Leading Beyond the Bottom Line: Organizational Assets for the New Economy.

(Part 2 in Series)

IN OUR FIRST ARTICLE ON "Leading Beyond the Bottom Line" (volume 26, issue #4). We described a philosophy of leadership and management that reconciles what's important to physician exectives and organizations. [1]

Following its publication, ACPE members participated in CyberForums to discuss this new philosophy's this new philosophy's strong and weak points. (We are grateful to the members who participated and to Drs. Marvin Kolb and Bruce bender for their exceptional work in facilitating and abstracting those discussions, which can be viewed at acpe.org.)

We were encouraged by the level of enthusiasm and support. It was clear, however, that the members' support had to be limited to an appeal for the concept: "It feels right." But will it prove to be more effective than traditional, mainstream philosphies?

In a series of articles to be published in The physician Executive, we hope to explain why a philosophy like "Leading Beyond the Bottom Line" will be a more effective strategy for leaders and managers, particularly in health care.

Philosophy

First, a word about philosophy. A Greek word "philosophia," it is defined as the "theory or logical analysis of the principles underlying conduct, thought and knowledge." A philosophy can be viewed as the principles governing the conduct of life. The presence or absence of a philosophy defines the practitioner, whether it is a physician manager, lawyer, or craftsman.

Mature practitioners should have developed a rationale for the way they approach their work and use their tools. "What's important?" A philosophy serves as a rudder when the often conflicting demands of the work need resolution. A philosophy helps the practitioner integrate the variety of tools to be used in a structure to make decisions, trade-offs, or analyze a situation.

In many ways, a philosophy gives meaning to the work and allows others to understand the nature of the work.

Many times such a philosophy is unarticulated. Explaining one's philosophy to another person or group is an important means for reaching clarity in one's own mind.

When we think about a philosophy of leadership and management, simple definitions will not serve us. Each of us has learned, somewhere, sometime, what leadership and management mean--and will probably disagree with the hundreds of definitions. Stumbling around with definitions is likely to cause us to miss the more important issue of "meaning."

The best use of assets

Organizations (however one defines them) are created to aggregate resources to accomplish some purpose, be it to provide health care, raise a family, or build cars. These resources are assets. A manager has a fiduciary responsibility, by practice, and, in many cases, by law, to make the best use of all of those assets.

Traditionally, we've evaluated the use of assets through financial statements. Figure 1 illustrates the "Balance Sheet," "Income Statement," and the connecting "Cash Flow" or "Sources and Uses of Funds Statement." The troublesome aspect of these financial statements is that they were designed to measure only those things that can be counted simply or easily--financial assets, such as cash, accounts receivable, investments, and physical assets, such as equipment, buildings, and inventory. These things clearly matter, but as Albert Einstein has said, "Sometimes what counts can't be counted and what can be counted doesn't count." This, of course, doesn't mean that financial and physical assets are irrelevant, but, simply, that in today's world they are insufficient in fully valuing an organization's assets, its strengths and weaknesses.

The value of intangible assets

Employees

Our world has moved from an industrial, manufacturing age to an information, service economy and we are learning that intangible assets are as powerful--potentially more powerful--in creating value as are the tangible assets. Employees, for example, can represent all or part of an organization's intellectual capital. It is the sum total of this knowledge that can result in a monetary exchange from customers. People are willing to pay for the access to that intellectual capital in an information or service enterprise--employees and the intellectual or service capacity they represent may be of far more value than the office space they occupy.

But in our financial reporting, employees are treated as an expense. The only value of the relative worth of the intellectual capital has been the salary paid to an employee. The assumption being that a difference in the compensation would reflect a difference in the relative value of the intellectual capital of the individual. Yet the traditional approach to asset valuation places the person with the higher intellectual capital worth as a higher expense item. This inconsistency occurs despite the fact that many managers describe their employees as their most important asset.

Customers

In financial reporting, customers as individuals or as a group are not recognized, only the revenue they represent. Most organizations miss an important opportunity by failing to understand that in the aggregate, "customers" are an asset to be managed--and as vital as financial assets. Traditionally, organizations sought to acquire customers. Only recently have they begun to appreciate the costs of losing customers and the value of building long-lasting relationships with them.

To do this, however, requires an enormous and continuing effort. The value of customers is more than the episodic, direct transaction with an organization--for example, in health care, the patient visit. The greater value is in the relationship that the customer perceives with the organization. The sum of these relationships is the intangible asset we refer to as customers and it's this asset, if not recognized and consciously managed that will leave the organization vulnerable to those who do.

Being a good neighbor in the community

Many organizations, especially in health care, overlook another intangible asset, because it is not recognized in financial reporting. Being a good neighbor in the community is the moral expression of sound business principles. The health care organization's geographic community represents the source of most of its assets--for example, its employees, customers, and property. Newspaper, radio, and television stations can build or shatter an organization's image in the community. Government agencies, and charitable and networking organizations, like a hospice or V.N.A., can assist or obstruct the initiatives of any enterprise. All of these elements and more comprise a community, and this asset can be effectively or poorly managed.

Leveraging and managing organizational assets

Figure 2 depicts organizational assets for the new economy, while still recognizing the traditional "tangible" assets.

In the same way that the "Cash Flow Statement" links the "Balance Sheet" and "Income Statement," an organization's Leadership and Management links the organization's tangible and intangible assets.

Included in this label of Leadership and Management is organizational structure, decision-making processes, quality improvement, and other tools and skills used to effectively leverage and manage organizational assets.

In the previous article, we espoused a new philosophy of management called "Leading Beyond the Bottom Line." In this article, we have attempted to begin to define the totality of elements reflected in the circles around leadership (Figure 3) that must be considered in the new service economy. A focus on the assets that could be simply counted (financial), while necessary for any successful leader, is no longer sufficient.

In our next article, we will show why these assets are interdependent and inextricably linked and perhaps, most importantly, why "Leading Beyond the Bottom Line" will prove to be especially relevant in health care.

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.

J. Richard Gaintner, MD, FACPE, is Chief Executive Officer 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 of Clinical Internal Medicine at the University of Missouri Health Sciences in Columbia.

John M. Ludden, MD, CPE, FACPE, 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.

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., and Randolph, L. A New Philosophy of Management: Leading Beyond the Bottom Line. The Physician Executive. 26(4):6-11, 2000.

(2.) Boalton, Libert, and Samek, Cracking the Value Code. Harper Business, 2000.

(3.) Heskett, Sasser, and Schlesinger. The Service Profit Chain. Free Press, 1997.

KEY CONCEPTS

* Leading Health Care Organizations

* Developing a Philosophy or Rationale

* Tangible and Intangible Assets

* The Value of Employees and Customers

* Being a Good Neighbor in the Community

Organizations are created to aggregate resources to accomplish some purpose, be it to provide health care, raise a family, or build cars. These resources are assets. A manager has a fiduciary responsibility, by practice, and, in many cases, by law, to make the best use of those assets. Traditionally, we've evaluated the use of assets through financial statements. The troublesome aspect of these financial statements is that they were designed to measure only those things that can be counted simply-financial and physical assets. But our world has moved from an industrial, manufacturing age to an information, service economy and we are learning that intangible assets are as powerful-potentially more powerful-in creating value as are tangible assets. Recognizing the intangible asset value of employees, customers, and the community is the challenge in this new service economy. Effective health care leaders need to leverage and manage all of organization's assets.