Two phenomena can affect leaders’ abilities to make unbiased, rational decisions: the planning fallacy and attribution error.
Analytics is a multidisciplinary field that deploys the insights of mathematics and statistics, science, engineering, and other disciplines to gain knowledge from data, test hypotheses, and guide decision making. Hospital and health system leaders use analytics to accomplish the following:
- Identify opportunities for improvement across a range of strategic domains, including financial performance, clinical performance, patient satisfaction, and operational efficiency
- Set targets for improvement, defined as the expected return, based on informed assessments of how many opportunities are within reach
- Track progress on initiatives organizations implement to achieve expected returns
- Provide actionable data to address challenges as they emerge to ensure progress is made
By drawing on relevant external data, analytics can also provide organizations with an outside view. An outside view can counter biases and organizational pressures that can skew internal decision-making processes. It also provides a framework for target setting that—in combination with such factors as organizational strategy, mission, and appetite—helps define challenging but realistic expected returns for organizations.
The Outside View
Psychologists have identified two phenomena that can affect the abilities of organizations and their leaders to make unbiased, rational decisions:
The planning fallacy. This phenomenon describes the effect of leaders’ cognitive biases and organizational pressures to accentuate the positive on decision making. Subject to these forces, leaders tend to be overly optimistic in setting targets for expected returns and overlook the need for realistic assessments of potential gains and losses. As a result, initiatives implemented to achieve those returns will often take longer and cost more than originally forecast and may ultimately fail to realize expected returns.
Attribution error. This phenomenon describes individuals’ tendencies to attribute positive outcomes to their own efforts and negative outcomes to external factors, regardless of actual root causes of outcomes.
Both planning fallacies and attribution errors can be countered by what Nobel laureate Daniel Kahneman has defined as “the outside view” (Lovallo, D., and Kahneman, D., “Delusions of Success: How Optimism Undermines Executives’ Decisions.” Harvard Business Review, July 2003). The outside view is an analysis of appropriate reference classes, or peer groups, whose outcomes can help organizations’ leaders set realistic targets for expected returns. As initiatives implemented to achieve those returns proceed, the outside view further helps project leaders understand whether setbacks in progress, as measured by a common set of key metrics and performance indicators, are attributable to external or internal causes.
Analytics and the Outside View
Analytics provides an outside view by drawing on relevant peer-group data to define comparative frameworks that help organizations understand the following factors:
- How peer organizations are performing on key metrics and performance indicators
- Where organizational performance is positioned in comparison with peer organizations
- The scope of opportunities for improvement in areas where organizations lag behind top-performing peer organizations
To define relevant and functional outside views, organizations require analytics solutions that provide the following capabilities:
The ability to define appropriate peer groups. Hospital and health system outcomes are influenced by various factors. An organization’s leaders might determine, for example, that both geography and organizational size are significant factors. In this case, an organization would want the ability to identify peers of similar size, within a similar geography. If a small hospital in the Midwest were looking at operating room minutes as a key metric to define opportunities and set targets for an initiative designed to improve operational efficiency, its outside view would be very different from larger hospitals or hospitals in other regions of the country (see exhibit below).
Outcome Variation by Region and Organization Size
Clean and comparable data. An organization must have confidence that it is comparing “apples to apples” when looking at data for other organizations in its peer group. It requires an analytics solution that classifies and standardizes data across and within common categories. Comparisons of internal data with normalized external data can also overcome obstacles related to adoption and belief that can arise from reliance on internal data alone.
Timely data. Once an organization has incorporated an outside view into its target-setting process, it is critical that the organization maintain this outside view as it tracks progress on the initiatives implemented to achieve its expected return. Much can happen over a year that could sidetrack progress and make an expected return unattainable. An organization requires access to timely information on its peer group’s performance, refreshed on a monthly basis, to help determine, for example, whether challenges to progress are affecting the peer group as a whole or are unique to the organization and thus more likely attributable to internal factors.
The ability to develop an internal “outside view.” An organization’s own experiences can also provide an important reference point. An effective analytics solution will extend a common set of key metrics and performance indicators internally and externally, both to track progress on internal initiatives and facilitate ongoing comparisons with external peer-group organizations. As an organization’s experience grows, so too will the value of data that demonstrates how often and how closely the organization was able to achieve its expected returns and how consistently it tracked with the performance of its peer group as a whole. This knowledge may affect future target setting or indicate the need to identify internal factors that are creating obstacles to success.
Achieving the Expected Return
In today’s environment, all hospital and health system leaders should be setting targets that push their organizations to perform at the highest levels. The outside view that analytics provides is an important component in defining how high their organization can reach and where they must improve within to achieve their expected returns.
Scott R. Engel is vice president, and product director, Kaufman, Hall & Associates, LLC, Skokie, Ill.
Erik Swanson is vice president, Kaufman, Hall & Associates, LLC, Skokie, Ill., and is a member of HFMA’s First Illinois Chapter.