A reality of life in today's competitive, volatile economy is that most corporate functions are having to reduce operating costs, while improving value for the larger enterprise. But that stark atmosphere is compounded by the fact that many executives lack the essential tools they need to paint a detailed picture of their function's performance along key dimensions and how that performance measures up against peers.
Benchmarking is emerging as an essential tool providing visibility to executives. According to new research from Accenture, benchmarking delivers four critical benefits: a current-state assessment, a strong foundation for transformation programs, a strong basis for continuous improvement and a standard set of terms and definitions for key aspects of a company's business processes.
Chuck Wise, a senior principal in Accenture's finance and performance management wing, sat down recently with Business Finance to discuss the value of benchmarking, how internal and external benchmarking can be an instrumental lever for performance and identifying areas most urgently in need of improvement.
Business Finance: Tell us a little bit about external benchmarking, especially within the role of finance.
Chuck Wise: External benchmarking simply refers to the comparison of the baseline cost and performance of a particular process or function. It gives a composite average of other companies' cost and performance or that particular function.
It produces a detailed picture of the current state of that function across key dimensions: cost, productivity, quality, cycle time, etc. It compares that performance against competitors and peers, highlighting key gaps and improvement opportunities. Benchmarking is quantitative in nature and therefore more objective than other forms of analysis. Often it generates insight not available by any other means.
BF: How long has external benchmarking been used within finance and how is it being used today?
CW: External benchmarking has been used for quite some time. Finance was one of the first functions, I think, that really took to benchmarking and a lot of the other functions have followed suit. So, at least a decade, if not more, that benchmarking has been used routinely within the finance function.
BF: I understand there is internal benchmarking, but also external. Tell me a little bit about each of those elements and how they are used differently?
CW: External benchmarking is critical because it allows for the comparison against peers. And in the competitive world that is obviously important. This is typically what comes to mind when an executive thinks about benchmarking.
Internal benchmarking is important as well. Typically, when you calculate the metric values across a particular enterprise and decompose it by region or by business unit, an internal cost or performance leader will emerge. Other parts of the enterprise can then emulate the practices that that internal leader has used to achieve that cost or performance.
BF: What do top organizations do to achieve and maintain their leadership position and how can benchmarking play a role?
CW: Benchmarks are best used as a forward-looking management tool with an eye to improving cost and performance as opposed to a backward-looking report card. Doing that tends to take some of the emotion out of it and makes it more productive. The key is to generate meaningful insight about the current state and identify and quantify improvement opportunities.
BF: As long as benchmarking has been around, how well do you see companies, especially within finance, using it?
CW: Well unfortunately, despite all the benefits, our research revealed that companies are not using benchmarking to the effect that they could. We recently surveyed CFOs and other senior finance leaders and found that only one company out of three on average has conducted a recent benchmarking study of the finance function.
Not surprisingly, the same research pointed out that only about a third of respondents said they had a good understanding of where their finance function stood relative to their peers. With that said we have seen numerous examples in our client work for the companies who do use benchmarking have finally made progress on improvement initiatives now that they had the objective benchmarking data to build a business case and move forward.
Don't miss Chuck Wise's video interview The Keys to Successful and Ongoing Benchmarking and article Benchmarking: A Critical Element in Finance Transformation.