Raising the bar to world class standards - and beyond.

The ongoing FEI/Hackett finance benchmark divides participant performance into a four-quartile scale so organizations can see how they stack up against each other. Best-of-breed companies attain the cost efficiencies and productivity that are the first-quartile baseline.

That isn't to say, however, that companies shouldn't aspire to something greater.

Within the first quartile are those rarities defined as "world class." While no single entity is world class across the board, in every metric, that should be the goal. World-class finance departments, though, generate tremendous value across the people, processes and technology inherent in the mix. They couple high efficiency with low cost; they leverage technology throughout the process spectrum; and they direct their resources to the highest value-added activities. They've raised the bar of excellence to previously unheard-of levels, but here's a critical point: At some juncture, maybe not too long ago, they probably looked a lot less impressive. So what happened?

Attention Must Be Paid

Look at costs. That's where world-class organizations currently define the true bottom edge of the envelope. The overall average for finance costs as a percent of revenue is 1.2 percent, according to 1998 Hackett data, but world class is less than 1 percent - and dropping fast. Moreover, world-class organizations don't just drive costs down by being "quick and dirty," but instead lower expenses while enhancing the value provided to the larger organization. They do it better, not just faster and cheaper.

The point is driven home at the process level. It costs the average finance organization in the benchmark $2.93 to process each individual vendor invoice, but the price tag is less than $1.90 for world-class companies. The average cost to process a travel and expense report is $5.51, but only $3.39 for world-class firms. The difference between average and world class to process a customer billing invoice is $0.33 to $0.18; it's $1.24 to $0.80 per freight invoice. Extrapolate these savings across tens or even hundreds of thousands of transactions, and envision them incorporated throughout multiple finance processes, and the amount of money involved is eye-popping enough that every senior finance manager should be paying close attention.

The difference in process is also striking. For example, world-class customer billing operations handle over 223,000 invoices annually per full-time equivalent employee (FTE), compared with 144,000 on average. The average company processes over 63,000 remittances per FTE annually. World-class performance for the same activity exceeds 82,000 remittances. A world-class company handles 10,000 travel and expense reports annually per FTE; its average counterpart manages about 7,600. In accounts payable, the average/world-class performance comparison is 15,900 invoices processed annually vs. 17,679 invoices.

Can you imagine the change in your bottom line if you could lower costs by 25 percent and increase productivity by the same amount? Some world-class performers - and they may be your competitors - have achieved those levels and identified new targets.

What about cycle times? World-class businesses have reduced their budget cycles to under 60 days, and their closing cycles to under three. By comparison, their average counterparts still need more than 90 days to budget and from five to eight days to close.

Thus, many factors contribute to true world-class performance. An important ingredient is the ability of world-class organizations to reconcile labor costs while maintaining optimal efficiency. FTEs per $1 billion in revenue in finance continues its steady decline, with the average organization hovering around 130 FTEs (down from 152 in 1996). Worldclass finance departments, however, have under 120 FTEs per $1 billion in revenue, and will hit 100 soon.

At the process level, the reduction in FTEs clarified. The average $1 billion organization needs 6.8 FTEs in accounts receivable, but world-class needs only 3.4. In collections, average FTEs per $1 billion in revenue is nine, while world class is 2.4. Customer billing has 13 FTEs on average vs. 4.1 for world class. Payroll comes in at 6.5 FTEs to 4.5 FTEs, for average vs. world class. Critical reminder: Efficiency isn't lost to the lower number of FTEs in worldclass companies. Instead, a look at other key metrics reveals that efficiency is enhanced.

Tomorrowland

At the root of what we're witnessing is a shift away from the segmented, process-driven model to a more integrated e-business paradigm. The historic disconnect among people, processes and technology is being bridged; the result is a more cohesive, end-to-end financial model many companies are adopting. It sounds simple enough, but only the most forward-thinking companies have moved down this path till now.

The Costs of Doing Business

                       Productivities         Cost per transaction
                    Average    World Class    Average World    Class

Active customers     14,449       15,909          $3.37        $2.94
Annual paychecks     23,843       30,597          $1.87        $1.33
Assets tracked       21,414       24,085          $2.52        $1.75
Collection calls      3,981        4,466         $11.77        $9.97
Customer billing    144,863      223,320          $0.33        $0.18
Expense reports      77,667       10,104          $5.51        $3.39
Freight invoices     40,040       62,636          $1.24        $0.80
Remittances          63,788       82,346          $0.65        $0.46
Vendor invoices      13,137       17,679          $2.93        $1.90

Source: FEI/Hackett 1998 overall database finance benchmark

That's changing though, as more small and mid-sized organizations aggressively seek a world-class vision to match their larger compatriots. So where do we see world class in the future?

Look for enterprise resource planning (ERP) vendors to shift their attention from the individual enterprise to an integrated supply chain model, allowing for internal and external touch points throughout the finance function. The closed-niche model simply won't apply anymore.

Concurrently, add web-facilitated data standards to the "virtual workflow" environment created by the Internet, and businesses will be able to exchange information more readily and hire the best and brightest regardless of geography. A decentralized workforce will become the norm.

Firms - especially the largest companies that have the most to gain on a global scale - will continue to embrace shared services. Outsourcing - or perhaps more appropriately, "co-sourcing" - will persist as organizations find new ways to share finance and accounting responsibilities with business partners. Moreover, standardization should let outsourcing become more of a value proposition as the increased costs traditionally associated with it shrink.

Of course, there are significant challenges along the way. While finance gadgetry and technology are undeniably robust, what many professionals want more than anything is just the simplest way to do their jobs better. At some levels, finance managers are drowning in data, trying to discern what's useful and what's overkill. World-class organizations know which metrics are integral to running the business and rally the troops around them.

Maybe most critically, finance has failed to adequately prepare its senior professionals for the coming changes. Too much focus remains at the enterprise level, when the future will call for a cross-enterprise approach with financial managers who have both a macro and micro view of the business.

There's going to be increased reliance on senior finance managers who can think tactically, and less of a need for invoice-pushers. But the finance professional of the new millennium will need a global business view, not just an understanding of costs.

The world-class vision of today and tomorrow means senior finance professionals should take the initiative themselves, right now, to seek the training and experience they'll need for ongoing success. Without that preparation, the harsh reality is that those in the third and fourth quartiles will continue to spin their wheels, while truly world-class companies widen the competitive gap.

Richard T. Roth is managing director of Hackett Benchmarking|solutions[SM], part of AnswerThink Consulting Group. All the above statistics are from the ongoing finance benchmark sponsored by Financial Executives Institute and Hackett Benchmarking|solutions. Visit www.fei.org for more information about the study.