QUESTION: how to design a system that would allow comparisons of village performance, despite each village having quite different operating characteristics. Could a consistent set of measures be developed and applied to all villages? How could the measures for the seven indicators be combined so that league tables and overall rankings could be produced for all villages? What should happen about rewards?

Case:

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Company overview

Summerset is a New Zealand retirement village operator founded in 1994. The founder's vision was to create retirement community that his own parents would be happy to call home. Summerset articulates its brand as follows: "Respect for every New Zealander, the life he or she has led, and the value they bring to our Villages".

The company designs, builds and operates fully integrated retirement villages which cater for a mix of living arrangements (see Appendix 1). Retirees capable of independent living can elect to reside in standalone villas or apartment units. Retirees requiring in-home support can opt for assisted care in rest home units or care apartments. Individuals requiring higher levels of care such as specialist nursing services are provided for through hospital care beds. The retirement unit mix is approximately 70% villas, 20% apartments and 10% care apartments.

Since 1997, the company has expanded operations throughout the North and South Island of New Zealand. It is currently the third largest operator by retirement unit numbers, and the second largest developer in this sector. As at 2015, the company operates 21 fully or partially completed villages, offering 2,257 retirement units and 523 care beds across its villages. Not all villages offer the full range of care and those with care facilities vary in the number of care beds they have available.

In addition to accommodation units, villages provide spacious and secure communal areas with a wide range of recreational facilities. Services and facilities include caf, dining and resident bar facilities; beauty clinics and hair salons; lounges and libraries with internet facilities; entertainment areas; sports facilities such as bowling greens, mini-putt courses, petanque pistes, snooker tables; children's playgrounds and barbeque areas; and gym, spa and swimming facilities. Villages typically have a dedicated activities coordinator who organise happy hours, entertainment, shows and exhibitions, and group exercise classes. Village vans provide regular excursions such as shopping, winery tours, and museum visits.

Industry background

The New Zealand aged residential care industry comprises three main sectors: retirement villages, residential aged care, and home based support. Retirement villages involve the provision of independent or assisted living accommodation services for older people. Aged care includes both rest home and hospital care, providing accommodation to older persons who have a greater need for healthcare services. Home based support provides healthcare services to individuals in their own home. While the three sectors have traditionally operated independently of one another, integrated villages now provide independent, rest home and hospital care options.

The retirement village industry is heavily regulated. Relevant legislation includes the Retirement Villages Act 2003, the Health and Disability Services (Safety) Act 2001, and the Code of Practice (2008). The NZ Ministry of Health publishes audit reports for all rest homes on its website at http://www.health.govt.nz/your-health/certified-providers/aged-care

Creating benchmarks

In 2015, after roughly 20 years of operation, Summerset wanted to introduce a benchmarking system to motivate village managers to focus on maintaining and improving their management of key factors impacting organizational performance. The Summerset villages throughout New Zealand vary in age and style and the company has an ongoing programme to build and open new villages and to refurbish existing villages.

To preserve and build its brand image, Summerset needs to ensure that all villages consistently maintain the high standard of facilities and service expected by residents. by introducing a benchmarking system, Summerset's management team aimed to a) focus village managers' on the key drivers of performance, b) enable comparisons to be made between apparently dissimilar villages, and c) identify best practices that could be disseminated throughout the organisations and used to improve performance standards. Management hoped that benchmarking would motivate the 'right type of behaviours' and to recognize such behaviour with team based rewards.

Budgeting for Summerset Villages

Summerset expects each village to operate profitably. Budgets are used to establish targets and monitor whether performance is on track. The key driver of revenues and expenses for care bed facilities is 'care bed nights' (see Appendix 2). Budget targets for revenues and expenses therefore reflect the mix of care units on offer (rest home versus full hospital care), the anticipated occupancy rates of village units and care beds, the age of the village (new or established), and the geographic location of the village (North or South Island; major city or provincial town).

Additionally, characteristics of the villages influence the details included in their budgets. For example, new villages have targets for sales of new units whereas established villages only include targets for resales of existing units. Budgeted staffing costs are higher for villages with hospital care beds because of their need to meet legislated requirements about the number and type of nursing staff. Consequently, the items included in the budgets for different villages vary to reflect their unique characteristics. Appendix 3 provides illustrative budgets for villages with different characteristics. The following sections describe the main revenue streams and expenditures at Summerset.

Revenue streams: Retirement villages have five main streams of cash flow.

a) New unit sales: Residents in retirement villages do not own the accommodation units. Instead, they purchase a right to occupy their chosen accommodation as detailed in an occupation right agreement (ORA). Most commonly, the ORA gives residents a lifetime right to occupy their village accommodation. Pricing is set to ensure new retirement units are sold quickly. New village units are built and sold in stages, with increases in prices as each stage of the village is completed. The price paid for ORAs varies by type of unit (independent living, assisted living, or hospital care) and location. Prices for independent living units is equivalent to market rates for similar housing. The price for units in villages in Auckland and other major centres is higher than those in regional locations.

The prices paid for ORAs are categorized as non-interest bearing loans from residents. According to the CEO:

Technically the residents loan us money in return for which we grant them the right to occupy a retirement unit and participate in shared services. At the termination of the licence to occupy we will repay that loan, after deduction of the Deferred Management Fee.

Budgets for new villages include targets for sales of ORAs. Budgets for existing villages do not have ORAs unless they construct additional accommodation units.

b) Resale of units: When residents quit the village, the ORA for their unit is on-sold and a significant portion of the original amount paid is returned to the resident or their estate. The original price paid is reduced by the cost of refurbishing the unit before resale and the amount of the deferred management fees (DMF, described below). The village does not have to pay the resident out until the unit is resold. All village budgets include targets for resales of existing units, except for new villages that are only releasing the first stage of units.

Retirement villages retain any gains on resale of ORAs. Resales of ORAs typically involve higher prices than the amount paid by the departing resident. The capital gain arising from resales of ORAs varies between villages in different geographic regions.

c) Deferred management fees: This is the primary source of income for established villages. Residents are liable for the DMF once they quit the village. The DMF is typically 20% to 25% of the ORA price. This fee is accrued over the term of the residents stay in the village and realised on the resale of the ORA.

d) Resident levies: Village residents pay a resident's levy to cover residential services. This is payable monthly in advance to cover ongoing costs and service fees. The costs to be covered by the levy include rates, unit insurance, security and emergency call services, lawns, gardening and exterior maintenance. Although levies are a key tool for managing costs the CEO noted:

We need to price to cover our full direct operating costs plus a margin to contribute to other costs. These costs include staff managers, office managers, grounds, property maintenance, power, rates and insurance. But we also have to consider market forces and when you are filling a village you carry some costs due to being not fully occupied.

This levy is indexed to superannuation, which limits the increase in annual charges that retirement villages can introduce each year. Residents have the option of buying additional services such as meals, housekeeping, transportation and lifestyle services. They are billed for these additional services on a weekly basis.

e) Aged care fees: There is a set weekly charge for aged care. Some aged care costs are subsidized by the government as specified in the Age Related Residential Care contract. This is a national contract governing the relationship between district health boards and aged residential care providers. The contract covers all contracted services including accommodation, meals, pharmaceuticals and medical supplies. Approximately 53% of Summerset's care revenue is government subsidized. Residents are charged for the unsubsidized portion of their aged service care.(47%) They may also be charged for additional services such as larger rooms, ensuite units, home cleaning and nursing services. Aged care fees are a source of stable cash flow and the proportion of revenue from this source is expected to increase in the future.

Expenditures: The operating expenses associated with running retirement villages are varied. Some expenses are driven directly by occupancy mix, such as staffing and medical costs. Others are relatively stable, including property costs, phone, internet, utilities and printing costs. (VC + FC)

a) Staffing - VC: Staffing costs can be significant for villages offering care beds and must be well managed. Rosters must ensure the right mix of professional staff are available 24/7 to provide nursing services. The budgeted occupancy rates for care beds and staffing costs associated with this level and mix of occupancy is used to derive a staffing cost per bed.

Budgeted care facility staff costs are based on forecast staff hours for each category of staff as determined by the occupancy mix and minimum staffing levels required by law. Directors of nursing therefore have to monitor actual occupancy rates, dynamically adjust the type and level of staff as required, and manage the cost impact of the changes made. Furthermore, they are expected to minimize unoccupied beds by identifying residents or DHB patients who could utilize the bed. There are nightly updates of unoccupied beds in the care centre. Contact is then made with DHBs or invalid residents to advise them of bed availability. The indicator used to manage occupancy rates is occupancy per bed night.[1]

The actual mix of staff required, in terms of registered nurses, enrolled nurses or other staff (caregivers, housekeeping, therapists, etc.) is likely to vary from the budgeted figures depending on actual occupancy rates for hospital and rest home beds. To help manage care centre staff costs, actual staffing hours are reviewed fortnightly. The clinical supervisor assesses whether the staff hours actually provided by each category of staff exceeded the minimum hours actually required. The over (under) provision of staff hours is reported as a financial variance in management reports.

Other staff costs include costs for village managers, administrative and accounting staff, property and grounds maintenance, security personnel and catering staff. Costs for these staff are more predictable than those for professional staff.

b) Medical supplies - VC: The costs of pharmaceutical and medical supplies used by care bed facilities is budgeted as a separate line item. These costs must be managed to keep them in line with the amounts subsidized by government contracts and to recover any excess costs from individual residents. Summerset has national contracts with medical suppliers to provide 200 medical supplies at competitive prices. All care facilities are expected to use the approved suppliers.

The indicator used to track and manage these costs is costs per bed night. There is an overall indicator and a separate indicator for hospital beds. Bed nights reflect the actual occupancy of beds available for a given period of time. The cost per rest home bed night and cost per hospital care bed night are tracked separately.

c) Property costs - FC: Residents value secure, attractive and well maintained villages. Accordingly, villages must maintain the quality of their buildings and grounds. Each village is responsible for its own preventative and corrective maintenance, gardening, rubbish collection and security including lighting and fire alarms.

d) Food costs - VC: Residents value food that is of nutritious, good quality, attractive and varied. Accordingly, villages must supply healthy options to cater for a range of tastes and appetites. However they must also minimize the amount of food that is leftover or wasted. Residents may choose to eat in the caf or dining areas or have food provided to their care unit and are charged for the meals provided to them. The indicator used to track and manage food costs is food costs per bed night.

e) Other expenses: Other costs, such as phone and internet, utilities (power & water), insurance, rates and printing, are tracked and managed separately. Resident levies are used to cover these costs, however there is a limit on the extent to which this happens. For example, new, partially filled villages must carry some of the costs themselves. There is a limit on the rate at which resident levies can be increased each year. The tenure of residents also affects the percentage of costs recovered by levies with newer villages more able to set levies commensurate with current costs. The percentage of actual operating costs recovered ranges between 58% and 90% and is about 66% on average.

Reports of actual revenue, bed utilisation, expenses, and capital purchases are generated at the end of each month. (Will be reported in Appendix 4. Actuals for the current month are not yet available but will be reported shortly[2]). These reports are used by management to regularly review performance with senior management and the finance team, and to identify where corrective action is required. The benchmarking initiative is intended to make all other staff aware of how their village is performing against the KPIs and the performance of other villages. To make this feedback accessible to staff, the benchmarking system should be simple for non-management staff to understand.

Designing a benchmarking system

Research into retirement villages has identified the key factors people consider when initially selecting a village and when deciding to move to another village. These factors include easy access to nursing care, maintenance free home, security, quality, affordability, companionship, and geographic location within easy proximity to family and friends. Additional factors include the desire for villages and units to be attractive and nice and within a 15km radius or residents' current neighbourhoods[3]. While these factors are clinical and operational, they are known to influence long-term profitability and must be effectively managed. While Summerset has budgets to tightly control the financial performance of villages, it lacked a way to monitor the other dimensions of performance. Nonetheless, remarks by the CEO revealed he was aware of the need to do so:

Obviously financial results are extremely important. But on the aged care side there could be some risks unless properly qualified staff are employed so this is important to monitor. Staff turnover is an issue in this industry and we keep a close eye on that also.

Summerset's management team met with managers from sales, property, operations, finance, and the clinical team to identify factors critical to the company's success. Their discussions led to a list of seven critical success factors they believed all villages should be actively manage. These were:

1)adherence to safe staffing levels,

2)retention of qualified clinical staff (staff turnover),

3)well-maintained property,

4)occupancy levels of total care beds,

5)occupancy levels of hospital care beds,

6)turnover of village units (resale stock and new sale stock), and

7)speed of the settlement process.

Management believed these were the factors that residents cared about and that added to the company's appeal as a place to live. As one member of the finance team put it, "it's important to them so it's important to us". These seven factors, briefly explained, are:

1) Safe staffing adherence: Residents expect villages to provide the levels of nursing and other care required by actual occupancy rates and care requirements and to conform to minimum safe staffing levels. Villages must manage staffing levels to avoid both over and under capacity.

2) Staff turnover: Residents feel more comfortable with staff they know rather than strangers. A lower rate of turnover also means greater retention of qualified clinical staff. Villages operate more efficiently with staff who know the systems and standards and operate well as a team, and without the costs of advertising and hiring new staff.

3) Well-maintained property: Residents are attracted to the look and feel of the village, both the living accommodation, communal areas and the surrounding grounds. Villages need to keep the units and grounds attractive while managing the cost of maintenance.

4) Care bed occupancy: Residents are reassured by the availability of care beds in case they should need them. This includes both rest home care beds, where residents can be supported in their own unit, and hospital care beds where full nursing care is provided. There are staffing and other costs associated with making these beds available and villages need to optimize their occupancy rates.

5) Hospital care mix: Residents are reassured by the availability of hospital beds in case they should be needed. Villages need to adjust the mix of care beds to align with actual demand and to optimize the occupancy rates for these beds.

6) Resale and new sale stock: Residents want appropriate units to be available when they are ready to move into villages from their own homes. Villages need to manage the timing and sales of new and existing stock of villages and apartments.

7) Speed of settlement process: Residents want the settlement process to be completed efficiently. Villages need to manage the settlement process to align with the timing of residents' house sales and to avoid delays.

With information in hand, the finance team began to brainstorm how to create a benchmarking system that would focus village managers' attention on these key performance drivers while also providing a fair comparison of village performance. The finance team considered how they could utilize the information they had already produced to prepare the budgets. They wondered whether operational assumptions about occupancy rates, staffing levels, bed occupancy rates, and financial forecasts of revenues and expenses could somehow be used to design the benchmarking system. The finance team also acknowledged that for some indicators, such as property maintenance, a 'softer' or more subjective measure of performance might be required. They needed to consider how such a measure might be generated. Finally, how could this diverse set of indicators be used to identify best performing villages?

The overall goal is to design a benchmarking system that will allow management to regularly measure the performance of each village against the critical success factors, and to provide for a quarterly ranking of their overall performance. Results would be circulated in the company newsletter to inform managers and their teams how well they were meeting performance expectations and to motivate performance improvements in lower ranking villages. The finance team is also considering the issue of rewards. They are unsure whether the top ranked village should be rewarded, the type of reward that might be appropriate, and the frequency of rewards if they are deemed appropriate.

References

Retirement Villages Survey December 2006. Retrieved from http://www.cffc.org.nz/assets/Documents/RV-Retirement-Villages-Survey-2006.pdf

This provides a benchmark measure before the Retirement Villages Act 2003 (the Act) and associated regulations and code of practice came into force.

Appendix 1: Description of Retirement Units

Villas: Villas typically have 2 or 3 bedrooms and a single or double internal access garage. Each has a small private courtyard attached to the main living area and some have conservatories. These are the most spacious of the three type of units.

Apartments: Apartments range from 1 to 3 bedrooms and include a fully self-contained kitchen, laundry, and bathroom. Apartments typically have a patio or balcony outside the living area.

Care apartments: Care apartments typically contain 1 bedroom and are fully self-contained with a kitchenette, laundry and bathroom. They have been specifically designed to support residents rather than provide for independent living. There are 3 levels care package options available. Summerset has attained Ministry of Health certification to provide subsidised care in some of these apartments and expects this number to continue to increase. The company believes that a growing percentage of residents in certified care apartments will receive ether a supporting living care package or full rest home level care over time.

Appendix 2: Care bed nights

The starting point for developing care facility budgets is estimated occupancy rates, for the care beds facility overall (including both hospital and rest home beds) and for hospital beds individually (see Appendix 2). Villages with care facilities have different numbers of care beds available and vary in the expected occupancy rates of each type of bed. Care facility budget figures are therefore developed around the concept of care bed nights. While two care facilities may each have 100 care beds they may have different expected occupancy rates leading to a different number of care-bed nights. For example, two villages with 100 beds each and occupancy rates of 90% and 75% would result in 32,850 and 27,375 care bed nights, respectively[4]. Annual budgeted figures for care-related revenues (aged care service fees) and costs (nursing staff, medical costs, and food) are based on the number of care bed nights. Appendix 3 provides illustrative budgets for villages with different characteristics.

The foundation of care facility budgets involves estimating the number and mix (hospital or rest care) of care beds and their expected occupancy rates. Occupancy rates vary depending on the type of care bed and village characteristics, e.g. new villages have lower expected care bed occupancy rates. The occupancy rates of care beds impact the required levels of nursing staff as well as medical supply and food costs. Amounts budgeted for nursing staff must be sufficient to ensure staffing ratios outlined by legislation are met, providing the right number and type of nursing staff to handle the number and types of patients in care beds. Managing the occupancy of care beds is thus critical to the profitability of aged care facilities. The nursing supervisor is responsible for managing the care facility and its budget.

Budgeted revenues for care facilities are estimated based on expected occupancy rates of available care bed nights for both rest home and hospital care beds. While villages earn more revenue per bed night for hospital level care beds their nurse staffing costs also rise to maintain safe staffing ratios. Preparing care facility budgets therefore requires complicated estimates of occupancy rates for the mix of care beds and the staffing levels required to cater for this mix.

[1] Consider a care facility with 100 beds. It has 100 bed nights available per day and 700 bed nights available per week. If actual occupancy is 40 residents in rest home beds and 20 residents in hospital care beds for the week then this equates to 280 rest home bed nights and 140 hospital bed nights (60% bed night occupancy rate). Costs would be spread over the bed nights. This indicator reflects actual occupancy rather than availability. Adopting this indicator enables usage to be compared between villages with different numbers of care / hospital beds.

[2] A notice will be placed on Canvas when these figures are available.

[3] http://www.insitemagazine.co.nz/issues/march-2015/in-your-expert-opinion/#.VywE4Xp8v0E

[4] (100 beds*365days*90%) and (100 beds*365*75%)

Appendix 3: Village budgets

Care bed facilities Non - care facilities Village A Village B Village C Village D Village E Village A Village B Village C Village D Village E 33%0 70% 9605 95 %/0 999/0 20%/ 40%/0 33% 10% 80%/0 30 43 30 25 44 350 375 250 300 325 N / A N / A N / A N / A N / A 6.00 , 0.00 800, 000 N / A N / A N / A N / A N / A N / A N / A N / A N / A N / A 1, 400, 000 1, 800 , 000 N / A N / A 1 , 600 , 000 N / A N / A N / A 400 , 000 450, 000 N / A N / A 900, 000 1 , 200 , 000 N / A N / A 1 , 005 , 000 N / A 150 , 000 200, 000 500 , 000 400, 000 650, 000 1 , 350 , 000 550, 000 1 , 800 , 000 1 , 600, 000 2 , 200 , 000 245, 045 745, 035 658, 304 587 , 860 1 , 078 , 197 300, 000 400, 000 100 , 901 400, 000 500, 000 40.0, 000 306 , 779 275 , 184 242, 060 443, 964 144 , 144 43.8 , 256 393 , 120 345 , 800 634 , 234 3.00, 000 400 , 000 400, 000 10 , 000 600 , 000 100 , 000 12 , 000 14 , 750 16 , 850 17 , 995 15 , 000 15 , 000 20, 000 30, 000 100, 000 100 , 000 20 , 000 95 , 000 120, 000 20, 000 29, 000 90, 000 80, 000 78, 000 100 , 000 9, 000 10, 000 20, 000 17, 000 20, 000 10 , 000 10, 000 20, 000 20, 000 25 , 000 25 , 000 30, 000 80, 000 120 , 000 2, 000 90, 000 4, 000 10, 000 10 , 000 15 , 000 5 , 000 5, 000 30, 000 40, 000 8 , 000 24 , 000 9, 000 10, 000 10 , 000 10 , 000 20 , 000 25 , 000 50, 000 80 , 000 100, 000 65 , 000 200 , 000 3.00 , 000 280, 000 3.00 , 000 3 , 000 3 , 500 10, 000 10, 000 5 , 000 10, 000 10, 000 20 , 000 20 , 000 30 , 000 3 , 000 3, 500 10, 000 190 , 000 10 , 000 95 , 000 280, 000 260 , 000 270 , 000 10, 000 10, 000 10 , 000 10, 000 10, 000 10, 000 30, 000 35, 000 30, 000 45 , 000 30, 000 75, 000 75, 000 80, 000 90, 000 90, 000 90, 000 100 , 000 100,000 55, 000 150 , 000 100 , 000 55, 000 60, 000 70, 000 70 , 000 75 , 000 80, 000 15 , 000 80, 000 15 , 000 120, 000 80, 000 15, 000 15 , 000 15 , 000 8 , 000 12, 000 10, 000 15 , 000 10, 000 5 , 000 5 , 000 5, 000 5 , 000 5 , 000 7, 000 8, 000 10, 000 15 , 000 45 , 000 10 , 000 47, 000 50, 000 50, 000 55 , 000 30, 0.00 50, 000 100, 000 120 , 000 115 , 000 125, 045 150, 965 556, 946 450, 290 503, 808 657, 000 816, 500\\ 2, 060, 000\\ 2, 585, 000 2, 390, 000Actual Actual Actual Actual Actual Actual Actual Actual Actual ACTUAL 2^ 29* 4^ 350 3 7'd 250% 309 325 330 1. TED. 020 1. 5TH, BED 1. 309. 510| 98.250 43.3. 1.4^ 1, 210. 5 50 957. 29 797, 170 192. BE^ 503. 750 6:16 . 36:01 5:19 9717 495,0 09\\ 40 0 . 10 0 1 . 221 . 100 1 , EDU . S.^ 1. 60.0.0.0 0 2. 310,00 0 3:27 040 1, 195, 201! 1, 348, 5^ 390.301 ECE , 540 109, 540 40 3.70 $ 20.0 09 301. 960 531, 710 35,0 09 $95, 8:3^ 276,600 380.300 606. 540 3:37. 310| 387.00 0 147 , 570 177, 23^ 19 . 241 13, 6120 29.120\\ 19 , 10 0 10, 2:30 36. 20:0 52.270 $0.120 70.250 13.390 15, 0 017 29, 490,00 91. 200 0 0 95, 490 0 0 125, 910.04 24, 510 79. 650 70. 310 4, 530 9.050 20.350 15 , 120| 2queand* 12. 3`OLDO 103. 580.010 23, 240.0 0 9.840.0 0 26.5.20.04 75, 370104 1:19, 730.010 1,970 1. 830 LO, COLD 10, 090 4 , 5:20 28, 500 7,370 3. 170 10. ``` 10, 0501\\ $0. 541 8. 340 24 210 19. 970 75 , 240 2012, 0^0.0` 305, 460.05 2, PERIOD 3. 100.00 10:050.50 9.910 0 0 102,490.00 182, 8|40105 295, 5601.0^ 9.910 19, 14:0 20.030 31. 194 2.750 3509 19.950 Toon 5.050 97 , 431 173_2012 290.010 20:1. 997\\ 273.98^ 10, 210 2.0 09\\ 9.910 9,909 10.060 27, 160 34. 120 20.650 23. 71 28. 530 13. 59:01.50 $9.730.0 0 121, 5.0 8.5, #^ $1 , 60.0 53, 502) 50. 064 \\EL, 170 73, 514 ER , GOO 14, 730 14,3501\\ 15, 5801\\ 7.360 1 1. 5^` 9.50 0\\ 14, 950 19 , 870 14, 840 4510 $.989\\ 53: 09 7 , 8:30 9.530| 14, 950 19, 8.^ 8.940 4,350\\ $ 950 50,000 54,540 27, 30 0 48. 870 $4, 720 120, 3:10 1.17, 141 13 , 00 0 46, 030 12, 720 50. 050 304. 200