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Who wouldn’t want more for less? More profit from less investment? More government services for fewer taxes? More charity work for less administrative overhead? But what measures will help us hit or exceed our productivity ambitions?
This is part 1 in a series. Read the other part here: Managing accounting’s relevance
[ Listen to the audio version, read by David Hodes]
The organisations we work in, manage and lead are complex systems that have a standardised way of measuring what is happening with the enterprise as a whole. We all know about the balance sheet, profit and loss, and cash flow statements. But, when measuring what goes on within the organisation, things get much more complicated and less standardised.
We seem wedded to the idea that because our enterprises are so complex, whether big or small, we need to break them up into functional areas to manage them effectively. Thus, we have Sales & Marketing, Operations, R&D, IT, Finance, HR and on and on. And for each of these functions, we design measures that seek to optimise that function’s production.
But will a function measured on what’s optimal for itself actually deliver what’s best for the business? How can we design a measurement system that has the people at the lowest level, those on the proverbial shop floor, measured in such a way that they are empowered to make decisions which they know will be in the organisation’s best interests? How do we get alignment from top to bottom and bottom to top?
“Will a function measured on what’s optimal for itself actually deliver what’s best for the business?”
For now, let’s stick with for-profit businesses, as the lessons readily translate to government and NGO environments. The goal of a for-profit organisation is to maximise return on shareholder funds—or at the very least to provide a competitive return against other businesses in that sector. And before you jump on the ESG bandwagon, social licence is not a goal but rather a necessary condition that must be fulfilled to achieve the goal.
If our goal is to maximise return on investment, what should we measure to determine whether we’re getting closer to achieving it? Here are six critical financial performance questions for which our measures must provide an answer:
1.Is the overall business profitable?
2.Is a given strategic business unit within the overall business profitable?
3.Is a given product or service attractive for us to make and sell?
4.Is a given customer or customer segment attractive for us to do business with?
5.Should we make the product or service ourselves or buy it from a third party?
6.Should we make a given investment?
These big questions look inwards at our own enterprise. But we should also consider how our customers will judge our products and services:
And, of course, since we are part of a value chain, we’re asking ourselves the same questions about our own suppliers’ products and services. What will it cost us? How easy is this supplier to work with? And what are the risks? All based on the same measures of their price, lead time, due date performance, quality, and overall value.
As already mentioned, at the top level of the organisation, there is a set of measures prepared by the financial accountants that comply with generally accepted accounting principles, such as the balance sheet, profit and loss and cash flow. At the strategic business unit level, it often gets a lot trickier. The relationships, for example, between the producing division and the sales and marketing division are not necessarily at arm’s length. Through transfer pricing, many organisations dictate and often distort the profitability of their business units. Costs are allocated for shared overhead, often in ways that make little sense other than to those who do the allocating. Way down at the shop floor, the measures are often predicated on efficient use of resources to ensure maximal utilisation.
The trouble is that if the measures are set up in this polarising way between different levels of the organisation, it becomes tough to make day-to-day decisions that translate the impact that local actions have on the goal. We need something better to help us become more proactive everyday decision-makers.
Let’s take a closer look at the cost-world paradigm and how it attempts to address complexity by adopting a reductionist approach.
The diagram below shows how a typical product (or service) costing is calculated based on activity—hence, it is called activity-based costing. We start with step 1. The number of labour minutes is budgeted and costed. The cost of raw materials is added for that activity, along with various overhead ‘burdens’ according to a formula calculated by the cost accountants, usually predicated on the proportion of the labour minutes associated with that step relative to the total labour minutes of the combined overhead.
As each step is undertaken, the product (or service) absorbs more and more costs based on direct labour minutes for the activity and their associated absorbed costs until you have a finished product. You can add general factory overheads (GFO) and other overheads such as engineering, safety and assorted personnel at this stage. Looking closely, you’ll find the kitchen sink absorbed into the product costs.
What’s the problem, then, with this method of measurement? Goldratt famously said, ‘Tell me how you measure me, and I will tell you how I will behave. If you measure me in an illogical way… do not complain about illogical behaviour.’
The behaviour induced by such a system encourages managers to produce as much as possible to reduce unit costs. How does this work? The volumes to be made are based on a budgeted number. The allocation of the overhead burden is also based on a budgeted number. Then, by the rules of activity-based costing, if the number of units produced is above what was budgeted, each unit will absorb less of the overhead burden than initially budgeted as more units are passing through in a given period to do the ‘work’ of recovering the costs. The management accountants call this an over-recovery. An over-recovery is credited to the profit side of the ledger, and everyone feels good about the benefit of being more productive than budgeted…until you have piles of inventory and work in process that no one wants to buy.
More egregiously, this costing system pays no heed to the existence of the constraint. No less an authority than the late Charles Horngren, Professor of Accounting at Stanford University, declared: ‘Relevant information is the predicted future costs and revenues that will differ among alternative actions. The existence of a limiting factor changes the basic assumptions underlying the cost and revenue opportunity of a particular action.’ In simpler terms, he wrote: ‘A company will profit maximise when it sells the product or service with the highest contribution per unit of the scarce resource.’
The limiting factor or scarce resource Horngren refers to is the constraint. However, despite the good professor’s advice, most finance departments completely ignore the identification of the scarce resource, often arguing that it is the job of Operations to determine where the bottlenecks are and deal with them. For the most part, Finance and its armies of cost accountants focus on cost drivers, not constraints.
You have to pity Operations as they scour the horizon for greater and greater local efficiencies. In all likelihood, they know where the bottlenecks are, as they need only look for the build-up of work in progress. Bottlenecks, after all, cause logjams. But we all know that accountants set the rules of how the game is played with their activity-based absorption costing. Thus, Operations must be satisfied with scratching their heads in wonder at what happened to common sense and how common practice got to be so out of kilter with it.
I’ve mentioned the key measures we need to make better decisions. In my next article, I’ll show how they lead to the throughput-world paradigm for management accounting, which is much better suited to addressing the six questions for financial performance than activity-based absorption costing. After all, none other than W Edwards Deming said, ‘The object of any component is to contribute its best to the system, not to maximise its production…some components may operate at a loss themselves to optimise the whole system.’
Here are the six questions again so you can consider your organisation’s way of addressing them.
1.Is the overall business profitable?
2.Is a given strategic business unit within the overall business profitable?
3.Is a given product or service attractive for us to make and sell?
4.Is a given customer segment attractive for us to do business with?
5.Should we make the product or service ourselves or buy it from a third party?
6.Should we make a given investment?
Are you currently in the cost-world or throughput-world paradigm?
Read Part Two: Managing accounting’s relevance
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What’s next?
The change to using Theory of Constraints (TOC) as an underlying operating system is both profound and exhilarating. We’ve developed the Systems Thinker Course to bring the ideas into your organisation.
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Healthcare professionals are central to the patient’s progress from awareness of a therapy to successful long-term use. They identify risk, interpret evidence, diagnose conditions, discuss options, perform procedures, provide training and monitor outcomes.
Yet many medical device development programs treat healthcare professionals primarily as users to be trained or customers to be persuaded.
HCP-Centered Design takes a wider view. It examines the work healthcare professionals must perform, the system in which they perform it and the constraints that limit their ability to move suitable patients through the care pathway.
“If patient flow depends on a healthcare professional, that professional’s available capacity may determine how many patients ultimately receive the therapy.”
A medical device patient journey commonly depends on several healthcare professionals:
Each professional governs a transition in the flow of patients.
If one transition lacks sufficient capacity, information or clarity, the whole pathway slows. More marketing, sales activity or production capacity will not compensate for a shortage of specialist time or a burdensome diagnostic process.
This is why HCP-Centered Design is not simply about making an interface easier to use. It is about enabling the system of care to perform.
A healthcare professional’s work depends on information and actions supplied by others. They may rely on referrals, patient histories, pathology, imaging, electronic records, clinical guidelines and the availability of equipment or trained colleagues.
After reaching a decision, they may need to explain it, document it, arrange authorization, coordinate treatment and prepare the next person in the pathway.
A technically strong solution can still create difficulty if it:
The relevant design question is not merely, “Can the HCP use this product?”
It is, “Does this solution improve the HCP’s ability to complete important clinical work within the conditions in which care is actually delivered?”
“HCP” is not one persona.
A general practitioner, specialist, interventional physician, nurse, technician and clinical administrator encounter different stages of the pathway. Each has different responsibilities, authority, expertise and exposure to risk.
Even within a profession, context matters. An experienced specialist in a major hospital may approach the same task differently from a professional who encounters the condition infrequently or works without immediate specialist support.
Useful HCP personas distinguish factors that influence work:
These personas clarify who performs each job and what support each person requires.
The HCP journey often begins before the visible clinical procedure.
It may include receiving a referral, gathering information, forming an initial view, ordering investigations, interpreting results, deciding whether the patient is eligible, discussing treatment, obtaining authorization, preparing for the procedure, delivering care and arranging follow-up.
At each stage, ask:
The resulting journey map should distinguish processing time from waiting time. A decision may require only minutes of specialist attention while patients wait weeks to access that attention.
This reveals the practical relationship between HCP capacity and patient flow.
The Theory of Constraints directs attention to the factor limiting the performance of the entire system.
In some pathways, the constraint may be the number of qualified interventional specialists. In others, it may be diagnostic capacity, physician confidence, authorization effort, operating room access or the time required to train patients.
The constraint may also be hidden inside the HCP’s working day.
A specialist supporting a therapy must still manage other clinical duties, administration, meetings, documentation and urgent cases. The question is not simply how many specialists exist. It is how much of their usable capacity is available for the activities upon which patient flow depends.
“The scarcest resource may not be the healthcare professional. It may be the few hours of focused capacity available for the critical work.”
Improvement away from this constraint can make performance worse. Sending more referrals to an already overloaded specialist increases the queue. Adding information may increase cognitive burden. Creating another approval may consume the capacity required to treat patients.
HCP-Centered Design seeks to protect and expand the capacity that governs flow.
Policies and procedures describe how clinical work should happen. Observation reveals how it actually happens.
Healthcare professionals routinely compensate for missing information, awkward interfaces and unreliable handovers. These workarounds may become so familiar that nobody reports them as problems.
Gemba research should examine:
The purpose is not to judge the healthcare professional. It is to understand the system surrounding the work.
“A workaround is often evidence that the system has failed to support the person doing the work.”
Healthcare professionals do not simply use devices. They use them to make progress in clinical work.
An HCP may need to identify risk, reach a confident diagnosis, select an intervention, perform a procedure safely, explain options, monitor progress or recognize deterioration.
A structured job map divides this work into eight stages:
This wider view prevents the product team from concentrating exclusively on the procedure.
The greatest value may come from reducing preparation, improving decision confidence, clarifying an exception, simplifying documentation or improving the handover to follow-up care.
Comments such as “the interface is difficult” or “we need better information” indicate dissatisfaction, but do not provide sufficient direction for design.
They should be translated into measurable outcome statements, such as:
“Minimize the time required to identify which clinical information is missing before making a treatment decision.”
Or:
“Reduce the likelihood that a clinically significant change goes unrecognized between scheduled reviews.”
A broader population of healthcare professionals can then assess the importance of each outcome and their satisfaction with their current ability to achieve it.
Highly important and poorly satisfied outcomes provide a rational basis for prioritizing innovation.
“Adoption follows when a solution makes important clinical work safer, clearer or easier to complete.”
The five-step FOCUS process creates a practical improvement cycle.
Find the constraint. Determine which HCP activity or resource currently limits patient flow.
Optimise for it. Protect the constraint from avoidable work, missing information, interruptions and rework.
Collaborate around it. Align upstream and downstream teams so patients, information and resources arrive when required.
Uplift it. Add capacity, redesign responsibilities, improve technology or remove restrictive policies.
Start Again. Identify the new constraint once flow improves.
This approach allows the organization to distinguish activity from value. It also turns HCP engagement into an ongoing management discipline.
HCP-Centered Design must connect clinical reality with patient needs, technology, regulation and business strategy.
A Value Management Office can help coordinate these perspectives across the product lifecycle. Its role is to ensure that projects, resources and stage-gate decisions remain connected to patient flow and business value.
The organization should be able to show:
The goal is not simply a device that healthcare professionals can operate. It is a solution they can confidently incorporate into care and a delivery system capable of getting that solution to more patients.
Use the HCP-Centered Design assessment to determine how well your organization understands clinical work, HCP capacity and the constraints governing patient flow.
The resulting evidence should guide product design, process improvement and investment toward better products, delivered faster, with more lives changed for good.
Medical device companies devote enormous skill and investment to developing safe, effective products. Yet a technically successful device changes no lives while suitable patients remain unable to reach it.
Between a patient becoming aware of a therapy and receiving its intended benefit lies a pathway of referrals, consultations, diagnostics, approvals, procedures, training and follow-up. Every step consumes time. Between the steps, patients wait. At some points, they become confused, discouraged, ineligible or lost to the process.
Patient Centered Design must therefore address more than the design of the device. It must improve the performance of the entire system through which patients reach, receive and live successfully with the solution.
“A life-changing therapy changes no lives while patients remain trapped in the pathway leading to it.”
A typical medical device journey may include:
Companies often manage these stages as separate functions. Marketing works on awareness. Medical affairs supports clinicians. Market access addresses reimbursement. Sales works with specialists. Clinical teams gather evidence. Training teams support adoption.
The patient, however, experiences one journey.
From the patient’s perspective, a delay between two organizational functions remains a delay. A repeated test remains repeated work. An unclear handover creates uncertainty regardless of which department owns it.
Patient Centered Design begins when the organization sees and manages this journey as a connected system.
Every step contains some necessary processing time. A consultation takes time. A diagnostic test takes time. An authorization must be assessed. A procedure must be performed.
The patient’s total lead time, however, also includes the waiting between these activities.
A consultation may take 30 minutes, but the patient could wait six weeks for it. A diagnostic test may take an hour, followed by another delay before a specialist reviews the result. Prior authorization may require little actual work while adding weeks to the pathway.
This distinction matters because organizations often improve processing time while leaving the larger queues untouched. Saving five minutes during an appointment produces little benefit if the patient waits months to reach it.
Patient Centered Design therefore asks:
The answers reveal the true performance of the patient system.
Theory of Constraints teaches that the performance of any system is limited by a constraint. Improving a part of the system that is not constraining flow may create more activity without increasing results.
If diagnostic capacity is the constraint, generating more awareness may simply produce a longer queue for diagnosis. If specialist capacity is the constraint, accelerating authorization may move patients more quickly into another wait. If training after first use is inadequate, increasing procedures may produce poor experiences and avoidable follow-up demand.
“More activity at a non-constraint creates work in process. More capability at the constraint improves the system.”
The constraint is not always a physical resource. It may be a policy, an eligibility rule, missing evidence, a fragmented handover, an information delay or the cognitive burden placed on the patient.
The most important question is therefore not, “How do we improve every step?”
It is, “What currently limits the flow of suitable patients to successful use of the therapy?”
Numbers show where patients are lost. Patient research helps explain why.
Two patients with the same diagnosis may respond very differently. One may actively seek new treatment options. Another may delay action until symptoms become severe. A third may want help but lack confidence in navigating the healthcare system.
Meaningful patient segmentation considers characteristics that influence behavior:
These differences affect whether patients enter the pathway, remain engaged and successfully adopt the solution.
The Gemba is the place where work actually happens. For patients, this includes the home, clinic, hospital and all the places where they manage their condition between formal encounters.
Interviews alone may miss important evidence. People normalize inconvenience, forget workarounds and simplify their past decisions. Observation allows the development team to see what patients actually do.
Good research combines three activities.
Observe. Watch how patients obtain information, prepare, use the solution and respond when something goes wrong.
Immerse. Understand the physical, emotional and practical conditions surrounding the experience.
Engage. Ask open questions that allow patients to describe their goals, fears and frustrations in their own language.
The purpose is to discover the patient’s reality before asking them to evaluate the organization’s preferred answer.
Patients rarely want a medical device for its own sake. They want the progress it may enable.
They may want to recognize deterioration earlier, preserve independence, reduce pain, avoid repeated visits, return to work or prevent a disease from controlling daily life.
A useful job map examines eight recurring stages:
This reveals opportunities beyond the immediate use of the device. The most valuable improvement may involve helping patients prepare, confirm readiness, recognize an exception or understand what happens next.
Stories create understanding, but investment decisions require structured evidence.
Patient observations and comments should be converted into outcome statements that identify:
For example:
“Minimize the time required to recognize that my condition has changed sufficiently to require clinical help.”
Patients can then assess the importance of each outcome and their satisfaction with their current ability to achieve it.
Highly important and poorly satisfied outcomes represent genuine opportunities. This prevents teams from prioritizing attractive features that do not materially improve the patient’s life or progress through the pathway.
“Innovation becomes valuable when it improves an outcome that matters and remains poorly served.”
The Patient Centered Design pathway can be improved through a repeating discipline:
Find the constraint. Identify what currently limits patient flow or successful use.
Optimise for it. Make the best possible use of existing constraint capacity.
Collaborate around it. Align functions and partners so their actions support the constraint.
Uplift it. Add capability, remove restrictive policies or redesign the pathway.
Start Again. Once the constraint moves, identify and address the next limiting factor.
This prevents improvement from becoming a collection of disconnected initiatives. It directs scarce resources toward the factor that most strongly governs the result.
Patient insight should influence more than early product design. It should shape clinical evidence, regulatory strategy, reimbursement, manufacturing, education, market development and post-market support.
The organization should be able to show:
The goal is not simply to place the patient at the center of a diagram. It is to organize the enterprise around delivering better products faster, so that more lives can be changed for good.
Use the Patient Centered Design assessment to determine how well your organization understands its patient journeys, priority outcomes and constraints to patient flow.
The result should be more than another collection of patient opinions. It should provide evidence that directs strategy, investment and execution toward the changes that matter most.
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