Rules of the Game.

To avoid the traps set by internal benchmarking, certain rules must be observed

To survive in business, the rules of the game are clear: a company must maintain its competitive edge and monitor its expenses. Thus, managers place great emphasis on efficiency in those sectors where the value added is perceived to be low, such as payroll production, accounts payable, the production of financial statements, cash management, fixed assets and inventories. The trend is toward outsourcing. At the same time, the world is becoming a playing field that is increasingly accessible to anyone who wants to venture onto it. Market globalization is omnipresent. The multinationals have subsidiaries throughout the world, with managers who are equally concerned with controlling costs.

Following the failure of a number of methods, an innovative idea has taken shape: identifying the best business processes of the company's different subsidiaries, and sharing the information among them. This concept, known as internal benchmarking, sensitizes employees to efficiency, and opens up some effective avenues of solution.

At first sight, this concept offers certain advantages. Instead of paying consultants to improve the business processes, the company uses the employees' experience to benchmark between the subsidiaries and applies this winning formula to the other subsidiaries in the group. This is found to be an excellent motivational tool for the better-performing employees, who are asked to share their know-how and thus help the company become more efficient.

Furthermore, by conducting the internal survey annually, management ensures that the most economical processes for the company are maintained. Managers also feel more reassured, since the information used as the basis for evaluation comes from within and is therefore easy to verify.

Dangers that threaten a company

The great danger with internal benchmarking is comparing what cannot be compared. The payroll process, for example, is fairly standard and is thus similar from one country to another. This assumption is extended to the production of checks to suppliers and to the end-of-month procedures. Despite globalization, cultural differences remain and can cause a given subsidiary's performance to be poor in relation to another. Just consider the French, who have six weeks of vacation a year, or the Japanese, who work an average of 10 hours a day.

Consider also the level of technological development, which differs from one country to another, and which has a major impact on the subsidiaries' level of productivity. How are best business practices to be implemented if the technology to support these practices is lacking? For these implementations to be beneficial to the company, the organization would have to ensure that the subsidiaries are on the same technological footing from the beginning. This requires corporate standards for the software and equipment that the subsidiaries need to acquire. Otherwise, to be objective, the results would have to be adjusted to take into account the technological differences.

There is also the law of large numbers to think about. Payroll processing time is much the same for 100 or 1,000 employees, when paid weekly. However, when the fixed costs are amortized over the number of employees, a company with 1,000 employees ends up being more efficient. The same analogy applies to the accounts payable process. Paying 100 suppliers does not take 10 times longer than paying 10. The result of this theory is the penalization of the subsidiaries where the transaction volumes are low.

Impact on employees

If the employees are faced with higher work standards, they are likely to perform differently. They may, for instance, be content with doing their work mechanically. Or, their level of involvement could diminish, and the value added they were able to provide could decrease significantly. For example, it is very difficult for an employee to focus on the details of each case when the emphasis is on volume. If the focus is on increasing productivity, then outsourcing may be justified as a means to achieving that goal. With outsourcing, the number of jobs will be reduced and the subsidiary's rating in the internal benchmarking will improve.

Rules to be observed

If a company is to take full advantage of internal benchmarking, certain rules must be observed. First, steps must be taken to ensure that all the subsidiaries are on the same technological footing. Otherwise, the performance results need to be adjusted to account for the technological difference. Next, the amounts allocated to outsourcing must be taken into account if the company is to avoid manipulating the statistics compiled during surveys. Furthermore, the organization must provide a value-added indicator to weigh the quality of the services provided, in addition to measuring the volume of these services. The process must also be objective and use competent resources. Finally, the results must be weighed according to cost-of-living indexes for each area of the globe. With these recommendations in mind, the chances for successful internal benchmarking will be significantly greater.

Jocelyne Huppe, CMA, is a member of the CMA Observatory of Management Accounting Practices.