Key Assets that Create Value in Health Care.

IN PART 1 OF THIS SERIES, we presented a philosophy of leadership and management that reconciles the best of medicine and management. [1] In Part 2, we described why the traditional view of an organization's assets and the metrics used by management are necessary, but insufficient in today's new service economy. [2] We suggested a broader view--one that embraces not only the traditional tangible assets, such as capital and property, but the potentially more powerful "intangible" assets included in Figure 1.

As our colleagues at Arthur Andersen have written in Breaking the Value Code, major U.S. companies have launched successful strategies by identifying and leveraging customers (e.g., Schwab, GAP), employees (e.g., Pfizer, USAA), or physical/financial assets (e.g., Cisco, Amazon). [3] An enterprise can focus on or leverage any one of its assets and distinguish itself in the marketplace in the short term. But unless that enterprise understands the interdependent relationship among its assets, it will deplete its other assets and risk long term prosperity. A critical understanding of "Leading Beyond the Bottom Line" is understanding the relationships that exist among all of the assets.

In our first article, a flower was used as a metaphor to illustrate the multiple resources needed for growth. Air, water, sunlight, and soil are all necessary. But if we "leverage" water, we might drown the flower. Some might argue that "leveraging the water" does not mean over-applying this resource, but simply applying the optimal amount. We suggest that in order to know the optimal amount, one must know the relationship of water to the other nutrients.

Not understanding the relationships among the assets can lead to trouble. One of our organizations found itself in a period of severe financial distress. The organization's governing board directed cutbacks in services, downsizing, and a reduction in outreach programs. The result was a return to profits, but the price was increased labor conflicts, community anger (represented through radio, television, and newspaper coverage), and loss of patients. Did the governing board have an obligation to take steps to restore financial heath? Of course. But by not managing the relationships among the assets, it applied too much water and nearly drowned the plant.

It's all connected

There is ample evidence in the service industries to show how improving employee satisfaction leads to improved customer satisfaction, which leads to improved financial performance. Sears, for example, can project that for an increase of 5 percent in employee satisfaction, it will see a 1.3 percent improvement in customer satisfaction and a 0.5 percent increase in net income. [4 ] Heskett et al. in The Service Profit Chain, show equally impressive relationships at Southwest Airlines, MCI, Nike, Banc One, and other service-related enterprises. [5] That such relationships exist will not come as a surprise to any experienced manager. The importance of the studies is that the relationships are quantitatively predictable.

Less studied is the relationship that the "community" plays in creating value for the organization. The importance of future studies will not be that a "community" is a valuable asset, but in quantitatively predicting how much the "community" contributes to the value-creating asset chain. It's the "community" that provides the employees, customers, land, water, and electricity. Newspapers, radio, and television stations, as the "community's" storytellers, shape an organization's image among customers and employees. Being perceived as a "good neighbor" is the context in which the "community" becomes a valuable asset.

Like all the other assets, the community's perception of the enterprise does not simply occur. It must be created, developed, and managed. Employee perceptions that the organization "is a great place to work" begin to shape a larger community image. Customer recognition that the organization is the preferred place to receive care continues to build the image. Outreach, screening, and community education programs support a perception of community commitment.

But community commitment and perceptions alone do not create value for the organization in the same way that water alone does not create a growing flower. It's only when all the tangible and intangible assets are applied in the right relationships that the organization can prosper.

Is it margin or mission?

We tend to see a linear relationship among the various assets. Satisfied employees will lead to satisfied customers, which will lead to higher financial returns.

This logic can only be partially true. It won't allow us to reverse the relationship and say, for example, that satisfied customers will lead to satisfied employees. (Imagine working in an organization where customers were regularly complaining to employees about the organization's product or service.) Nor will it allow us to say that satisfied employees can contribute directly to higher financial returns by simply finding ways to reduce costs. Linear relationships show only dependent relationships, not interdependence.

In addition, if the relationship is linear, then we would be led to believe that if we continue to apply resources to improve employee satisfaction, we would continue to see commensurate increases in customer satisfaction and increasing profits. Clearly, there is a point of diminishing return, not implied by the straight line relationship.

But the more significant problem of seeing assets in a linear relationship leads us to attempt to prioritize each asset.

* "Our customers are our first priority."

* "Our most important asset is our employees."

* "No margin, no mission."

Assigning priorities ignores the true interrelationship among the assets. So is it mission (patient care) or margin (profit)? At any instant in time it can be either. But after that instant, it's both. Always. A more accurate way to see the relationships among organizational assets is shown in Figure 3.

Returning to the flower metaphor, the gardener finds the right balance of air, water, sun, and soil or the flower dies. In the organization, management fulfills that role by creating the structures, processes, and the environment where assets are effectively connected and utilized.

Following a drought, the gardener may choose to maximize water to the flower. But if the gardener doesn't understand the relationship of water to soil, for example, and applies too much water or continually applies water over a longer period of time, he or she is likely to drown the plant. Likewise, a manager might maximize revenue producing or cost reduction activities following a period of financial distress. It would be an appropriate response only if the manager understood the consequences that maximizing one group of assets will have on all the assets and, therefore, the organization itself.

The laws of interdependence

Arthur Andersen's research demonstrates how certain enterprises have differentiated themselves in the marketplace by "leveraging" one group of assets. [3] If one accepts the premise that organizational assets are interdependent--in that they are all connected--then "leveraging" one set of assets will necessarily affect all other assets. With the possible exception of the most draconian measures, most organizations, like most plants, will absorb short-term mistakes.

But strategies that narrowly focus on "customer service" or "profits" will, in the long term, succumb to the laws of interdependence. Bottom line-driven organizations will burn up their employee asset in the long term. Customer service-driven organizations will burn up their financial and employee assets unless these are attended to in equal measure. Health care organizations that don't include their community in their value creating asset chain will use a disproportionate share of their financial resources for new initiatives. (It wasn't too many years ago when few of us could see the relationship between the water temperature in the South Pacific and the price of heating oil in the Northeast U.S. Not understanding the relationship doesn't mean there is no relationship.)

The role of leadership and management

The fiduciary responsibility of managers is to make the best use of all the organization's assets. Correctly identifying those assets, both tangible and intangible, should be the first goal. Understanding the relationships of those assets should follow. Making the best use of, or leveraging, those assets in the correct proportions is the unique role of leadership and management. The management team's ability to do that is one of the five significant assets of any enterprise (please see Figure 4).

Unfortunately, in most enterprises, leadership and management see profits as the goal--and all the other assets as a means to that end. In some industries, profits are not only the goal, but the means of measuring all performance. That should not and cannot be the goal of the modern, effective health care organization. In fact, we argue, the 21st Century health care organization cannot have one goal. By necessity, it must have multiple goals. Financial health, customer/patient welfare, employee well-being, and community development represent the true depth and vitality of any organization, as well as the broader understanding of system relationships. These goals are as interdependent as the organization's assets.

Each of us would prefer one goal, one objective, one purpose. But each of us knows that while that may lend clarity to our roles, it is not the world in which we live. All of the short term pressures push us to isolate and portray as supreme one goal--for example, patient care, profits, research, or service. Physicians practicing medicine should be primarily concerned with patient care. Finance professionals should be primarily concerned with measuring financial health and so on. But organizational leaders and managers must have a broader perspective. They, in particular, must understand the interdependence of assets and the interdependence of goals.

We are grateful for the extraordinary response to these articles through emails, phone calls, and letters. In our next article we will respond to the questions raised by readers.

Roger Schenke is Executive Vice President of the American College of Physician Executives in Tampa, Florida.

Eric Berkowitz, PhD, is a Professor and Director of MBA programs in the Department of Marketing at the University of Massachusetts' School of Management in Amherst. A frequent speaker for medical staff meetings and retreats, he also serves as a core faculty member for the American College of Physician Executives.

John M. Ludden, MD, FACPE, CPE, is Director of the MD/MBA Program at Tufts University Medical School in Boston. He serves on the board of the National Committee for Quality Assurance and is past President of the American College of Physician Executives.

J. Richard Gaintner, MD, FACPE, is CEO of Shands HealthCare in Gainesville, Florida.

Martin E. Hickey, MD, MS, FACPE, is President and CEO of Lovelace Health Systems in Albuquerque, New Mexico.

Robert H. Hodge, Jr., MD, CPE, FACPE, is Clinical Professor at the University of Missouri Health Sciences in Columbia.

Major General Leonard M. Randolph, Jr., MD, MS, FACS, CPE, FACPE, is Deputy Surgeon General at Bolling Air Force Base in Washington, D.C.

References

(1.) Schenke, R., Gaintner, J., Hickey, M., Hodge, R., Ludden, J., Randolph, L. The Physician Executive. 2000; 26(4): 6-11.

(2.) Schenke, R., Berkowitz, E., Ludden, J., Gaintner, J., Hickey, M., Hodge, R., Randolph, L. The Physician Executive. 2000; 26(6): 6-11.

(3.) Boulton, R., Libert, B., Samek. Breaking the Value Code: How Successful Businesses Are Creating Wealth in the New Economy. New York: HarperBusiness, 2000.

(4.) Rucci, Anthony J. Kirn, Steven P., Quinn, Richard T. The Employee-Customer-Profit Chain at Sears. Harvard Business Review. January/February, 1988.

(5.) Heskett et al. The Service Profit Chain. New York: Free Press, 1997.

KEY CONCEPTS

* Value Creating Asset Chain

* Tangible and Intangible Assets

* Managing the Relationships of All Assets

* Leveraging Assets--Short Term and Long Term Consequences

* Assets are Interdependent

A critical understanding of "Leading Beyond the Bottom Line" is understanding the relationships that exist among all of the assets. Organizations can leverage certain assets for short term gains--but at the expense of long term prasperity. Only when all of the tangible and intangible assets are applied in the right relationships can the organization prosper. Physician executives need to understand the consequences that maximizing one group of assets will have on all of the organizational assets and, therefore, the organization itself. Since assets are interdependent--they are all connected--then "leveraging" one set of assets will necessarily affect all other assets. If the leaders of an organization don't recognize the value of the intangible assets and/or they don't see or manage the relationships among the assets, it will be impassible to make the best use of those resources in the long term.