Strategic business planning linking strategy with financial reality: linking long-term strategy with near-term financial and operational realities makes for a clearer march toward key objectives

Healthcare Financial Management, Nov, 2004 by Andrew K. Bachrodt, J. Patrick Smyth

AT A GLANCE

To succeed in today's complex and often adverse business environment, a healthcare organization's strategic direction must be calculated, focused, and financially sustainable, Strategic business planning is an essential tool to help organizations focus strategic choices within the financial realities of their environment. An effective strategic business planning cycle includes conducting an assessment, identifying business objectives, developing strategy, conducting an impact analysis, and developing an implementation plan.

Unclear priorities, a list of initiatives with unclear strategic benefits, and "squeaky wheel" uses of capital--that's what can happen when multiyear strategic planning (vision, objectives, strategies) is a separate process from annual business planning (programs, operations, finance). Strategic business planning aligns strategic priorities with financial realities. Translation: fewer priorities, shorter implementation time frames, and higher thresholds for return, or residual benefit, to the organization.

The key steps in integrated strategic business planning include conducting an assessment, identifying business objectives, developing strategy, conducting an impact analysis, and developing an implementation plan. This process could cover a one- to three-year cycle and can be applied at the clinical service line or business unit level for even more focused planning.

Step 1. Conduct a Market and Competitive Assessment

The only certainty in today's healthcare environment is an ever changing set of assumptions about the future. The assessment stage establishes the basis for planning. Depending on the specific market or issues, the depth of analysis at the assessment stage may vary. However, at a minimum, three key areas of analysis are needed: define future market scenarios, identify a financial outlook, and identify strategic advantages and vulnerabilities.

Define future market scenarios and baseline demand forecasts. Future market scenarios can he developed by answering a few basic questions:

* What will the demographics in our market look like in five to 10 years?

* Will demographic shifts require our service area to be defined the same or differently in the future?

* Will utilization rates for specific services rise, fall, or stay the same?

* Will new technology create or change demand for specific services?

* Will current or anticipated market forces change the delivery point for specific types of care?

Answers to these questions can be modeled to establish baseline and future market scenarios as a basis for planning. The results should indicate both the market size for specific services and the demand forecasts for inpatient and outpatient service categories. At this stage, market share is typically held constant as a core planning assumption, with potential share gains modeled within specific strategies later in the process.

Establish a financial outlook. The essence of strategic business planning is to secure, and preferably improve, the organization's financial situation, enabling it to continue its mission well into the future. At a minimum, the hospital should develop a macro level financial model linked to its demand forecasts and based on "most likely" assumptions for revenue and expense categories. Some level of capital costs related to infrastructure and essential equipment replacement should be included in the base model. Incorporating a benchmarking component at this stage will help to identify opportunities for improvement and sensitivity analyses for assumption development.

Because business planning is focused on prioritizing future investments in the clinical enterprise, it is imperative to go beyond the income statement to the balance sheet, cash now statement, debt capacity, and capital availability for the planning horizon. Applying outside rating agency metrics adds another layer of credibility.

To the extent possible, the hospital should also analyze the financial performance of its clinical service lines, even if only at the contribution margin level. This analysis will highlight potential operating problems and establish a basis for evaluating future investment potential. The over all baseline financial model will help the organization assess its expected future position against established performance metrics set by its board.

Also, the financial model will allow the hospital to gauge the magnitude of financial impact from strategic initiatives necessary to close the gap between expected baseline performance and desired position. As specific strategies, including any potential capital requirements, are developed, they should be added to this model.

Identify strategic advantages, opportunities, and vulnerabilities. Hospitals should go beyond the often generic "strengths, weaknesses, opportunities, threats" analysis and critically assess their current situations and ability to meet future market needs. Strategic advantage derives from favorable differentiation within the marketplace. A differentiating strength might be a specific clinical program, favorable pricing, or a meaningful service/quality measure. Many hospitals find that their true strategic advantage is not as great as they would like it to be.