Saturday, August 8, 2009

Yogi Berra, healthcare, hoshin kanri, and management accounting

Recently I have been doing most of my shopfloor work in healthcare. To quote Yankee great, Yogi Berra: It's deja vu all over again.

Today I visited the IHI's (Institute for Healthcare Improvement) web site, where it's gifted President, Donald Berwick, advocates for evidence-based medicine and lean healthcare. It is already a veritable encyclopedia of best practices. And that's the problem.

The economic hypothesis behind this blog is that lean enterprise (in any industry) represents a new organizational form. An organizational form is defined as a particular type of information processing structure characterized in at least two dimensions: a) the degree of decentralization of decision-making; and b) a unique control system. Cf. Oliver Williamson, The Economic Institutions of Capitalism. General Motor's invention of the modern corporation represented an effective decentralization of decision-making, relative to the command-and-control structure of the railroads and the Robber Barons. Sloan's new divisional structure (Chevy, Buick, Cadillac, etc.) was coupled with his invention of management accounting (financial targets and internal audits), which kept GM's strong-minded divisional presidents in check. Lean enterprise closely echoes these two innovations. First, there is the radical decentralization of decision-making, represented by Toyota's iconic andon cord and, in healthcare, Virginia Mason Medical Center's patient safety alert system. Now for the second part: the control system. Move over management accounting.

Lean enterprise has a new control system, and this would be hoshin kanri, but not just any version of hoshin. It has to be Toyota's version, known to a small audience as "profit management." Toyota's implementation of hoshin in 1960-63 displaced management accounting and resulted in the creation of kaizen costing and target costing. Because of the thoroughgoing deployment of quality, cost, and delivery targets to all managers (front line supervisors included), and the unique structure of standard work and poka yoke on the other hand, front line employees perform audits of cost as well as quality in real time. At the same time, Toyota used hoshin to pioneer cross-functional teams, also known as matrix organization.

So how does this affect healthcare and why am I quoting Yogi Berra? For the last 20 years I have witnessed manufacturing leaders try to cherry pick the best practices of Toyota. They have all failed, some spectacularly. Now, the same process is happening in healthcare. Alas, most healthcare executives function based upon the same received wisdom that continues to inform executives in manufacturing: Alfred Sloan's GM. I believe that well-intentioned healthcare executives can, and probably will, cherry pick Berwick's encyclopedia--perhaps for 20 years. And the effect will be the same. Isolated islands of excellence, and a fundamental failure to reform.

What we need is a revolution in management thinking and education that will couple best practices (almost all of which depend upon radical decentralization and matrix organization) with the correct management control system: hoshin kanri / profit management. It is indicative of the typically fragmented thinking of Western-educated execs that, on IHI's otherwise splendid website, there is listed a short paper entitled, "Execution of Strategic Improvement Initiatives to Produce System-Level Results." The paper is yet another watered-down version of hoshin kanri, something akin to Six Sigma's Breakthrough Strategy. You will have to register to IHI's site and log in to download the paper (for free). But don't bother. Everything you need to know is in the title: "Execution of Strategic Improvement Initiatives..."

As a new management system, hoshin kanri is intended not only for the execution of strategic initiatives, but for the management of everything that moves. Managers who relegate hoshin to strategic initiatives treat it mainly as a powerful project management tool (which it is), but--whether they know it or not, and apparently they don't--in the service of GM's management accounting.

This is, of course, what went so horribly wrong with Six Sigma. It also explains Six Sigma's great popularity. It's so easy, compared to lean enterprise, because the executives don't have to bother with transforming the organization or, more to the point, their own thinking. Indeed, it was Six Sigma's focus upon good old cost reduction (not quality) that made it a big hit in the C-suite. By the way, healthcare seems to be replicating manufacturing errors in this department, too.

While management accounting suited the divisional structure of 1920s GM, it is unsuited for the radically decentralized and matrixed structures of Toyota, Canon, and other faithful adopters of lean enterprise. The conflict between hoshin and management accounting is well known to lean consultants, and is increasingly well documented by leading accountants (see, e.g., H. Thomas Johnson's and Anders Broms Profit Beyond Measure and Hope and Fraser's influential Beyond Budgeting). Among management accounting's many faults are its incredibly slow response times, the incorrect valuation of inventories, the peanut butter approach of overhead allocations, the abject failure to value human resource development, and, despite the decoupling of effect (financial results) from cause (systematic process improvement) its generally punitive approach.

To simplify my message for healthcare executives--or executives in any industry who have yet to realize: You can't sustain, let alone optimize "best practices" without a suitable control system. In other words, you can't have lean or total quality methods without lean and total quality management, otherwise known as hoshin kanri.

Also, to quote H. Thomas Johnson, you must "stop accounting."


Mike Davis said...

AND there's a great little book called "Cost Half" by Toshio Suzue which discusses Cost Planning & Tamazume teams of course.
Mike Davis

Tom Jackson said...

Got it on my shelf, but never read it. I will now fix that immediately. Thanks for the tip!