Friday, September 21, 2012

Don’t Waste Your Time Benchmarking Against Others

There are a number of different paths one can take to benchmark their finance and accounting organization’s operating performance against others:
·       Use publicly available information in order to calculate metrics, such as the Cash Conversion Cycle.
·       Use information from consulting firms who have a “window” into many firms’ performance and have consolidated and summarized this information.
·       Use a consultant to perform a study specific to your organization
·       Participate in a group study with a number of other firms, such as members of a trade association or industry group.
Avoid this activity if at all possible!
 
The Promise
The promise of benchmarking is that it will provide us with a nice, neat set of results that tells the operational tale. It is akin to looking at the sports standings – Team A is 16-3 and Team B is 13-6, and therefore Team A is #1.
The results are indisputable, and this simplicity provides comfort.
Running a business is a complex undertaking. As such, it is almost always the case that the decisions we face have the following qualities:
·       There is no clear answer among the alternatives
·       There is balance required amongst many factors, such as stakeholders interests or organization objectives
·       We lack all the relevant information
·       Feedback is not available or “muddy”
Decision making under uncertainty is stressful. We are never totally sure, and never will we ever be.
Benchmarking provides the illusion that there is feedback on these decisions, allowing us to say things like “We’re in the top quartile, so we must be doing something right” or “These three areas need to be the focus for our improvement efforts this coming year”.
The benchmarking results confirm and validate what we have done, and point the way for what we must do in the future. They are the lighthouse beacon in the stormy sea.
 
The Reality
The problem with this is that it does not reflect the reality of our organization or the environment we operate in.
Let’s look at some of the reasons:
 
Apples to Oranges
The results of a benchmarking study are never completely apples to apples, but rather apples to oranges.
There is a wide variety of options for where functions land within an organization. Risk Management, for example, may be housed in Accounting & Finance, in its own separate area with a Chief Risk Officer, or somewhere within the operating companies.
There are numerous “shades of gray” along the Centralization - Decentralization continuum. Benchmark Company A requires its operating units to come up with budget numbers that they then consolidate, for which purpose a number of people from across the unit devote a portion of their time towards budgeting work. Company B has a fully staffed unit within Accounting and Finance working full-time that comes up with the numbers after working with the business units.
If the benchmarking effort is very intensive, chewing up a lot of staff (or consultant’s) time and attention in order to “levelize” these differences, some of these factors can be overcome, but invariably some of them will be missed.
 
People are People
Decisions about how to go about the benchmarking itself involve a myriad of factors: the make up of the comparable group of companies, the methodology of the study, the metrics that will be used, who is selected to perform the study, and the scope of the analysis to be performed.
Because the benchmarking is initiated by human beings, underlying agendas will inevitably come into play with respect to these decisions.
For instance, what benchmarking results might you expect to see if the person initiating the analysis is going to use the results a) in order to enhance the status of the department within the organization in order to get a “seat at the table”, b) to burnish their resume for the recruiters who have recently been calling, or c) in advance of an upcoming critical performance review?
Compare that to the results you might expect to see if the person initiating the analysis is going to use the results a) to shake up an intractable bureaucracy inherited from a predecessor, or b) to paint a potential organizational rival in a bad light?
This is not to say that people are malicious or underhanded (at least for the most part). However, a lot of what we do is outside of our awareness and is in congruence with our needs and desires.
 
The Organization is Holistic
What do you think a parent’s response would be if you asked them “who is the better person, your first or second born child?” In all likelihood, we would expect the answer to be along the lines of “each one is special in their own way”.
The fact is that most organizational decisions will take into account a wide variety of perspectives and objectives.
Let’s say a benchmarking analysis comes back showing Company A with a cost per square foot of building space that is 25% lower than Company B’s. Before we conclude that Company A is the winner, let’s think about what might factor into that difference.
Company A, whose primary objective is to reduce cost, moved their headquarters to another jurisdiction to reduce taxes. Company B, who has long invested in community relations efforts, operates a booth at all the downtown street festivals, and has maintained their original presence in the community in which it was founded decades ago, has taken a jurisdictional move “off the table” when considering its options.
Or Company A has moved to a far-suburban “office campus” due to a new CEO’s preference, with the result that long commutes are now required for a large percentage of its workforce. Company B, on the other hand, conducted an employee transportation study and located their building near several transportation hubs in order to make it convenient for its workforce to get to work, thereby boosting morale and improving retention.  
Company leadership is required to balance the demands of a large number of stakeholders and the many varied needs of the business. There are literally hundreds of variables that can enter into the mix. Each decision embodies this balance amongst this multitude of competing objectives, and the amount of weight given to each will invariably be somewhat different between entities.
 
You Can Still Reap the Benefits
If benchmarking is not the answer, what is?
The “promise” of benchmarking against others is:
·         We will be able to identify who is world-class so that we can emulate them
·         We will identify areas of weakness that we can improve upon
These benefits are attainable without the time, effort and cost of conducting a study.
 
Become the Best
As discussed, the organization is holistic - it is not just the sum of its parts or described by one or two metrics.
Your vision should be to be the best Finance and Accounting unit your organization could ever hope to have. Spend the time you would have spent benchmarking performing the work of detailing exactly how “best” will manifest itself in your firm - do not rely on the simple platitudes of “providing the best service” etc.
View your organization as a separate business, and the CEO, the Board, the Operating Companies and other Staff Functions as your customers within this holistic structure. Find out what your customers want and need, and then go beyond and find a way to “delight them”. We have discussed fulfilling this type of vision in “Triangulating Mission and Vision Using Mind Maps” and “Rollin the DICEE”.
Avoid the temptation to identify other world class organizations, because if you are going to emulate another you have taken yourself out of the running for being the best. You might achieve being the same, but you will not be the best.
If we want to be truly world-class and best-in-breed, than the only appropriate benchmark to go after is the one we set ourselves! Internal comparisons will drive us farther and farther. Establishing targets and metrics that convey meaningful information about the path to our organization’s mission are valuable, and much more important than learning “who beats who” on facility cost per employee or some other silly measure! Looking to others conveys a loss of confidence in ourselves and keeps our sights set too low. Stay the course!
 
Continually Improve
Think about it this way – if we use an external benchmarking effort to identify the areas where we “are behind”, what happens after this occurs? The answer is - we will begin to devote time and effort towards improving those functions. We’ll have discussions, draft plans, and then go about executing them.
Well, why wait? We can implement the activities that would come out of a benchmarking study without ever needing to do the study itself. The two items – benchmark study and improvement efforts – are not “cause and effect”, but two separate and distinct activities. One does not beget the other, and either can exist on their own without the other. You do not need an external benchmark in order to improve.
But how can we identify the areas to improve? There are many methodologies that exist today to improve processes, such as Lean, Six Sigma, and BPM. Using any one of these will serve to guide us towards improvement efforts.
For example, in the Lean world they tell us to look for the “7 Wastes”. We can identify these today by:
·       Simply leaving our offices and observing people doing their work
·       Holding a departmental meeting where the current process is “mapped” and asking where the value added steps are and which steps do not add value
·       Asking the people doing the work what is inefficient and what creates “pain points”
·       Asking our customers what is working and what is not
The advantage to this is that we will generate process improvement opportunities today, not three months later when the study is completed. Let’s get going!
 
Key Takeaways
One cannot summarize an organization’s activity into a set of metrics anymore than one can drive a car simply by looking at the instrument panel. Don’t pretend that you can. And don’t get bogged down in comparing your organization to others. Focus on being the best provider of your organization’s needs, and improve constantly and continuously, and all the benefits of benchmarking are yours to enjoy without wasting your time.
 
Questions
·         What has been your experience with competitive benchmarking? Was it rewarding?
 
Add to the discussion with your thoughts, comments, questions and feedback! Please share Treasury Café with others. Thank you!

6 comments:

  1. Love this perspective Dave. In most of the benchmarking exercises I have been involved in one common question has emerged after all of the work had been completed - "Now what does this mean for my organization specifically?" The reasons for this are varied as you state, but they share a common theme - that corporations are as unique as the individuals that comprise them. They each have their own characteristics from capital structure to geography and customer demographics to internal politics and corporate culture and history. By this very fact attempting to boil down a firm to just metrics is not a fair assessment, and will invariably cause mistakes in decision making. I have come to the conclusion that as you have that benefits can still be gained by defining upfront what being the best finance, customer service, remittance processing organization, etc. means for your firm specifically, then use metrics to monitor and forecast changes. I think your point about an outside consultant or the facilitator's agenda is spot-on as well. So often, benchmarking is used to build a business case to make change which usually involves some new product and/or some cost outlay on the benchmarkee's part. I think that in many cases that can be valuable and will deliver the results that are sought after; however, it still needs to be controlled and focused on the internal benchmarks you have set.

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    Replies
    1. Mark,

      Thank you for your thoughtful discussion of this topic - it is very helpful to me to hear that others have seen this perspective as well! Good luck in your pursuit of being the best!

      Delete
  2. This article really speaks to me, David, as a small business owner. Although you focus on accounting/finance departments of (seemingly) larger organizations, the key takeaway I got is to strive to be the very best at what you do in your industry or niche. Whether it's basket weaving, content marketing, or fixing cars -- be the best and offer that certain something others don't.

    Cash flow, organizational attitudes toward money and spending, competitiveness - these all play into success of a business, but it's the human aspect that provides the lubrication for the cash to flow to and through the pipe.

    Benchmarking is just another way of keeping up with the Joneses for those striving for success in the business world. At least, that's my perspective (one that is rooted in a background that's far removed from complex financial data and interpreting that data).

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    Replies
    1. Samantha,

      Thank you for your thoughtful reply and sharing your experience as a small business owner.

      I agree with you that the human aspect is the compelling point - the judgment, the value prioritization, the stakeholder relationships, and a creative approach all come from people in the organization, whether it is small or large.

      And yes, while some might want to keep up with the Joneses, it is much better to surpass them in the things that are important to you.

      Thanks again for you comments.

      Delete
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  4. I loved this one. It has given me courage to try scarier things. I tend to steer clear of them but not anymore.
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