What Actually Is Benchmarking

Published Date: 02 Nov 2017

The goal of benchmarking is to identify and improve the weaknesses within an organization, having an idea to become the "best of the best." The process of benchmarking helps managers in finding gaps in performance & turning them into opportunities for improvement. Also, the benchmarking enables companies in identifying the most successful strategies used by other companies of comparable type, regional location, or size, and after that, adopting relevant measure for making their own programs more efficient. Benchmarking is applied as part of a broad strategic process by most companies. E.g.,, benchmarking is used by companies for finding breakthrough ideas to improve processes, for supporting quality improvement programs, for motivating staffs for improving performance, and for satisfying management's need for competitive assessments.

Benchmarking targets roles, processes, and critical success factors. Roles are what define the job or function that a person fulfills. Processes are what consume a company's resources. Critical success factors are issues that company must address for success over the long-term in order to gain a competitive advantage. In benchmarking focus is on above mentioned things in order to point out bottlenecks and potential areas which require improvement.

What actually is benchmarking?

A company which has decided to undertake a bench-marking initiative will have to consider these questions: When? Why? Who? What? and How?

WHEN.

At any time, benchmarking can be used, but it is generally performed in response to needs that arise within a company. According to C.J. McNair and Kathleen H.J. Leibfried : A Tool for Continuous Improvement, some potential "triggers" for the benchmarking process include:

quality programs

operations improvement efforts

cost reduction/budget process

management change

rethinking existing strategies

new operations/new ventures

competitive assaults/crises

WHY.

In management's decision, this is the most important question to begin the process of benchmarking. McNair and Leibfried have suggested many reasons why companies may embark upon benchmarking:

To establish goals that are meaningful and measures of performance that reflect an customer/external focus, boost quantum leap" thinking, and foster high-payoff opportunities;

To promote teamwork which is based on competitive need and which is driven by concrete data analysis, not gut feeling or intuition;

To signal willingness of management to pursue a philosophy that embraces change not in a reactive manner rather in a proactive manner; and

To create early awareness about competitive disadvantage.

WHO.

Sometimes, a company may decide to benchmark internally, against industry performance, against competitors, or against the "best of the best." Thus, internal benchmarking is the analysis of practices that exist within various divisions or departments of the organization, looks for best performance as well as identifies baseline drivers and activities. Competitive benchmarking gives a look to a company's direct competitors and does evaluation of how the company is doing in comparison. With having known the weaknesses and strengths of the competition does not only help in plotting a successful strategy, but it also helps in prioritizing areas of improvement when specific customer expectations are identified. However, industry benchmarking is more trend-based having a much broader scope. Industry benchmarking helps in establishing performance baselines. Multiple industries are examined by the best-in-class form of benchmarking in search of innovative, new practices. It does not only provides a broad scope, but it also best opportunities are provided by it over that range.

WHAT.

Benchmarking focuses on processes, roles, or strategic issues. It sometimes is used for establishing the mission or function of an organization. It is also used for examining existing practices while we look at the organization as a whole for identifying practices that support critical objectives or major processes. While we focus on specific activities or processes, the depth of the analysis is a key issue. The analysis can take the form of horizontal or vertical benchmarking. In vertical benchmarking, the focus is placed on specific functions or departments, while horizontal bench-marking focuses upon a specific activity or process. Concerning strategic issues, the objective is identifying factors that are of greatest importance to competitive advantage, to differentiate companies that appear to be top performers in such areas, to define measures of excellence that capture those issues.

HOW.

Different sources of information are used by benchmarking, including trade meetings, published materials and conversations with consultants, industry experts, customers, & marketing representatives. Emergence of Internet technology has facilitated bench-marking process. Internet offers access to no. of databases-like Power-MARQ from nonprofit American Productivity & the Quality Center-containing performance indicators for the thousands of different companies. Internet also enables the companies to conduct an electronic survey to collect the bench-marking data. Thus, how company benchmarks may depend on available resources, the deadlines, & no. of alternative sources of information.

BENEFITS:

By continuously seeking to identify best-in-class & duplicate, surpass the performance, organizations can embed in their culture and behavior the strong spirit of pride, energy, competitiveness, confidence and striving for improvement. Benchmarking is also relatively low technology, has low cost and quick response technique which can be adopted by almost any organization. Benchmarking seems to be common sense & is easily understood by the managers, employees, customers, suppliers, general public and media.

Finance, is under pressure like other key corporate functions, to reduce operational costs while increasing business value it generates for a larger enterprise. To do this, reliable information is needed by executives that can help them understand whether they are accomplishing their objectives & how the performances stack up against the peers. Such information is acquired with benchmarking.

What is surprising is just that by less than 1/3rd of finance organizations, according to Accenture's own data, benchmarking is used. That may be why, as reported in Accenture report, "The Changing Role of the Finance Organization in a Multi-Polar World," that only 29 % of the 350 survey respondents said they have a good understanding about where their organization stands in relation to the finance functions in comparable enterprises.

Four critical benefits are delivered by benchmarking for organizations looking to improve performance of functions:

Benchmarking provides the current-state assessment of finance function. Assessment of this involves a rigorous baseline of cost, cycle time and quality, internal and external comparisons (E.g., by the region or the business unit) of performance and cost, & identification of the meaningful gaps. This assessment is more defensible, fact-based understanding of function's performance and cost drivers.

Benchmarking creates a strong foundation for the transformation programs. Effective benchmarking initiative enables the organizations in more easily identifying and prioritizing opportunities -- by region, process & cost driver -- which, thus, results in relevant improvement targets and more informed and stronger overall business case for transformation effort.

It delivers basis for continuous improvement. Benchmarking does this in part by renewing or creating the culture of managing by the metrics & by enabling the periodic measurement against an initial baseline. Also, baseline assessment is process-based, so this baseline assessment remains relevant regardless of the subsequent organizational changes.

Finally, it sets forth the standard set of terms & definitions for key aspects of the company's business processes, enabling everyone in an enterprise to share a same level of information about state of an enterprise's operations.

The process of benchmarking involves 4 main steps that help an organization to deliver, discover & maintain in enhanced business value from a function being evaluated.

In first phase, the company formally launches an initiative and the plan is devised for gathering required data (which must include the definition of an initiative's scope, thus including which metrics to evaluate & the relevant data sources). A company also identifies -- & trains, if necessary – those people who will be responsible for collecting data. It's critical for the company to get first phase step right, as the time which is spent here can pay significant dividends in this process later.

In second phase is involved, firstly, the gathering of data which is to be evaluated, typically using the standard data collection & formatting template. After the data collection is completed, company produces the preliminary benchmark comparison with peer group, validates data, & when necessary, corrects the inaccuracies. The second phase of a project typically lasts between 1-4 weeks; it is also most common source of delays in projects of benchmarking. Therefore, it is important to have & follow the solid data collection and the validation plan.

A company in the third phase performs the qualitative assessment to help in revealing the insights behind a quantitative data collected in preceding phase. The leading practice evaluation and interviews with the relevant executives form a core of qualitative assessment. Thus a company is enabled to put quantitative benchmarks in context & understand "why" behind numbers.

In the fourth & final phase, a company reviews performance and cost gaps revealed in comparisons with peer group and identifies root causes of such gaps. Company also develops the set of recommendations and addresses root causes and closing gaps, which must be reviewed with key stakeholders to get the crucial buy-in. Importantly, benchmarking may be highly political exercise, thus getting everyone affected engaged with & supportive of an initiative is vital to the success.

Ultimately, benchmarking must become an automated (& automatic) process with in the finance. When it is used with the other analytic tools, e.g. internal voice of the customer and leading practice comparison, it provides insight not available by the other means, & can be basis for better decision-making in the finance.

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Function which will benefit most from benchmarking: Finance and accounts

Benchmarking in Finance and Accounts

Benchmarking is often the numerical exercise; Aspects of the business which lend themselves to it are more commonly benchmarked. Accounts and finance is prime candidate. There are 2 ways of looking at role of finance. Traditional way is to look at various functions it performs.

Typically, a finance organization performs few following functions:

Fixed assets accounting and management

Financial budgeting and analysis

Accounts receivables

Accounts payable

Treasury

‘Close the books’ and reporting

Travel reimbursement

MIS

Tax

A main function of the benchmarking is to assess performance in each of these functions. A key question is what performance of course is. India’s IMA discussions with the CFOs suggest that there are 3 measures of performance which should be benchmarked, namely – efficiency, cost and quality. An important goal of all organizations is to perform the job at the lowest cost, by using minimum resources & with highest level of quality or accuracy. The components of the cost & meaning of quality & efficiency will vary across the different functions.

Other way is to look at value-addition provided by finance function – transactional versus strategic. The strategic value is inadequately captured in a functional view of finance. The measures of the performance in such area will also be different.

Strategic Contribution:

Strategic contribution is comparatively more difficult area to be benchmarked, because strategic contribution does not lend itself easily to the measurement. One can look for some surrogate measures. The finance function executives spend their time on 4 broad areas – transaction processing, reporting, control and management activities/decision support. Unless the organization has outsourced the transaction processing partially or fully, it takes most time, followed by the reporting and control, leaving a little time for decision support. Finance will need to alter this to play a more strategic role, by squeezing the time spent on the first 3 & increase that on the decision support. Thus, a good surrogate measure for strategic role which finance function is playing will be to map time that it spends on those activities, compare it with the peers at that point of time & track it over period of time. The less time spent by it on conventional roles, the more will it have available for the value added activities.

The ratios can be altered favorably by increasing use of technology & outsourcing. If these initiatives do not significantly save the cost, they might free up the management time to play even more strategic roles.

Beyond the time spent, 1 more way to assess if the CFO has time to spend on strategic contribution is to find seniority & the decision making power of the people dealing with key functions, like accounts, treasury, and controls among others. More senior the direct reports, the lesser the time spent by the CFO on looking after such functions & by implication, higher the availability of time for the strategic contribution.

Answer: 2.

Measures of performance

Overall finance function

In the most basic level, cost of running finance function is the key variable for benchmarking the function on. It is measured as a % age of total cost or of total revenue. It normalizes data for the size & thus, makes this comparable. The number of full time, similarly, equivalents (FTE’s) in finance function as proportion of the total FTEs is the good measure. This has to be interpreted in a context of an organization’s specific conditions; it is useful measure for efficiency.

Specific transactional functions

Transactional activities – accounts receivable (AR), accounts payable (AR), payroll, benefits, fixed assets (FA), travel claim and reimbursement – are best targets for the benchmarking because it is much easier to quantify magnitude of the work. Allocation of resources to the various activities is also relatively straight forward. There are 3 types of benchmarks for the transactional activities:

Cost (overall and per activity),

Quality (usually, error rates) and

Efficiency (level of activity per FTE)

COSTS:

Benchmarking become easily bogged down in the performance measurement & lose sight of real objective of the performance improvement. It is particularly significant as measuring performance of organizations, is a very difficult task, typically of public organizations with multiple goals.

As suggested by Fischer—

No data are perfect ever;

Small differences must not be considered overly meaningful; &

Comparisons with competitors must be used to find the red flags.

Significant factors sometimes might be too difficult or even impossible to be quantified (example energy, spirit or attitude).

Benchmarking may lead to limits on creativity by doing focus on copying what is already been achieved, instead of encouraging thinking that is "out of the box" & looking for quantum break-throughs. It can become a ceiling on an achievement in the given field. It also can lead to blind attempts for imitating when more careful analysis will relieve cultural, geographical, temporal or other characteristics which limit replicability of selected benchmark.

Lastly, cost of benchmarking is seldom noted in the literature or considered in the field. Research takes time, energy and resources. More extensive the effort of benchmarking, more likely is it to consume an organization's innovative capacity. When taken to the combined & extreme with complex performance measurement system for establishing the baselines, benchmarking thus, can negatively affect quantity & quality of the services that are delivered.

Thus, overall cost benchmark for accounts that is payable is ‘accounts payable cost as the proportion of the total organizational expenditure’. Per-activity cost parameter would be ‘number of annual invoices’/‘total accounts payable cost’. Also, per-activity fixed asset cost parameter would be the ‘total fixed assets activity cost / total number of fixed assets tracked’.

Cost of funds

The life cycle stage of the company is a determining factor. A newer but highly profitable company might have to bear higher cost of funds because of the performance history & shorter credit. Also, this will tend to be more people-intensive thus, affecting operating costs, while staged & similar sized company set up by an organization which is existing in its expansionary stage would benefit from the position of the parent company. As CFO, one of the KRAs is minimizing blended cost of the funds for the organization that can be measured through interest paid as share of the total debt or average outstanding per month, or day.

Efficiency: It is the output per FTE. Thus, in case of accounts receivable, it would be the no. of payments (remittances) / total accounts receivable FTE’s. Now, efficiency or productivity depends upon quantum of the work done, which is measured better by the remittances processed or no. of invoices, rather than handling of amounts.

Quality: It is generally measured by error rates per unit of the activity. E.g., no. of accounts payable errors/no. of invoices processed is a measure of the quality of AP process. ‘Total remittances matched first time / total remittance’ is also useful measure of the quality.

Many of such parameters are influenced by level of technology that is embedded in various processes. Enterprise resource planning (ERP) systems have been deployed by many medium to large organization and it has led to vast improvements in quality &efficiency. Technology is more or less similar across organizations it is the source of comparison between different companies? It is the cocktail of the extent of the capability of the people, the standardization of processes and level of technology which separates high performers from others. If the processes are not standardized, there are many exceptions which demand manual intervention, which results in lower efficiency, higher cost and poorer quality, as it introduces the chances of error. Thus, true driver of the performance is not only the automation, but the process rationalization, & reengineering, as and when required.

E.g., IT sector MNC has abolished perquisites & allowances which required employees to submit the bills. Instead the MNC chose to add amount of tax each employee can save to their salaries. In one go, it reduced need to process 1000’s of claims every year, hence making whole of the benefits process simpler & more efficient. Also, it cut the risk by employees of fraud, because of which the company would have become liable to prosecution.

One more factor which influences efficiency & cost is outsourcing. Degree of outsourcing must be considered when the performances are compared across the organizations.

People-related measures

The organization is only as good as its people. Therefore, quality of the people & investment which organization makes in the people is key determinant of the success of the organization. Thus, the people-related metrics are important to judge the performance of a finance team. Mr Prasad believes that the level of attrition in the finance function is important barometer of health of finance organization. Many companies prefer to use related measure – the average length of service in finance function. Employee satisfaction scores have been favored. Though, these scores might not be easily comparable across companies, because these are likely to use different methods & tools for calculating it. Microsoft tracks the no. & duration of open positions at some point of time; only goal is keeping the no. low by filling positions very soon. This is again great measure to track, however, it is context-sensitive, & might not lend itself to comparison across different types of organizations. Many other organizations track no. of positions which are filled by internal recruitment & movement. For assessing the quality of the talent, ratio of highly educated employees to the total employees in the finance function could be measured. Per employee, the training hours are another metric that is often tracked. An important people-oriented dimension is diversity & is easy to track as well. E.g., finance division of a manufacturing company’s might benefit from finance professional with the past experience in retail market that provides insights for improving & strengthening the distribution & sourcing channels of the firm.

THE FUTURE OF BENCHMARKING

The early work in benchmarking used to focus on the manufacturing sector; now it is considered as management tool which can be applied to any business virtually. Benchmarking has become common place to use for companies for competing in & leading their industries respectively. Benchmarking has helped many companies for increasing productivity, reducing costs, improving quality, and strengthening the customer service; the companies are interested increasingly in benchmarking for a no. of activities, which includes the following:

cost of supporting business driver (transaction costs, or cost per order)

end-user support

systems development activities, including maintenance, backlogs, development productivity and project management

skills management

data centers/communication networks

business strategy alignment

customer/user satisfaction

technology management