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Boosting business performance through benchmarking: benchmarking both external and internal data and using business performance management (BPM) tools can do much to make organizations more efficient and productive.

Hugh Collins, CFO at St. John's Hospital, a Springfield, Ill.-based regional healthcare center, turned to benchmarking and business performance management 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.

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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 answer that question as organizations compare processes and identify performance gaps and areas for improvement. Using benchmarking and business performance management (BPM) systems, many organizations are reducing costs and improving efficiency and performance. (BPM is the newest financial solution that professes to improve visibility, decision-making and resource allocation by combining business processes, measures and systems to bolster business performance.)

"If you want to do effective benchmarking, it's not just enough to compare," says Bradley Allen, partner in the 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 Bain's 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 value clearly goes beyond that.

Meta Group, the technology consulting firm, estimates that BPM solutions and services will have increased 15 to 20 percent in 2004 as organizations turn to them for internal performance management and compliance activities such as The Sarbanes-Oxley Act. Half of the financial management inquiries that Meta Group receives are related to BPM, notes 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 found some managers were not on board or ignored the data, overall, its benchmarking process has worked efficiently. The goal is to attain a best-practice level, though Collins says that didn'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 that 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 performance benchmarks tied to financial best practices. Its stated goals include reducing net days in receivables, increasing cash flow, reducing bad debts and improving operating margins. In the fiscal year ending June 2003, St. John's boosted cash flow by $9 million by lowering patient accounts receivable by 11.5 net days. In the 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 a year. Other significant results include a $4.5 million annual savings from its Productivity Improvement Project and $6.8 million annual savings from its Supply Chain Cost Reduction Initiative.

Benchmarking Across the Globe

Just as 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 from 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 in local currencies worldwide, 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, says 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 end users within the company. Davis believes benchmarking is important to gauge against competitors in the market-place, but he sees internal benchmarking--which can provide a strategic advantage--as more important.

Davis says that SAS divides subsidiaries into groups, based on 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," says Davis. "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 work-force. 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, as well as revenue per employee and expenses per headcount to drive hiring trends and sales. SAS also benchmarks and monitors employee performance, which is a critical aspect of its culture.

"We've always been in the single digits for [annual] 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 Power-MARQ, 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; www.aqpc.org), 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.

For example, PowerMARQ contains more than 240 finance and accounting (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 so on. The report includes qualitative information--including 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 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."

RELATED ARTICLE: Best Practices in Business Performance Management

* Push the accountability for forecast numbers or budget numbers down to those closely related to those activities.

* Make sure you're compensating people for the behavior you want them engaged in.

* Get the right information out to people so they have the right tools to work with.

Source: Barbara Barker, BPM Partners

RELATED ARTICLE: Best Practices in Benchmarking

* Mitigate ethical and legal risks in benchmarking.

* Institute a companywide benchmarking initiative.

* Establish benchmarking procedures.

* Empower employees with benchmarking knowledge and resources.

Source: PwC Global Best Practices database

RELATED ARTICLE: 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 PricewaterhouseCooper's Bradley Allen, and an in-depth study actually mapping what those processes are and comparing the individual processes to best practices.

One of the keys to successful benchmarking, says 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 implementing performance management as a practice. How many people are involved in the budgeting process, for instance? 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."

Vicki Powers (www.vickipowers.com) is a Houston-based freelance researcher and writer who has written frequently about benchmarking, technology and customer relationship management.
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Author:Powers, Vicki
Publication:Financial Executive
Geographic Code:1USA
Date:Nov 1, 2004
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