The Necessity Of Benchmarking

In today’s turbulent economy, businesses need to maximize efficiency and effectiveness across all functions, particularly those of the back office, including finance & accounting (F&A). Why F&A in particular? As a percentage of revenue, the cost of F&A can range from .55% – to 1.50% of revenue. For a $300 million company, that translates to between $1.65 million (top performers) to $4.5 million (bottom performers). One significant difference between top and bottom performers is approximately $2.85 million annually.

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A successful company needs an effective strategy to survive, thrive, and grow, which begins by identifying where they are now (as-is state) versus what improvements or changes would make life easier for everyone involved (to-be state). A helpful framework used to determine As-Is vs To-Be states is benchmarking. 

Benchmarking overview

Simply put, benchmarking is a management-sponsored data-gathering/fact-finding exercise to assess where the company is relative to its peers and competitors. When done correctly, it can provide insights and transformation goals & objectives that an organization should prioritize. Additionally, benchmarking allows leaders to evaluate and implement best/leading practices to help improve overall performance. Transformation is a never-ending process, and no one technique will suffice as the ultimate solution. Yet benchmarking can provide valuable data for identifying opportunities to improve your organization’s performance in areas that matter most – without having any additional work put into it!

What are the benefits of benchmarking?

– It provides a non-bias view of the organization’s or a function’s current state and how that compares to other companies,

– It highlights critical areas or processes that can yield the most business benefit while avoiding projects with minimal impact, and

– It provides a structured approach to developing, implementing, and measuring a transformation program.

What are some of the considerations for benchmarking?

– It is not an exact science since it makes the general assumption that all companies are homogeneous, meaning that all companies operate within the same industries, have an identical product mix, share the same geographical structure, and pursue the market with the same strategy,

– Benchmarking can be time-consuming to conduct because of the various systems and processes involved, and

– It requires project team members with a high degree of understanding of data and data analysis.

Benchmarking, a step-by-step approach

This section provides a step-by-step approach to guide businesses interested in transforming or beginning the initial phases. Even for those organizations that may not be ready for change, the content below can be helpful for future reference.

Step 1: Scope definition

The first step for any benchmarking exercise is scope definition. Scope definition establishes a framework with firm boundaries concerning the overall scope of the benchmarking exercise. Having solid boundaries limits the opportunity for scope creep. The answers to the following questions will establish the scope definition?

– What is the scope of the benchmarking exercise?

– Do we have the resources to perform the data collection and analysis?

– What IT resources can we go to for support in pulling data out of the various systems?

– How much time should be allocated to the benchmarking exercise?

Step 2: Data gathering & validation

After the benchmarking scope is finalized (or approved), the next step is to collect the data associated with the scope definition. IT should assist with pulling the data out of the various supporting systems. Additionally, the team should identify an industry benchmark most relevant to the scope. Industry groups, special interest groups, or third-party benchmark data providers (e.g. APQC, CFO.com, etc.) can be consulted.

Another aspect of data gathering is to set up workshops with stakeholders from all aspects of the business participating. While the information gathered via workshops is not typically quantitative, its qualitative nature can provide significant insights into specific challenges employees and other stakeholders face.

The maturity and completeness of information will vary from one organization to another. Remember that while perfect data is preferred, partial data can also provide valuable insights. Compare the collected data with relevant industry benchmark data and develop some transformation/project ideas.

If the data does not make sense, prioritize spending more effort on validating the data. It is recommended that benchmarking takes into account 36 months of data so that the data can be normalized. That said, a shorter period may be acceptable if seasonality can be built into the model. This way, the company’s metrics can be fairly compared with benchmark data.

Step 3: Data analysis

Data analysis is typically done during and post the validation process. Root causes should be identified across five key dimensions or components: People, Process, Technology, Policies and Operating Model. Each size represents a part of the business that plays a significant role in creating or contributing to the root causes. Each root cause should have an associated impact score. The output from this phase is then used to develop transformation priorities and investment strategies.

Step 4: Best practice analysis

A simple review of best and current practices can often provide significant insights into why the organization is outperforming or underperforming its benchmark. Best practices are typically associated with policies, processes and systems. However, those relating to people (typically training) and operating models can have a profound impact.

Conclusion

Benchmarking can provide organizations with a clear roadmap for business transformation. When done correctly, it can help the organization prioritize opportunities and allocate funds to deliver the most benefits from its transformation initiatives. Additionally, benchmarking is not always about numbers. Sometimes, the qualitative analysis and best practice identification and implementation can provide significant benefits.

See Also: What is Strategic Leadership and Why Do Businesses Need It?

Please let us know if you are interested in learning more about benchmarking or business transformation. You can reach us directly by sending an email to quoc.nguyen@arthurlawrence.net.