July 1

BEYOND BENCHMARKING: Forward to Activity-Based Measurement


Robert T. Yokl-President and Chief Value Strategist


Labor management or the measurement and control of departmental workloads and staffing ratios on a continuous basis is becoming a priority in healthcare organizations today. Labor costs continue to rise, while reimbursement from third parties continues to fall. Healthcare organizations must dramatically improve and maximize their management of labor resources if they are to survive and thrive in the 21stcentury. The question most CEOs, CFOs, and COOs are asking today is not when, but how do we put the pieces of the labor puzzle together to get a real picture of our labor resources, so department heads and managers can take action before a crisis arises?


Benchmarking has become a major industry in healthcare today. Numerous companies and alliances will provide your healthcare organization with just about any comparative data you could ever want, but are they really the right metrics for your organization considering the data dump that is required to generate these statistics? Most healthcare organizations only use them as a guide, not a precise measurement tool, because they don’t know how to relate them to their own operations or they can’t convince their department heads to buy into them. Isn’t there a better way to get these metrics right?


Putting All the Pieces of the Labor Puzzle Together 


The answer to this labor puzzle is to give department heads and managers timely (quarterly static reports won’t cut the mustard) activity-based reports, reliable metrics, ownership of the labor measurement process, and advanced training to know where their money is being spent, how their labor resources are being deployed, and whether there are better ways to utilize their resources. Healthcare organizations that have solved the labor puzzle have recognized that they must go beyond benchmarking, which only gives them a view from 30,000 feet, and come down to ground level with an activity-based measurement system to capture, analyze, and report relevant information.


Activity-based measurements relate labor resources to their consuming activities, therefore removing the distortions and guess work caused by traditional benchmarking systems. Unlike most benchmarking systems, activity-based systems will accurately measure your healthcare organization’s variable and fixed labor resources, and assign them to activity centers which will be determined through an activity-based analysis to select your best labor resource drivers and allocate them appropriately. This methodology takes the mystery and inexactitude out of the benchmarking game and goes beyond benchmarking. It gives your department heads and managers reliable, mission-critical data that they need to manage this vital resource.


Figure 1: Activity-Based Labor Management Report 

Activity Based Labor Management Report

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Activity-Based Trending Is the Answer to the Puzzle


Our extensive research and imperial experience has shown that if a healthcare organization utilizes activity-based labor trending reporting (figure 1) in combination with reliable functional benchmarks, they will quickly and scientifically identify numerous incremental as well as unfavorable labor variances in real time, by pay period, or on a monthly basis. Based on our experience, this can mean a labor savings opportunity of 5% to 8% annually for your healthcare organization. We can make this claim because timely activity-based labor trending reports will show you where gaps are in labor costs, allowing you to reduce these unwanted and unneeded costs painlessly through attrition, re-engineering or redeployment of labor resources, before a crisis arises.


Figure 2

FTE Summary

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Most hospital executives don’t realize the huge swings in labor resources and excess labor dollars that can be wasted in any given month. To demonstrate, in figure 2 we show a 250-bed community hospital that had labor variances from a low of $742,000.00 in December to a high of $3,206,000 in January. This phenomenon created cash flow challenges and excessive labor costs averaging $1.5 million dollars annually for this hospital. But, until senior management embraced the concept of activity-based labor trending they weren’t even aware that this phenomenon was happening. 


Don’t make the same mistake!


Beyond Benchmarking: Forward to Activity-Based Measurements


Benchmarking is an important tool to take a snapshot – if measured by function – of where your healthcare organization is related to labor resources. However, if you want to move beyond benchmarking to continuously measure, manage, and control labor resources, you will need a new dynamic methodology. Activity-based trending is the tool that will give you and your department heads/managers the right technology to continuously manage labor resources so that your healthcare organization can:


  • Have a real picture of labor resources so you can take action to control them

Without an activity-based labor management system, your healthcare organization has no idea which resources are truly required to staff your hospital’s departments on a day-to-day, week-to-week, and month-to- month basis. Therefore, your department heads and managers can only make assumptions about their ideal staffing requirements. This is not the case if you employ an activity-based system! Your department heads and managers will have a real picture of past labor performance, current labor resources being consumed, and future staffing requirements based on scientific analysis of anticipated demands.


  • Create and refine staffing models and “what if” scenarios for budgets or special projects

All healthcare organizations are finding that it is necessary to project their labor resources into the future for budget purposes, programmatic changes, and downsizing opportunities. However, most organizations are “winging it” when it comes to this activity. Rather than scientifically forecasting labor resources they are making educated guesses about the future. This approach to constructing staffing models isn’t good enough in this era of tight budgets, limited resources, and risk avoidance! A better way is to utilize staffing models that are based on scientific data, labor trending, and functional labor measurements. Conversely, an activity-based labor system will give you the historical and predictive data that you need to create and refine staffing models that are exacting and reliable.


  • Be able to analyze labor resources so you can reallocate them as required 

Most department heads and managers don’t realize they are deploying more labor resources than are necessary to meet their workload requirements. Being creatures of habit (like all of us) they are scheduling their staffing based on gut feel, past history, or a combination of both elements. Whereas, if they have the opportunity to analyze their actual labor trends and have activity-based measurements to guide them, they can quickly reallocate their labor resources to be balanced with their actual labor metrics.


  • Have the ability to visualize labor resources at any level of your organization

Do you know how many fixed positions (positions that have no direct activities related to your core functions of patient care, but are considered important to your healthcare organization’s mission, i.e., security, administration, risk management, legal, materials management, marketing, public relations, data processing, mail room, quality management, telecommunications, etc.) your healthcare organization has? Or how many functions or activities are being duplicated in your hospital or multi-hospital system? For example, on an assignment in New York City (figure 3) we found that an eight-hospital system had hundreds of fixed positions and 2,574 duplicate functional administrative, financial, support, and clinical positions that could possibly be candidates for elimination, consolidated, or re-engineered to reduce labor costs. This is the kind of information you need to visualize and analyze the value of all of your functional departments.


Figure 3: Functional Administrative, Financial, Support, and Clinical Departments

Activity Based Trending Model

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  • Provide a framework for benchmarking with your peer healthcare organizations

Benchmarking is not a science, but is the art of measuring opportunities for improving a healthcare organization’s performance. To effectively conduct a benchmarking study you must have common characteristics that can be measured accurately. The most exacting measurement for this purpose is a functional measurement!


No two hospital departments function identically, yet most labor benchmarking systems will attempt to compare your hospital departments (laboratory, radiology, operating room, nursing floors, specialty units, etc.) to hospitals of the same type, size, workload intensity, and volume – when no valid comparison can really be made. Whereas, with functional benchmarking all of the above factors are taken into consideration, but with one big difference; your departments are also measured functionally to determine their uniqueness. This approach is a more exacting measurement than just a statistical or operational comparison of your hospital’s departments. For example, in figure 4 we show a sample functional or activity-based analysis of a typical general nursing unit.


Figure 4: Sample Functional Benchmarking Analysis – 2 West Nursing Unit

Nursing Department Functional Assessment


With this functional approach your unique functional departmental profiles or characteristics can be accurately compared and benchmarked to similar peer hospital functional profiles for an exact match. This match might require comparisons of eight to ten or more peer hospital departments to configure your exact functional equivalents. This approach enables you to find comparable peers that mirror your own operation, not just a statistical measurement or comparison to some unknown, non-conforming hospital operation.


What Gets Measured Happens


“What gets measured gets done,” is sound advice from Tom Peters. Yet, most healthcare organizations don’t effectively or precisely measure their labor resources on a continuous basis or are measuring the wrong things. We have provided you with these critical success factors to ensure that you are measuring the right things, in the right way, with the right tools and training.


activity-based labor management, benchmarking, benchmarking systems, healthcare, healthcare industry, healthcare organizations, hospital, labor costs, labor resources

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