Boosting Business Performance Through Benchmarking
Financial Executive, November 2004
by Vicki Powers
Hugh Collins, CFO at St. John’s Hospital, a Springfield,
Illinois-based regional healthcare center, turned to benchmarking
and business performance management (BPM) processes after the nonprofit
hospital experienced five years of flat financial performance,
including weakened cash flow and below-budget operating margins.
Financial woes had forced St. John’s to delay its long-term
building/renovation project for facilities improvements and the
purchase of updated technology to improve delivery of patient care.
During the past two years, however, benchmarking and related
practices have saved the hospital millions of dollars and fostered
a culture that embraces best practices. Collins says St. John’s
realized it had to change processes, improve its business management
and change its culture if it ever hoped to get back on track with
its capital-spending plan. "You can’t achieve the financial
objectives if your operations are not efficient and effective,
and don’t serve the needs of your customer," Collins
Financial performance ultimately defines how well a company is
performing but not necessarily why it’s performing that way.
Benchmarking can take that next step as organizations compare processes,
identify performance gaps, and areas for improvement.
"If you want to do effective benchmarking, it’s not
just enough to compare," says Bradley Allen, partner in Global
Assurance Methodology Group at PricewaterhouseCoopers. "You
need to understand why. Any organization that is focused on continuous
improvement should be doing some kind of benchmarking."
Benchmarking continues to enjoy high satisfaction among business
users (3.96 on 1 to 5 scale) since its debut in the 1990s, according
to Bain & Co.’s annual survey in 2003, "Management
Tools and Trends." Benchmarking also received the second-highest
usage score (84 percent) in this 2003 ranking out of more than
two dozen management tools used by global senior executives. Although
benchmarking is often used primarily as a cost-reduction tool,
its purpose goes beyond that.
Business performance management (BPM) is the newest financial
solution that improves visibility, decision making, and resource
allocation by combining business processes, measures, and systems
to improve business performance. META Group, the technology consulting
firm, estimates that BPM solutions and services will increase 15
percent to 20 percent in 2004 as organizations use BPM for internal
performance management and internal compliance activities such
as Sarbanes-Oxley. Half of the financial management inquiries that
META Group receives are related to BPM, according to John Van Decker,
senior vice president, Technology Research Services.
Turning back to St. John’s, the hospital implemented performance/comparison
benchmarking in late 2002 to establish goals, measure progress,
report on its progress, and take the necessary corrective action
when needed. It benchmarks within the hospital—at the hospital
and department level—and performs external benchmarking within
its region as well.
The hospital collects external data and compares it to its own
internal data around performance, direct labor, and direct materials.
St. John’s receives its benchmarking data from Solucient,
an Illinois-based provider of healthcare business intelligence.
St. John’s and other healthcare providers submit their data
and receive trending reports over a rolling five-quarter period.
Although St. John’s experienced some managers who were
not on board or ignored the data, overall its benchmarking process
works efficiently. The goal is to attain a best-practice level,
though Collins says that doesn’t occur overnight. St. John’s
established targets and target dates for improvement, developed
strategies to develop those targets, and identified resource targets.
Collins notes this required some investment within the organization
as well as planning and time.
One specific action plan, dubbed STARMAP (Strategic A/R Management
Action Plan), comprises more than 40 benchmarks of performance
used to achieve best practices. Its stated goals include reducing
net days in receivables, increasing cash flow, decreasing bad debt,
and improving its operating margin. In fiscal year ending June
2003, St. John’s increased cash flow by $9 million by decreasing
Patient Accounts Receivable by 11.5 net days. In fiscal year ending
June 2004, it increased cash flow by $11.5 million by decreasing
this process another 13.5 net days.
At a 7 percent internal rate of return, this equates to $1.4
million of investment income to St. John’s hospital a year.
Other significant results include a $4.5 million annual savings
for its Productivity Improvement Project and $6.8 million annual
savings for its Supply Chain Cost Reduction Initiative.
Benchmarking Across the Globe
Just like at many organizations, SAS, the North Carolina-based
provider of business intelligence software and services, found
itself overwhelmed trying to capture its financial data and report
on it across the globe. So, SAS implemented one of its customer
software solutions right inside its own organization, enabling
local financial departments and regions to report consolidated
With 40 to 50 subsidiaries operating with a local currency across
the globe, each one functions as a separate legal and finance entity
as it rolls up, reports, and consolidates data for an annual audit.
David Davis, SAS vice president, finance, and chief accounting
officer, the performance management solution helps plan, analyze,
and report on organizational performance, which drives strategic
business decisions and manages financial risks.
He adds that benchmarking is starting to play a bigger role at
SAS, especially as it rolls out more of its applications to the
end user within the company. Davis believes benchmarking is important
to gauge against competitors in the marketplace, but he sees internal
benchmarking--which can provide a strategic advantage—as
Davis says SAS divides subsidiaries based on their size and benchmarks
different performance indicators. "We’re a big proponent
of KPIs (key performance indicators), not only for our customers
but internally for driving our business in the direction it should
be going," Davis says. "We’ll push down to the
business units within the company, and they will establish their
KPIs at their business unit level. Then we’ll have to educate
what that target means to them at the business unit."
Once SAS achieved confidence in its financial numbers, it’s
been able to hold headcount stable and not hire additional employees
to pull together information; current employees can stop compiling
data and actually start analyzing it. However, Davis cautions organizations
about the numbers benchmarking can reveal. External benchmarking
results might actually be lower, or not as high, as organizations
can attain internally. SAS, for example, benchmarks many high-tech
companies relative to general performance indicators, revenue per
employee, and such.
"If our revenue per employee is lower than industry average,
that doesn’t mean we’re underperforming in the market," Davis
says. "We have to evaluate to understand what it means in
our business model based on the fact that SAS insources a lot of
its workforce. That’s critical for companies to evaluate
their business model and how that benchmark works for them."
SAS has embedded benchmarking in a number of areas to improve
its financial functions. It uses Days Sales Outstanding (DSO) benchmarking
to improve collection effectiveness, revenue per employee and expenses
per headcount to drive hiring trends and sales push, and managing
funding/capitalization at subsidiaries by benchmarking months lag
and royalty remittances. SAS also benchmarks and monitors employee
performance, which is a critical aspect of its culture.
"We’ve always been in the single digits for turnover
while others average 20 percent to 30 percent," Davis says. "We’re
still maintaining that."
F&A Database for Metrics
One improvement tool available to finance executives is PowerMARQ,
a global database of more than 1,200 performance indicators and
individual benchmarks for companies to improve their operations.
It was developed by Houston-based American Productivity & Quality
Center (APQC), a nonprofit organization devoted to helping organizations
improve performance. PowerMARQ is described as a standard way to
benchmark business performance across multiple processes and industries.
APQC, leading organizations, and industry leaders built this standard
approach to benchmarking, dubbed the Open Standard Benchmarking
Collaborative, upon which PowerMARQ is based.
In Finance & Accounting, for example, PowerMARQ contains
more than 240 F&A metrics across 10 key areas in finance such
as revenue accounting, general accounting and reporting, accounts
payable, treasury, and fixed asset management. The four categories
in each process—cost, staff productivity, process efficiency,
and cycle time—provide a balanced, holistic look at the entire
Organizations participating in PowerMARQ can determine where
they stand among peer groups. They submit their data to APQC and
receive a complimentary report that provides detail relating to
business performance on multiple dimensions—industry, regional
peers, similar transaction volume, and such. The report includes
qualitative information--such as key technology enablers, key systems
accounting managers use, and how certain management practices influence
performance—for a complete view of a business process. Organizations
also receive an executive report tailored to the CFO that reports
at a macro level. CFOs can benefit by understanding how the F&A
area spends its time.
Ozzie Evans, a benchmarking lead for IBM Global Services in the
Business Transformation Outsourcing organization in Houston, has
used APQC’s PowerMARQ to help his clients improve performance.
Evans believes benchmarking plays an important role to compare
performance to others.
"Organizations put in a lot of effort to eliminate defects
or reduce costs, but you need to enhance that information and see
how you compare with other organizations doing the same type of
thing," Evans states. "We need to ensure we’re
doing the best for our clients and this kind of benchmarking helps
us do that."
Evans says organizations that use this kind of benchmarking to
their best advantage examine what’s going on upstream and
downstream from the process that can influence those results. "Don’t
just focus on the cost," he says. "Look at the efficiency,
quality measures, and cycle time measures. As you change things
to make improvements to those, costs will come out."
How Do You Do That?
In a hypothetical example, Company A has an accounts payable
collection period of 50 days and Company B is 30 days. Why
is Company B collecting 20 days faster than A? Understanding
the "why" often involves further levels of comparison,
according to PricewaterhouseCoopers’s Bradley Allen,
and an in-depth study actually mapping what those processes
are and comparing the individual processes to what the best
One of the keys to successful benchmarking, according to
Allen, is collecting quality data and making sure you’re
measuring the right thing. Another key is realizing that
organizations don’t have to compare themselves against
other companies that are exactly like them.
BPM Partners, a Connecticut-based consulting organization
focusing on BPM, uses external benchmarking with its clients
with regards to how well a company is achieving performance
management as a practice. How many people are involved in
the budgeting process? How long does it take to complete
"When you look at measuring against an industry standard
benchmark, you take that into your strategic planning effort
and create an initiative in the organization, or a set of initiatives
within departments," says Barbara Barker, vice president
of Services Delivery, at BPM Partners. "Everyone should
be driving toward increasing your performance in that particular
area. Do you have to take action to be No. 1 in all those areas?
No, but you don’t know where you need to focus unless
you know where you’re strong and where you’re not