Utilizing Business Service Management Concepts to Improve Healthcare Information Services

This article presents background information on the Information Technology Infrastructure Library (ITIL) and Business Service Management (BSM), introduces methodology for implementing the ITIL processes in a business, and highlights lessons learned from the initial implementation of these processes at a regional medical center.

[powerpress http://gsbm-med.pepperdine.edu/gbr/audio/spring2010/healthcare.mp3]

Doctors at computersBusiness Service Management (BSM) is a fairly new methodology, which is being used by Information Technology (IT) organizations and businesses to describe a way to organize, operate, and manage IT Services.[1] Specifically, BSM allows an IT organization to properly align critical business services to the underlying IT infrastructure that provides the service, as described by the Information Technology Infrastructure Library (ITIL). This article provides a brief summary of ITIL and BSM, and describes the adoption of BSM concepts in an IT department and a business service unit of a regional healthcare provider that aims to further examine key performance indicators. The goal of the project described in this article is to identify potential points of service failure and proactively prevent these service failures from occurring, create a more efficient information flow, improve patient care, and lower IT costs. The lessons learned from the implementation of BSM at this company will be outlined in the article.

Background – Business Service Management

In order to fully explore BSM, we must also look at ITIL and its goals. The Information Technology Infrastructure Library (ITIL) was first published by the British Office of Government Commerce[2] in the early 1990s, and became widely adopted in the mid-1990s. ITIL was originally conceived of as a way to better align information systems with the business processes they supported. The goal was to improve the management of IT by implementing a more process-oriented model of control. Starting with ITIL version three, ITIL concepts focused on developing the quality of services that IT organizations provide to the business, rather than simply managing and maintaining the business IT infrastructure and technology. ITIL V3 introduces the idea of the “service life-cycle,” with five major components:

1. Service strategy—guidance, policies, and processes that assist in developing service management policies to govern the other service components,

2. Service design—guidance on developing processes that manage how changes and improvements are made to increase and maintain the business value,

3. Service transition—guidance on the development and improvement of capabilities for transitioning new and changed services into operations,

4. Service operations—guidance on achieving effectiveness and efficiency in the delivery and support of services so as to ensure value for the customer, and

5. Continual service improvement—guidance on creating and maintaining value for customers through better design, transition, and operation of services.[2]

With the addition of the “service-life cycle,” ITIL is focused more on the implementation of high levels of IT service for the business.

ITIL is becoming much more widely accepted in the business and IT communities. According to a study by Dimension Data, 85 percent of American CIOs stated that IT service management practices will allow increased optimization of IT “best practices” with 60 percent stating they were focused on implementing the ITIL framework.[3]

Business Service Management enables organizations to implement the ITIL framework, and enables the goals of the business to be more closely related to the IT components that support them. It also represents “a category of IT operations management software products that link the availability and performance status of underlying IT infrastructure and applications components to business-oriented IT services that enable business processes.”[4] Implementing this type of software can improve the service levels provided to the organization by IT, and reduce costs for the IT organization and the business.

According to Marquis,[1] the implementation process for BSM can be broken into four steps:

1. Define IT services and validate business cases.

2. Analyze service value and prioritize services in terms of IT focus.

3. Measure quality externally from the organization to choose improvement opportunities for those services that are not performing as required from the service consumer.

4. Authorize every IT improvement program as a formal project and allocate resources.

Adoption of ITIL and Business Service Management practices

Individual business services are built out of many different processes, policies, functions, systems, and customer interactions. The ability to model these moving parts in a single monitoring system is the real value of BSM, as the organization gains insight into the business service, end to end. In this section, the key module layers in BSM are discussed using the example of a large regional medical center, which benefitted from the flexibility and value that BSM adds to an organization.

In 2007, a large regional medical center began to implement ITIL practices into their IT long-term planning as well as in daily operations. In the fall of 2008, these practices were extended to the hospital’s IT Project Management Office, which specifies the ITIL guidelines implemented for knowledge, change, and service management modules. Goals were established for the BSM services, and several vendor applications were solicited to assist with the implementation of BSM.

The goals and anticipated benefits of the BSM modules were: a) monitor end-user experience to identify IT problems; b) spot pre-failure warnings through trending and historical analysis; c) prevent “finger pointing” through early detection of potential service failures; d) distinguish between vendor points of failure and internal points of failure; and e) provide management dashboards (a user interface to provide a visual representation of multiple key performance indicators) and alerts.

A vendor was selected to provide the core software for the “Business Service Management Model,” which functions as the engine that maps incoming data to the relevant business process it impacts. Once the business service is defined, and the IT components that provide this service are mapped out, data can be collected and used to tailor dashboards to the different end users. This in turn allows users to make informed decisions based on current and historical data.[4] Implementation of this service monitoring module began in early 2009. Key to the implementation was mapping specific hospital workflow practices to the monitoring system.









Mapping of service module.

Fig. 1: Mapping of service module.









The first layer inherent in the BSM is the establishment of the proper metrics and standards for the services being monitored. These metrics must be divided between those items that are the responsibility of the IT department and the service level agreements (SLA) with the individual hospital service providers. The IT responsibility arena includes items such as measuring network speed and managing capacity, including utilization of the central processing unit and random-access memory. The service level agreements are based on measurements like transaction or response times, and define the acceptable levels of performance for these metrics and the penalties for failing to meet these performance targets.

The next layer is what really defines BSM. When modeling a line of healthcare services, there are generally clearly defined steps that need to be monitored. For example: measuring the time from when a patient enters the hospital’s emergency room, to when they are provided the needed services and, finally, to release or admittance. A metric that defines this level of performance is called a key performance indicator (KPI). KPI’s are generally built upon SLA’s with additional interaction measurements between the managed service and the customer. Another example of a KPI would be the amount of time it takes for an employee to capture and enter new patient contact information. This time is measured from the time the employee starts entering the information to the time the system returns a complete message back to the employee, acknowledging that the information was captured accurately. This time measurement includes both the system response time and any additional interaction time between the patient and the employee, as the measurement starts as soon as the employee opens the new customer screen and ends only when the data is saved to the system. Thus, business performance is measured in KPI’s, which are an aggregation of system time (as defined by the SLA’s with the business unit) and interaction times.

Building Business Service Management Modules

All of the different layers of criteria and standards may be represented via a tree. Each layer of the tree has a node, which represents a service. In the tree, there is a top node or service, defined as a KPI. Other layers define the measurement standards, locations, and performance standards. Figure 1 represents the model to measure the business service management performance of the hospital’s emergency department (ED). The following definitions will assist in the understanding of the module components:

1. KPI—Key Performance Indicators for this tree are the actual business process definitions, such as “quick registration” to “triage,” which is the time it takes for a patient to go through the quick registration process, and ends when the triage process begins. Each KPI is the next step in the ED process in this service model.

2. Location—This medical center has multiple ED departments.

3. Acuity—Patients are assigned an acuity level or degree of illness.

4. Process—Due to the performance measures being calculated, patients could be divided into different process levels within each KPI. For this example the process levels are “In Process” and “Completed.” A patient is in process if they have a start timestamp for a KPI, but no end timestamp.

5. Performance—In this particular model we are measuring two performance metrics: the number of patients in the business process, and the average wait time for those patients in this business process. Each base node would represent the complete segregation of data we were looking for and as you moved up the tree, the “Patient Count” and “Average Wait Time” would aggregate to give you another view. This means, at the Acuity level, you would see the total number of patients and the average wait time across all of the nodes below Acuity.

Figure 2 represents what one entire leg of the tree would look like once data is entered into the system. The base of the tree, when fully populated, has approximately 300 nodes across. Once data is fed into the system, the tree grows horizontally at each layer of the service model. As messages come into the system via the data feed, the messages are compared to the model template. The model template is essentially a waterfall filter, which determines where the message (the data) fits into the tree. Once the message is fit into a template, it is compared to the other data that has already been fed and fits that template. If the node already exists, it is updated. If the node does not exist, a new node is created. The system then moves on to the next data set: building the message, running the message through the waterfall template filter, and fitting the data into the tree.





Tracking nodes are built automatically to track service points of contact and other KPI's

Fig. 2: Tracking nodes are built automatically to track service points of contact and other KPI




IT management, ED management and first-line supervisor dashboards

Once the model is populated, the tracking of performance can be segmented into a series of dashboards to assist IT management as well as ED personnel to identify potential bottlenecks. Several of the key management dashboards are shown below:









Component of the Executive Summary Dashboard

Fig. 3: Component of the Executive Summary Dashboard (above)









Figure 3: An executive summary dashboard that tracks and reports five KPI’s in terms of their current quality, availability, SLA status, and monthly quality trends.

Figure 4: This dashboard shows, by criteria, nodes where there might be service bottlenecks. This figure represents those items previously defined in Figure 2 and those that might be out of compliance for pre-established SLAs. The user can click on any node to drill down and respond to situations where the business might be performing poorly.









Potential service failure points.

Fig. 4: Potential service failure points.









Figure 5: This operation dashboard shows another view of the overall throughput of the ED business processes. It provides management and front-line supervisors information on the key KPI’s impacting service levels. The most interesting gauge here is the Acuity Throughput gauge—this is the number of hours, on average, it takes a patient of a specific acuity level to get through the selected ED location.









Operations Overview

Fig. 5: Operations Overview









Usage and Implementation

As this article was written, the dashboards were being introduced to additional IT management and the ED management at the medical center. A key component of using the dashboards is to train all users on their meaning and how responsible individuals may respond to different nodes that may be out of compliance.

Care was taken to involve the end user in the establishment of the KPI’s, the nodes to monitor, and potential responses. The goal is not to track failures and “point the finger,” but rather to assist the ED and IT supervisors in preventing a potential future service failure. For example, the BSM provides the acute care ED nursing supervisors real-time data on how many patients are currently in the queue at each specific level of acute care. This enables the supervisor to shift ED staff to those acute care levels approaching service failure.

Conclusions

The project team at the regional medical center reported success in the adoption of this business service management module. Several lessons were learned from this adoption, which will be applied to future work in expanding the modules and future implementation of ITIL standards. They are:

1. Creating and implementing this solution was more resource-intensive than originally anticipated. The next portion of this implementation will require additional monies more appropriately budgeted. Additional resources applied to develop and maintain the solution, including modeling business processes, creating dashboards, and mapping the information systems, are key to a successful implementation. The development and ongoing maintenance are extremely time-intensive tasks that require focus, especially in a rapidly evolving environment like healthcare.

2. Input from the employees who work the business processes each day is absolutely required from the start of the project. Their feedback allows the model to be more accurate conceptually. Including the business service managers as the KPI’s are discussed and developed on the dashboards is especially crucial, as these are things the business service managers may already be tracking.

3. Finally, this solution is best for process-driven businesses where management is already looking for ways to improve performance. If business lines operate in an organized fashion with clear business processes, the dashboard monitoring and maintenance costs decrease, and the process becomes easier. When starting a BSM project, it would be wise to start with a well-defined business process or unit, as these projects are more likely to succeed.

While this article tracks the implementation of ITIL standards at one medical facility, this method of process-improvement is relevant for any number of businesses and industries. Examples of other industries that may benefit from ITIL include production, shipping operations, financial institutions, and customer service. Management in each of these areas could work with their IT teams to define the key performance indicators, the primary bottlenecks, and the acceptable level of operations and service response times. Once these are defined, the use of dashboards can alert management to potential problem areas in advance, thus permitting managers to respond proactively to problems, rather than simply “fighting fires.”


[1] Marquis, H., “Business Service Management: What It Is and Why You Should Care,” Global Knowledge, August 2008 [White paper]. Retrieved from http://whitepapers.zdnet.com/abstract.aspx?docid=384727. (link no longer accessible).

[2] www.itil-officialsite.com, “ITIL, Information Technology Infrastructure Library,” 2010: http://www.itil-officialsite.com/home/home.asp.

[3] Dubie, D., “ITIL Adoption Increases in U.S., Proficiency Still Lacking,” Network World: Feb. 29, 2008. Retrieved from http://www.networkworld.com/news/2008/022908-itil-adoption.html.

[4] Compuware. “Vantage Service Manager: A Technical Overview,” 2007 [White paper]. Retrieved from http://whitepapers.techrepublic.com.com/abstract.aspx?docid=347890.

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What Determines Which Businesses Win and Which Lose?

Relationships often bring opportunities. I have known Keith McFarland for 20 years, since he was Associate Dean for the Pepperdine’s Graziadio School of Business and Management. Back then, the school was facing enrollment challenges. Dean Dr. James R. Wilburn brought Keith on to help with these issues he was just 26 years old at the time and several faculty had doubts about what he could do. As Keith focused his considerable energy on attracting new students, faculty doubts were quickly dispelled. He was a major factor in the successful launching of the graduate business programs on Pepperdine’s Malibu campus and he led the way in recruiting MBA students from several major cities in the East and West.

In January 2008, Keith published the The Breakthrough Company: How Everyday Companies Become Extraordinary Performers. Prominent business author and speaker Harvey MacKay wrote, “Keith McFarland is about to be added to the list of the top business thinkers.” The book was quickly praised by many other business writers, including, Stanford University distinguished professor Bill Barnett, Mattel CEO Bob Eckert, Stephen Covey, retired Motorola CEO Bob Galvin, and Steve Forbes, editor-in-chief of Forbes magazine. Since then, it has become a Wall Street Journal #1 best seller.

Editors Note: Click here to read the GBR’s review of Breakthrough Company.






Keith McFarland






My talk with Keith began a few days before he spoke to a gathering of Presidential and Key Executive (PKE) MBA students in Westlake Village in December 2008. Interviewing Keith McFarland was a distinct pleasure. He has an exceptionally quick mind and he is constantly looking for new opportunities to learn. His manner is rather straight-forward and matter-of-fact, with a bit of humor and a warm smile. Keith has the ability to quickly assess a situation and decide whether or not to press forward. With some frequency, he does press forward. That is probably why he is becoming an adept rock-climber!

Would you give me an overview of what you did from the time you left Pepperdine until you wrote The Breakthrough Company?

I started working as a management consultant, and then I was asked to run a company called Collectech Systems. We doubled in size every year for 10 years, and then we had a terrible thing happen, and I learned about resilience. We nearly went bankrupt. We were able to rebuild it. Eventually we sold it to GE Capital and Harvest Partners. Then I moved to Utah, where I live now, and I ran a business for Microsoft. We ran our 2000 testing centers for Microsoft around the world. We had a baby at the time I was working for Microsoft, I was 40-something, and soon I realized that having a company in 56 countries wasn’t good for being father to a newborn. I had to make a living, so I slowly got back into consulting because we love Utah. So, that’s kind of my story.

Where did the idea for your book, The Breakthrough Company, come from?

When I was enrolled in the doctoral program at the Peter Drucker Center, I had the good fortune to have Peter Drucker as my professor. I’ll never forget, one day we went to class and he asked this question I’ll spend the rest of my life working on this question. It’s an awesome question. Drucker said:

If you were going to make a list thats as short as possible but as long as necessary of the things that determine which businesses win and which lose, what would be on your list?

That question planted the seed for what eventually became the book in my mind. I continue to ask that question of every audience I speak to.

It really is a great question! It was 16 or 17 years ago, when I first heard this question asked. By the way, everyone asks me, “Well, what did Drucker say?” What happened is we talked about it in class for 90 minutes. Then someone raised their hand and said, “Professor Drucker, what’s the answer?” He said, “That’s what you should spend the rest of your life figuring out.”

Taking the lead from Drucker, I continue to ask that question. I actually have asked the same question of no less than 600 groups, the largest being 1,000 and the smallest being five people. I keep asking this question, partially because I’m interested, and whether or not I’ll ever discover anything new, and secondly, I did it for the first few years because I wanted to find out what the organizing principles of this answer were. All I can tell you is that my thinking continues to change as we go forward.

When you ask that question of groups, what kinds of things typically show up in their responses?

Several ideas show up most of the time. I would put the responses into three categories: Strategy, People, and Execution. I sometimes speak of these as three levers on the executive’s desk. The PKE students’ response to my question was like the responses from other groups.

Editor’s Note: The answers from McFarland’ session with the PKE-MBA students included: management, innovation, ethics, talent, leadership, alignment, risk-taking, culture, brand, DNA, flexibility, creativity that triggers innovation, motivation, profit, great product, good financing, customer service, focus, adaptability, and clear mission.

In my view, as we go into work every day, we should think about the three levers on a leader’s desk and ask ourselves, “Hey, isn’t my job really to optimize these three things?”These are the things that determine whether a business wins or loses.

You have worked with many companies that want to improve their performance. How do you approach that question?

Smart leaders know one of their main jobs is to help their business, and where appropriate, break out of routines. When people get into a routine, their brains often shift into neutral: They become less likely to spot changes in the environment and less likely to question what they are doing and how they are doing it. Embedded in routines are assumptions about the world and how it works, assumptions we often mistake for reality. When the world changes faster than our assumptions about it, danger lies ahead.

How do you get people to question their assumptions?

I ask questions, like, “In the past 90 days, what were your three most important strategic accomplishments?” I do not simply accept answers like, “We met our revenue budget.” A strategic accomplishment is one which changes the field of play in a company’s favor.

Another question I ask is, “In the past 90 days, what were the three most important ways you fell short of your potential?” The answers give insight into what people think the company should be emphasizing, but isn’t.

I also ask, “In the past 90 days, what are the three most important things you have learned about your strategy.” This is a tough question because it asks people to learn and adapt the strategy and tactics of the company.

At Pepperdine we give a lot of attention to teams. What do you think about teaming in the workplace?

When I work with companies to help them set strategy, I begin by creating what I call a Mind Bank. For groups to be effective, they need to have a method of aggregating the opinions and insights of individual members in a way that doesn’t undermine their diversity and independence. I always send 30 to 50 people a “strategy sketch” document, and ask them to return it to me with their reflections on what they consider the most important issues facing the business. If you’re looking for a way to make better decisions in your company, you will find that the more minds you get working on the problem, the better the solution.

Are you working on another book?

Yes, it is titled Bounce: The Art of Turning Tough Times into Triumph. It will be published by Random House on September 15 [2009].

What inspires you?

My six- and nine-year-olds! They remind me to see life through their eyes, with the future being one big shiny opportunity. Children are born with a transparent or clear way of seeing things. They respond to the world as it is. They are transparent. What you see, is what you get.

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Managerial Leadership at Twelve O’Clock

The Linkage Research Model can mean the difference between floundering and knowing how to drive business results.

Managerial leadership – everyone knows an organization needs it to thrive and grow. But what does managerial leadership mean for you and your organization? The Linkage Research Model (LRM) is one way to think about this. LRM encourages managers to focus on those managerial leadership practices that drive employee results, which in turn influence customer results, which are what actually produce business results.

This model can be depicted as a clock. At the twelve o’clock position is a set of Managerial Leadership Practices. At three, six, and nine, respectively, are employee, customer, and business results. This clockwise relationship is shown below.

Managerial Leadership Clock

The Linkage Research Model and Managerial Leadership

This article suggests one way for managers to explore and identify those managerial leadership practices that should be in their twelve o’clock box in the LRM model. In so doing, this approach encourages them to survey current popular management writings in order to stay up to date with current management practices.

More on the Linkage Research Model (LRM)

The primary purpose of linkage research is to identify elements operating in the work environment, especially managerial leadership practices, which influence employee actions as well as customer relationships. To do this, LRM correlates managerial leadership practices with employee and customer survey data and with other important organizational metrics. The stronger the link between particular managerial leadership practices and employee survey results, customer survey results, and other measures of organizational effectiveness, the more important these specific leadership practices are considered to be in influencing overall organizational success. As more research is conducted using this model, practitioners will learn more about how the various relationships examined in the framework interact across different cultural, industry and organizational settings.

While the LRM model does not address all the factors that may impact organizational performance, numerous foundational studies exist that lend support to the linkage methodology. One landmark study, done at Sears in the mid-1990s, demonstrated how the various components in the model can be quantitatively analyzed and used to manage business operations. Management focused on 12 skills, grouped into three categories: passion for customers, people add value, and performance leadership. Following implementation of these practices, they found that a five-unit increase in employee attitude was correlated with a 1.3 unit increase in customer satisfaction (both measured by surveys) and a 0.5% increase in revenue growth. These results were statistically significant.[1]

Jack Wiley is internationally recognized for his work in linking employee survey results to measures of customer satisfaction and business performance. From his experience and applications of LRM across a variety of organizational settings, including retail branch banking, he concludes that:

  1. Employee and customer satisfaction are clearly linked.
  2. Managerial leadership value systems and practices are critical ingredients in this linkage between employee and customer satisfaction.
  3. Employee retention and customer satisfaction are positively correlated.
  4. Over the long haul, quality and customer satisfaction are positively linked to customer retention, market share, and profitability.
  5. Short-term practices intended to maximize sales and profits may adversely affect employee and customer satisfaction.
  6. Commitment to managerial leadership practices that support quality, as well as employee and customer satisfaction, is a longer-term business strategy, not a quick fix.
  7. Managerial leadership practices within the LRM framework become self-reinforcing.

Given the growing track record of research on the LRM, I would strongly encourage any managerial leader to discern which managerial leadership practices actually drive employee, customer and business results for his or her group or organization. What follows is an approach to help you do just that!

Selecting Key Managerial Leadership Effectiveness Practices

Focusing on key managerial leadership practices that ultimately drive organizational results is a challenge. This challenge includes identifying the universe from which to choose, establishing a set of criteria by which to critically analyze each potential practice, and deciding upon the final practices to be included in your 12 o’clock box. To assist in meeting this challenge, I offer practitioners the following four-step approach to selecting managerial leadership practices that will be effective in their organizations.

Step 1: Survey Practices: First, identify the universe of managerial leadership practices. One way is to regularly review business periodicals that are written for practitioners[2], as well as websites that provide business tools and information or that aggregate business literature. Book review sections of papers, journals and websites can also be useful. However, if your time does not permit this amount of research, I recommend that you read The Manager’s Bookshelf: A Mosaic of Contemporary Views by Pierce and Newstrom, now in its sixth edition. The current volume concisely reviews 45 best-selling business books and offers summaries of a multitude of managerial leadership practices. This source provides a convenient and relatively painless way to pore through volumes of practices to glean what is useful to your circumstance.

Step 2: Identifying Relevant Practices: Then from the numerous practices you have identified, narrow the list to include only those that would be relevant to and potentially useful in your leadership role. This is essentially an informal brainstorming session.

Step 3: Establishing Selection Criteria:Now that your list is more refined, select those that would be most effective for you by formulating a list of a few meaningful criteria to use to narrow your field of finalists. Some potential criteria are presented as questions to ponder: Is the practice valid on its face? – Does it generally seem to make sense? Is the practice practical and does it have application in the real world? – Can this practice be made to work in my organization given my current situation,? Is the author espousing the practice credible? – Does the author’s training, experience and/or other credentials support and give credibility to what he or she is espousing?

Step 4: Using the Criteria to Select Your Final Practices: Next, look at each of the managerial leadership practices you brainstormed in Step 2 in light of each of your criteria. Typically, anywhere from five to twenty managerial leadership practices will make the cut. You may find it useful to engage co-workers in this critical review process, carefully considering each practice and its relevance and usefulness in your situation. . All your final selections should be double checked against the selection criteria you established in Step 3. Further refine your list until it represents the “best” of managerial leadership practices that you believe drive employee, customer and overall business results in your own sphere of influence.

The Application

To demonstrate the process, I would like to apply the Four-Step Model, showing how it can be used by management practitioners

Step 1: Survey Practices: Using the Manager’s Bookshelf, read each of the 45 summaries of these business best-selling books. You will find a myriad of managerial leadership practices, some of which may be relevant to your own situation, others not.

Step 2: Identifying Relevant Practices: As you read, list in bullet point fashion the managerial leadership practices that seem to be most able to drive results in your work setting. Note the page, source book, and “take-away” points for future reference.

Step 3: Establishing Selection Criteria: When you have generated an extensive list of potential managerial leadership practices,determine a handful of useful criteria to use to pare down your list. Potential criteria to use may include: Practicality Face Validity External Validity Research Support Author Credibility Uniqueness Objectivity Reliability Reasonable Approach Emotional Appeal Application Value Track Record of Success

Step 4: Using the Criteria to Select Your Final Practices: Your chosen criteria may be applied in a variety of ways to each of the managerial leadership practices designated thus far. I recommend that you create a spreadsheet and list each practice that you have selected. Then evaluate each of these practices against your established criteria using a ten point scale (ten being the highest). The practices receiving the highest ratings would be considered a “preliminary final list.” Discuss these practices with three or four of your key reports. Check these final candidate practices against your stated criteria once again. On a scale of one to ten, to what extent does each practice really seem like a key action that managerial leaders in your current situation can take to drive results? If you can answer this key question with an “8″ or higher, and you have also given the specific practice a high rating against your criteria, then that particular practice becomes a practice you place in the twelve o’clock box. You are endorsing it as a managerial leadership practice that should help you drive employee, customer, and overall business results.[3]

Selections using this stepwise approach are largely intuitive. To learn how to more rigorously examine your selected practices using quantitative methods with the LRM framework, visit Jack Wiley’s work on high performance organizational climate (Wiley, J.W., and Brooks S.M. (2000), “The High Performance Organizational Climate: How Workers Describe Top Performing Units,” in N. Ashkansay, C. Wilderom, and M. Peterson (eds.), and Handbook of Organizational Culture and Climate, Thousand Oaks, Sage Publications.

Some Sample Selections

Having worked externally in many companies across a variety of industries as a business advisor/organizational psychologist, I have gleaned five managerial leadership practices that I would recommend across the board for your final list:

1. The Stockdale Paradox: (Based on Admiral Stockdale’s experience as a prisoner of war in the “Hanoi Hilton” during the Vietnam War.) Face the hard cold facts of the current situation but, even with a grim reality, maintain total faith that you will prevail in the end.[4]

2. Affirming Shared Values and Honesty: Ensure there is an agreement in your organization about values, and be honest in your dealings with others. In one global survey involving over 15,000 managers, honesty was determined to be essential to leadership.[5]

3. Courage and Risk Taking: Create a working environment that fosters courage and encourages taking calculated risks.[6]

4. The New Management Virtues: Lead and manage in ways that reveal the virtues of trustworthiness, unity, respect, justice and service. Do the right things for the right reasons, and long-term results will tend to be positive.[7]

5. The Star of Success: Utilize a five-pointed star, where each point represents a key question that helps members of an organization determine if they have the right pattern of success. Do we have the right strategic direction? Do we have the right functions (processes and systems)? Do we have the right form? Do we have the right resources? Do we have the right information?[8]

In practice, I have my clients take this further by translating their selected managerial leadership practices (Step 4) into specific actions and behaviors. They are encouraged to determine how they plan to convert a practice into action, where it will be applied and when it will be applied.

A Closing Note

As a practicing manager or a student of management, knowing what is at your 12 o’clock position in the Linkage Research Model can mean the difference between floundering and knowing just what to do to help drive business results. I encourage you to use this four-step process to help you enhance your practice tool kit to achieve results. Managerial leadership practices at 12 o’clock can make the difference between organizational and career success and failure. Do you know what should go into your 12 o’clock box?


Notes

[1] Rucci, A.J., Kim, S.P. & Quinn, R. T. (1998). The employee-customer- profit chain at Sears. Harvard Business Review January-February, pp. 84-97. While Sears continues to be challenged by formidable competitors such as Wal Mart and Target, this work in the 1990′s of connecting soft people processes to hard business metrics helped demonstrate how LRM could be operationalized in an applied business setting. For those interested in learning more about the ups and downs of Sears as it strives to compete in a hyper-competitive industry, read The Hard Road to the Softer Side: Lessons From the Transformation of Sears, (2001) by Arthur C. Martinez and Charles Madigan, Crown Business Books.

[2] There are literally hundreds of business publications available, but many are research publications that target academic audiences. The business section of any major public library will have some that you can browse in addition to the well-known ones such as Fortune (hyperlink no longer accessible), Forbes, and Businessweek. The Academy of Management Executive, Harvard Business Review (hyperlink no longer accessible), Sloan Management Review, California Management Review, Chief Executive Magazine, to name just a few. If you are serious about exploring this world, check out Cabell’s Directory of Publishing Opportunities in Management (hyperlink no longer accessible) while you are in the library. It gives brief synopses of most of the business publications. Websites are also an increasingly popular source of information. Many also sell services and seminars, but many times they offer free articles as well. For example, check out BetterManagement, Strategy + Business, ManyWorlds, bPubs. Many major newspapers also have websites. There are many other sources you can find through Yahoo or just doing a search on the web.

[3] Selections using this stepwise approach are largely intuitive. To learn how to more rigorously examine your selected practices using quantitative methods with the LRM framework, visit Jack Wiley’s work on high performance organizational climate (Wiley, J.W., and Brooks S.M. (2000) “The High Performance Organizational Climate: How Workers Describe Top Performing Units” in N. Ashkansay, C. Wilderom, and M. Peterson (eds.) Handbook of Organizational Culture and Climate, Thousand Oaks, Sage Publications).

[4] From, Good to Great by James C. Collins, p. 200 in Pierce and Newstrom.

[5] From Credibility by James M. Kouzes and Barry Z. Posner, pp. 268 and 270 in Pierce and Newstrom.

[6] From, Fusion Leadership: Unlocking the Subtle Forces That Change People and Organizations by Richard L. Draft and Robert H. Lengel, p. 192 in Pierce and Newstrom.

[7] From Managing with the Wisdom of Love: Uncovering Virtue in People and Organizations, by Dorothy Marcic, p. 303 in Pierce and Newstrom.

[8] From Whole-Scale Change: Unleashing the Magic in Organizations, by Dannemiller Tyson Associates, p. 223 in Pierce and Newstrom.

References

Pierce, J.L. & Newstrom (J.W.). (2002). The Manager’s Bookshelf: A Mosaic of Contemporary Views. (Sixth Edition), Upper Saddle River, New Jersey: Prentice Hall.

Rucci, A.J., Kim, S.P. & Quinn, R. T. (1998). The employee-customer- profit chain at Sears. Harvard Business Review January-February, pp. 84-97.

Schneider, B. & Bowen, D. E. (1985). Employee and customer perceptions of service in banks: Replications and extension. Journal of Applied Psychology, 70, 423-433.

Wiley, J. W. (1996). Linking survey results to customer satisfaction and business performance. In A. Kraut (ed) Organizational Surveys. San Francisco: Jossey Bass.

Wiley, J. W. (1991). Customer satisfaction: A supportive work environment and its financial cost. Human Resource Planning. 14 (2), 117-128.

Wiley, J.W. & Brooks, S. M. (2000). The high performance organizational climate: How workers describe top performing units. In N. Ashkansay, C. Wilderom, & M. Peterson (eds). Handbook of Organizational Culture and Climate, Thousand Oaks, California: Sage Publishing.

Wiley, J.W., and others. “Driving Organizational Outcomes with Strategic Employee Surveys: Best Practices From Internal and External Practitioners.” (2002). Pre-Conference Workshop. Presented at the Seventeenth Annual Conference of the Society for Industrial and Organizational Psychology, Toronto, Canada, April 2002.

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Calculating the Strategic Value of Customer Satisfaction

Treat the pursuit of customer satisfaction as you do any other profit-driven investment—that is, assess it in terms of its net present value (NPV) and/or return on assets employed (ROA).

For What It’s Worth

Interest in, and concern about, the measurement of customer satisfaction has continued to rise. Whether the push is driven by internal or external champions, top management is being exhorted to establish a process for quantitatively determining the level of satisfaction among the firm’s customers. Marketing research firms have even created full divisions to exploit the demand.

However, once a system is set up, marketing executives often get caught up in chasing the metric. They launch a seemingly endless series of programs to improve the scores on customer satisfaction. Assets are committed, prices changed, communications adjusted, changes in scores are duly noted, and rewards or sanctions are distributed. By the sheer act of measuring and reporting customer satisfaction, its importance is elevated — in some cases to the level of a strategic outcome. A recent national survey of executives found that “information about customer satisfaction is highly valued by the largest percentage of executives, even more than the traditional management gauges of financial performance and operating efficiency.”[1]

With the growing amount of time and resources that have been going into the measurement of customer satisfaction, it is not surprising that questions are being raised about whether these commitments are truly worthwhile. What is the financial value of a one-point improvement in a satisfaction score? Some studies have been able to show evidence of benefits to business operating results that can accrue from a high level of customer satisfaction.[2] Yet, in an article published just last year, it was noted that less than 30% of managers reported being confident that their firms’ customer satisfaction levels were showing economic value. Only 2% claimed any ability to measure the financial impacts that resulted from any customer satisfaction initiatives.[3]

The Roots of the Problem

This weak record in linking satisfaction to financial performance can be at least partially explained by the fuzziness of the customer satisfaction construct. Each company tends to have its own definition, using different inputs and procedures to operationalize the term. Thus, a finding of no correlation between a company’s satisfaction scores and its profitability may simply be due to poor satisfaction measures being used. The development of the American Customer Satisfaction Index[4] may help the efforts to link satisfaction to financial performance, since there is now one standardized measure available for benchmarking.

Actually, one could argue that true customer-satisfaction tracking demands more, not fewer, customized measures, since each customer may consider different inputs and/or weight them differently. However, any implementation of customized measures could actually confound the efforts to link satisfaction to performance measures across multiple companies.

A second complication stems from the fact that the economic benefits of customer satisfaction, as one author put it, “are still lost inside the shades of traditional accounting” since the benefits are not necessarily turned into profit within the immediate accounting period[5] Any improvement in measured satisfaction could be seen as having three types of impacts: a) improved feelings among customers; b) immediate financial impacts such as greater sales volume; c) longer-term financial impacts such as increasing sales in years to come. To the degree that the last category is significant, the correlation between current satisfaction and profit-type measures will be distorted.

Finally, satisfaction computations most often give equal weight to all customers, regardless of their relative profitability to the firm. Hence, in an effort to raise satisfaction, the firm may take actions that could end up worsening profitability. For example, those patrons who only buy a few items in a store want the checkout lines to be short. Adding dedicated checkout stands for these customers will likely bring about an increase in their satisfaction. However, if this means fewer checkout stands for other customers, it may very well drive away those with large profitable baskets, thus generating a “double-whammy” of increasing costs to serve while lowering average check size.

A Not-So-Modest Proposal

As Peter Drucker is often quoted as saying, “The only profit center is the customer.” In this spirit, I believe that we can treat the pursuit of customer satisfaction as we do any other profit-driven investment — that is, assess it in terms of its net present value (NPV) and/or return on assets employed (ROA). To get to this ability requires a few adjustments in our thinking. First let’s return for a moment to why firms pursue customer satisfaction.

The pursuit of customer satisfaction is based on the belief that satisfied customers are “worth more” to the firm. That is, they are widely expected to:

  • be retained longer and in greater numbers
  • buy more goods
  • cost less to serve
  • be willing to pay slightly higher prices
  • respond faster to promotional efforts
  • refer others, thus helping reduce the cost of acquiring new customers
  • suggest and evaluate new products and revenue streams

In fact, for some firms, measures of the above activities are directly included in the satisfaction index.

For firms to be able to look at customer satisfaction in NPV or ROA terms, the key necessary tool would seem to be customer lifetime value (CLV). Long used by the direct mail industry among others, this indicator directly assesses the financial value of each individual customer. Under the CLV models, a customer represents a stream of future revenues that depend on the time frame that he/she is retained and the dollar rates of purchase per period. For each future period, these revenues are reduced by the total costs of acquiring, retaining, and fulfilling the customer. To this is added the additional cash flows that come from such derived sources as secondary purchases and referrals of other potential customers. In many cases, rather than doing a customer-specific calculation, average CLV’s are computed for customer segments.

Once we have calculated the average CLVi, or net present value of each customer, then the total NPV of the firm at any time would be

NPV = sum of (CLVi) or alternatively = sum of (CLVs* x Ns)

where CLVs* is the average CLV across all customers in a segment and Ns is the total number of customers in that segment.

So, rather than continuing to define customer satisfaction as an index of multiple inputs, what is proposed here is that we split the inputs into two streams. The first stream, containing opinions on specific quality and service levels, will provide input for changes in marketing activities – product/service features, ad themes, etc. The second stream should directly provide all the inputs to the CLV calculations. Examples of the types of questions that provide direct connection to the NPV are:

  • What are the chances that you will purchase again in the next “x” months?”
  • How much will you likely buy in the next “x” months?
  • Of your category purchases in the next “x” months, what percent will be from us as your provider?
  • If our brand were not available, what would you do?
  • How likely would you be to refer an associate to our firm?

There are several other adjustments that follow the refocusing from a customer satisfaction index to the CLV approach. Most customer satisfaction programs are content to take measures on an infrequent basis. However, the CLV, like any measure of future intentions, is temporal. Customers’ future purchases, their probability of making a successful referral, and the other components of CLV will change with their experiences and state of mind. Consequently, CLV should be considered as a variable that needs to be tracked, constantly fluctuating in value as opinions and intentions change.

Then too, we will be asking customers about their intentions. That means there is still the need to connect reported intentions with ultimate behaviors, and to track the objective measures of customer experience such as response and service times, completion and error rates, etc. The inputs to our CLV calculations should not be the raw reported intentions, but adjusted values that account for customer tendencies to misstate their realized rates. For example:

Expected Value of the retention rate = a function of (reported intent to repeat, historic repeat rate for different intentions levels, the firm’s achieved performance on objective satisfier dimensions).

The focus on consumer intentions will also have to be expanded to include potential customers as well as active ones. While satisfaction among active patrons has some impact on the number of customers that will be acquired, many will arrive at our doors without a referral. For a given desired target group, sampling will have to be done and measures established that will help forecast these numbers of new customers. Thus, the firm will need to include questions such as:

  • “Have you heard of our firm/brand/product?”
  • “What are the chances that you will visit our store in the next week?”

Once we have set up the procedures for sampling the inputs, we can then connect any proposed change in the marketing variables under control of the firm to the corresponding impacts they are expected to have on CLV factors. For example, a considered price change should impact rates of current and future purchase, retention and referral rates, as well as the rate of acquisition of new customers. Knowing the resources required to implement the change, we can then calculate the new NPV as well as an associated ROA.

Summary and Conclusions

The process proposed here may seem like a tall order, rife with the trepidations inherent with using subjectively estimated inputs. However, we have developed some degree of comfort in doing this type of analysis for the decisions we make about property, plant, and equipment investments. Our efforts to more fully understand the ultimate source of all revenue, our customers, deserves no less. Moreover, unless we adopt this kind of thinking, the previously identified limitations of current customer-satisfaction-measurement procedures virtually preclude any chance that these measures will be able to be linked to strategic financial performance on any widespread basis.

A word of caution is in order here. A Sears team which succeeded in building a system similar to that described here noted that while any retailer could copy the Sears measures, this company might still fail to achieve any demonstrated financial results “…because the mechanics of the system are not in themselves enough to make it work.” They go on to remind us that management must be fully aligned around the modeling effort, and that there must be a deep sense of ownership among the employees who must implement it.[6]

If we are to make progress in tying customer satisfaction to strategic performance, firms must commit to the following:

  • Formulate a customer-centric revenue model – recasting the P&L into customer-specific categories
  • Restate customer satisfaction to include all Customer Lifetime Value components
  • Connect marketing actions to each facet of the Customer Lifetime Value
  • Consider shifting the organization from SBU’s (Strategic Business Units) to SCu’s, that is, Strategic Customer Units.

[1] J. H. Lingle & W. A. Schiemann ,”From Balanced Scorecard to Strategic Gauges:Iis Measurement Worth It?” Management Review, 85 (1996): 56-62.

[2] E. W. Anderson, C. Fornell, & D. R. Lehmann, “Customer Satisfaction, Market Share, and Profitability: Findings from Sweden, Journal of Marketing, 58, (1994): 53 – 66; C. Fornell, M. D. Johnson, E. W. Anderson, J. Cha, & Br. Everitt-Bryant. “The American Customer Satisfaction Index: Nature, Purpose, and Findings,” Journal of Marketing, 60 (1996): 7 – 18; R. T. Rust, A. J. Zahorik, & T. L. Keiningham, “Return on Quality (ROQ: Making Service Quality Financially Accountable,” Journal of Marketing, 59 (1995): 70 – 88; A. Westlund & C. Fornell, “Customer Satisfaction Measurements and Its Relationship to Productivity Analysis,” Proceedings of the 8th World Productivity Congress Stockholm (1993).

[3] M. M. Andre & P. M. Saraiva, “Approches of Portuguese Companies for Relating Customer Satisfaction with Business Results, Total Quality Management, 11 (2000): 929-941.

[4] Fornell, Johnson, Anderson, Cha & Everitt-Bryant, 1996.

[5] Lingle & Schiemann, 1996.

[6] Rust, Zahorik & Keiningham, 1995.

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