vicki powers
freelance writer
 

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 says.

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 numbers.

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 more important.

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 business.

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 practices are.

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 a budget?

"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 as strong."
 
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