builds confidence in proposed process improvements. In turn, this confidence can have a measurable impact on the organization by accelerating the implementation of change, often viewed as a delicate balance between cost, quality and efficiency.

The Case for Change

Healthcare today is experiencing both the best and worst of times. Countless lives are saved daily by medical breakthroughs, dedicated practitioners and state-of-the-art technologies. Yet, within this trillion-dollar industry amazing medical feats are juxtaposed against systemic failures and disgruntled stakeholders. Workforce shortages further constrain a system facing a rising demand for services. Advanced technology is often overlaid on archaic processes. As some emergency departments are forced to close, others find themselves overcrowded and understaffed.

Especially frustrating are reimbursement challenges that continue unabated. These challenges are now accompanied by significant changes in the payer mix, moving steadily away from government toward private or industry payers, as illustrated in Figure 1. History indicates that the combination of this shift in payer mix with the rise in healthcare premiums will trigger a market reaction. Figure 2 illustrates this anticipated reaction by comparing the annual percent change in healthcare premiums to the annual percent change in the consumer price index as an indicator of general inflation.

Figure 1: U.S. Healthcare Coverage and Spending

Figure 1: U.S. Healthcare Coverage and Spending

Figure 2: Healthcare Premiums vs. General Inflation

Figure 2: Healthcare Premiums vs. General Inflation

The market began its reaction, in the form of managed care, to the wide gap existing prior to 1990. This gap decreased significantly until the implementation of the Balanced Budget Act (BBA), and by 2002 it had widened again to nearly 10 percentage points with further market reaction anticipated. There are two significant risks associated with the next market reaction: 1) government intervention and 2) industry consequently recasting providers as mere vendors.

The industry is at a critical juncture, facing a growing need for systemic change but lacking the infrastructure and digitization that could provide a clear line of sight from strategy to execution and impact. Under mounting pressure to provide better care using fewer resources, some organizations are seeking alternative management models, realizing they can no longer conduct “business as usual.”

One solution to help organizations truly align strategic objectives with a clear measurement of impact may be combining the rigor of Six Sigma with the balanced scorecard approach.

A balanced scorecard approach provides the mechanisms to drive organizational alignment, sustain improvements and maintain equilibrium across the enterprise. Based on statistics and aspects deemed most ‘critical to quality,’ Six Sigma could further focus the organization’s improvement efforts. Such an approach that identifies and statistically quantifies the impact of causal factors on healthcare’s value chain would provide organizations with a solid foundation for change.

Healthcare’s Value Chain

Understanding healthcare, from a business perspective, is critical to ensuring the long-term viability of a delivery system. It is also a prerequisite to applying both the balanced scorecard approach and Six Sigma methodology. Six Sigma originally grew from a setting that was primarily industrial and product-focused. Within this environment, operations are performed on raw materials and as a result they become more valuable component parts. These component parts are then built into higher-level assemblies and ultimately products of progressively increasing value. The value chain for healthcare differs significantly from this model and is illustrated below in Figure 3.

Figure 3: Healthcare's Value Chain

Figure 3: Healthcare’s Value Chain

The value chain for healthcare begins with highly satisfied, dedicated and well- motivated care providers. This produces high internal quality, which relates to process steps that are felt by the institution and are not directly felt by the patient or referring physician. An example of an internal quality metric is the cycle time for the transcription of a radiology report. This represents an interim step in the process that begins with the recognition of need for the exam and ends with the authenticated report in front of the clinical decision maker. Naturally then, high external quality follows from high internal quality. In other words, quality in those steps that are felt by the customer leads to high customer satisfaction and loyalty. This, in turn, leads to revenue and margin, completing the value chain.

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When appropriate performance metrics are aligned along the value chain, they provide greater insight into how the system is performing today, and what it may anticipate in the future. This concept is illustrated in Figure 4. In this illustration the organization under consideration is operating well in its financial and customer satisfaction metrics as indicated by the upward pointing green arrows. Employee satisfaction and internal quality are poor as indicated by the downward pointing red arrows. As a result, external quality felt by the customer is beginning to decline as indicated by the yellow arrow pointing sideways. It is intuitive that if this trend continues, customer satisfaction and financial performance will begin to decline as well.

Figure 4: Cause and Effect on Performance of Value Chain

Figure 4: Cause and Effect on Performance of Value Chain

The balanced scorecard approach is based upon understanding healthcare’s value chain and aligning both strategy and the extended delivery teams’ behavior to focus on those activities necessary for the sustained creation of value. Six Sigma methodology is based on statistically quantifying the impact of causal factors on the variability of results. When applied in concert, they represent powerful tools that can be effectively deployed to align the organization’s vision, mission, strategy and specific behaviors toward the sustained creation and delivery of value.

Creating Organizational Alignment

Most healthcare delivery systems in the United States publish a vision or mission statement. Most institutions also undergo a rigorous annual planning process. Fewer organizations take one more step by translating the resultant strategic imperatives into families of clear, simple metrics aligned to the value chain. Even fewer have made these metrics appropriately visible and actionable at all levels.

Generally written at the 30,000-foot level, vision and mission statements are designed to elicit basic agreement from all team members. When vision and mission are translated into specific behaviors, however, agreement is less immediate and conflict may arise among various stakeholder groups. Translating strategic imperatives into a network of clear, simple metrics is the first step in the balanced scorecard approach. Alignment of these metrics along the value chain is Step 2, and is illustrated in Figure 5.

Figure 5: Making Vision and Mission Actionable

Figure 5: Making Vision and Mission Actionable

The remaining steps in using the balanced scorecard approach to create organizational alignment include the following:

Step 3 – Assessment of the organization’s capabilities
Step 4 – Cause analysis
Step 5 – Resource deployment
Step 6 – Alignment of systems and structures
Step 7 – Monitoring progress and continually raising the bar

Many of the statistical tools and process improvement techniques associated with Six Sigma lend themselves well to the accomplishment of these subsequent steps and are illustrated in the following sections.

A Six Sigma Primer

The philosophy that underlies the Six Sigma process begins with the fundamental assumption that unless we understand a process mathematically, we know little about it. If we know little about it, we are not in a position to control it. If we are not in a position to control it, then we are at the mercy of chance variation.

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In the simplest of terms, Six Sigma is a quality improvement methodology that provides a systematic approach to the elimination of defects that affect something important to the customer. Those aspects of service that are of importance to the customer are termed critical to quality, or CTQs, in Six Sigma jargon. The tools associated with Six Sigma are qualitative, statistical and instructional devices for “observing” process variables, “quantifying” their impact on outcomes, as well as “managing” their character. Six Sigma is based upon three simple principles:

1. What is important to the customer? A customer is defined as anyone who receives a product, service or information. Therefore, when coupled with the balanced scorecard approach…internal quality impacts internal customers and external quality impacts external customers.

2. What is an opportunity? An opportunity is represented by every chance to get something right…or get it wrong.

3. What defines success? Every result of an opportunity either meets the customer’s CTQs and is a success, or fails to meet the customer’s CTQs and is a defect. In Six Sigma, an indicator of success or failure is referred to as defects per million opportunities

Every human activity contains variation. The term “Sigma” is a symbol for standard deviation, a measure of variation. Six Sigma refers to the idea of being able to achieve six standard deviations between the mean performance of the process and the customer-determined specification limit. If Six Sigma performance is achieved in a process, then that process will generate less that four defects (occurrences of getting it wrong) per one million opportunities.

The idea of measuring the number of standard deviations that fit between the mean performance of a process and the customer’s expectation (translated into specification limits) is referred to as the process Z-score. The Z-score allows for comparative analysis of the performance of dissimilar processes, based upon the tendencies of each to either satisfy or disappoint their respective customers, the higher the Z-score the less probability of customer disappointment.

Making Quality the Operating System

Each metric in the value chain is assessed based upon its ability to satisfy or disappoint its customer. Referring back to Figure 4, this is the method whereby the status of each link in the chain is evaluated. Employing this approach allows the institution to essentially make quality the operating system.

A top level institutional Scorecard must be translated to the department level. At the department level, those factors that have the greatest impact on the top level Scorecard must be identified and rigorously controlled. This is another significant opportunity to employ Six Sigma methodology. A typical Six Sigma project will focus on a specific metric referred to as the project’s “response variable” or Y. The variation in this Y is a function of one or more causal factors, referred to as Xs. The idea is to mathematically understand the contribution of causal factors to variability of the project’s response variable or Y, before specific solutions are designed, thereby maximizing the impact of the solution.

By creating statistical linkages between the Y, metrics on the balanced scorecard and the X(s), causal factors, the Six Sigma methodology augments the balanced scorecard approach in two important ways. First, every link in the value chain is a causal factor to the subsequent link. Referring back to Figure 4, each link may be thought of as a Y in and of itself, and as an X to the next downstream link in the chain. Second, as the value chain metrics at an institutional level are flowed-down to departments, quantification of the causal Xs at a department level will pinpoint specific processes and behaviors that have the greatest impact on the value chain. This provides the foundation for Step 4 (cause analysis).

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In cause analysis, two strategies are deployed with the same objective – focusing limited resources on those activities that represent the greatest return on investment. First, by retaining performance data month to month along the value chain, a regression model may be built indicating the potential impact of changes in one link of the value chain on performance in successive links. This model also can highlight where there is no verifiable statistical linkage, leading to three critical outcomes:

1. Ensuring the right metrics have been selected.
2. Ensuring these metrics are measured properly.
3. Focusing senior level management on one overall deployment strategy

During the analysis phase, the team identifies the factors or Xs likely to have the greatest impact on the response variable. These factors are classified as either controllable or uncontrollable. If a causal factor (X) is controllable and contributes significantly to variability in the response variable (Y), then an opportunity to achieve a better result presents itself by controlling the causal factor. By focusing on causal factors that have a statistically proven impact on a process, the organization gains an important advantage in being able to predict the effect of proposed changes and create an easily understood family of value propositions.

Aligning Systems and Structures

So far, we have translated the organization’s strategy to the value chain, assessed the organization’s capabilities and discovered which projects will have the greatest impact. In the analysis phase, we explored the underlying factors that actually drive results. Each phase is integral to the overall process and ensures that the team is using the right techniques to focus on the right objectives for the right reasons.

Taking an improvement initiative to the next level, however, also requires a careful examination of existing systems and structures. In many cases, the way an organization’s systems and structures are aligned fundamentally conflicts with the objectives they are trying to achieve. It’s important to begin by making sure appropriate resources are deployed where they will have the greatest impact. It is also necessary to look at seven additional elements that are key to the success of the initiative, and critical questions that must be answered:

Organizational design: Is your quality program contained within a single department or is the concept of quality spread across every part of the business?

Staffing: Are you selecting the “best and brightest” from your staff to lead quality and process improvement efforts?

Development: Have you provided options for continuing education, experiential or project-based training and cross-functional capabilities?

Measurement: Are your projects supported by the right metrics and aligned with your strategic objectives? Are your performance measurements designed to drive organizational success?

Rewards/recognition: Is there a consistent process in place for rewards and recognition linked to key metrics?

Communication: Does the organization understand the importance of clear and consistent communication?

Information Technology: Are there sufficient IT solutions in place for project funnel management, financial linkage and program monitoring?

Gaining Control

The last and continuing step in this process involves monitoring changes and key metrics. That is the purpose of the balanced scorecard itself – to serve as a tool that assures the achievement of the organization’s strategy on an ongoing basis. The balanced scorecard should have a top level appearance similar to the illustration in Figures 3 and 4, along with the ability to drill down in each one of the five top level sections and review the metrics associated with those activities that create the greatest organizational leverage.

The challenges confronting healthcare are complex, and no overnight solution will make the problems disappear. Taking a calibrated approach to performance improvement, however, can help hospitals and health systems regain control and realize substantial benefits. Combining Six Sigma with the balanced scorecard may be the best way to reach and sustain a new level of organizational excellence.

Comments 2

  1. sixsigmamarketing

    Interesting article. It would have been good to see an example of your balanced scorecard to complete the article.

    None the less some thought provoking questions are asked which is great.

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  2. amer

    what about integration between lean six sigma and balanced scorecard

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