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Evaluating the evaluators.

Educational Testing Service is clearly a company accustomed to measuring achievement. But how did it fare in its first attempt at benchmarking its own performance?

Benchmarking helps companies:

a) Understand their levels of performance in selected areas b) Target where they want their performance levels to be c) Develop a game plan to attain them d All of the above

* Educational Testing Service, a private, not-for-profit organization devoted to educational measurement and research, primarily through testing, decided to begin benchmarking the performance of its financial processes against companies of $1 billion or less in revenues in which area(s):

a) Financial functions b) Budgeting, forecasting and planning c) Purchasing and procurement d) All of the above

* Frank Gatti, vice president, treasurer and CFO of ETS, believes both upper management and staff will buy into the benefits of benchmarking when they understand that the results will enable them to:

a) Improve the organization's viability and health

b) Improve its service to both inside and outside customers

c) Enable personnel to participate in creating the next generation of the company's core competencies

d) All of the above

If you answered "d" to all of the above, you attained a perfect score. And, while "no one can get a perfect score in all areas all the time," Frank Gatti says, "benchmarking is an objective snapshot that gets an organization to focus on process improvements, and forces it to document what it's doing."

LOOKING FOR ANSWERS

ETS, headquartered in a pastoral, college-like campus in Princeton, N.J., was founded in 1947 and reported $500 million of revenues in fiscal 1998. It's not unusual to find employees there with 25 or 30 years of service under their belts. Because these employees developed many of the processes currently in place, Gatti says, "The processes existed in peoples' heads, which is dangerous but typical. They know what they do very well but may not know what the next person does."

Before he joined ETS a little over a year ago, Gatti was vice president of financial management at The New York Times Company, a media conglomerate that includes newspapers, television stations, magazines and other businesses throughout the country. "Each had a stand-alone financial function," Gatti explains. "Every day of the week, somewhere someone in the company was doing payroll." Therefore, NYT decided to benchmark about 20 processes that, Gatti says, "highlighted the cost of redundancy as well as the savings that come with best practices." (One result was the establishment of a shared services center in Norfolk, Va., where all common finance functions now run on common hardware and software.)

Thus he was no stranger to the process. But the issue ETS faced - lack of documentation, labor-intensive processes that don't allow it to be nimble (and therefore "make any kind of change a major event," Gatti says) and underuse of its sophisticated technology - were different. Yet the desire to run the company leaner and meaner was the same. Gatti assembled a team of four people - two from internal audit, one from purchasing and one from financial reporting - who worked full time for nearly two months to gather the information necessary to start. Some employees, understandably, were skittish.

"Educational Testing Service doesn't have similar peers out in the marketplace because it has a narrow, niche focus," says Mark Krueger, a managing director at AnswerThink Consulting Group, the parent of the Hackett Group, which assembled the data the team collected. "Looking outside their own company for the first time was a big issue. The first hurdle was developing the courage to peer outside. We had to suggest what we were looking at was not the industry they're in, but the processes within the organization. And people began to see commonalities."

"We had to assure them," Gatti adds, "that what we were going to see was the result of the last 20 to 30 years of good, hard work. And while we wouldn't condemn that hard work, we didn't want to replicate the processes of the past. We made a commitment at our kickoff meeting not to share the results with management before we shared them with the 100 or so people who helped the team."

And ETS was true to that promise. Krueger and his associates first presented the core group with the results in a day-long meeting, which he terms a "wake-up call to the idea that doing business as usual is no longer acceptable. It's an uncomfortable process, but a necessary one before the need to change becomes critical. People tried to understand the size of the challenge and what they could focus on in the short term. Their feedback was insightful. And finding that their performance was in the middle of the road put them at ease."

In other words, there was good news and bad news. The good news? Some best practices are currently in place. "Eighty-five percent of our employees are on direct deposit already," Gatti says. "All employees can access their payroll stubs on line from a desktop PC. We do electronic transfer of funds for reimbursement of expenses, which takes a huge amount of paper out of the system. And the speed with which we close our monthly financial statements ranks among best practices."

The bad news? "We asked whether ETS uses best practices extensively or selectively," Gatti says. "The results made clear we had a lot of work to do in three areas - finance functions; budgeting, forecasting and planning; and purchasing and procurement. Our costs were clearly more than those of best practices. So we created a menu to focus on."

The group then had two weeks to react to the presentation, contacting the four team members with their questions and concerns. "They were inundated with calls, e-mails and visits," Gatti says. "But once people realized how the information was collected, they were okay. We made some changes, The Hackett Group revised some calculations and we're using the revised reports to set up individual project teams."

EARLY RETURNS

Preliminary results are encouraging. "Our purchasing savings so far are modest," Gatti says, "but people are seeing they can save $5,000 here, $20,000 there." Renegotiated contracts for courier services saved $1.5 million this fiscal year, "and I don't think that's the end of the line," Gatti adds. "But the real serious money is going to start to come when we reengineer some financial processes and make them less labor-intensive."

And labor-intensiveness is a theme that runs through Gatti's conversation. "We have an extensive portfolio of products and services that use a variety of delivery mechanisms based upon the marketplace and the clients they serve," he says. "Some are paper and pencil based, whereas others are delivered over highly secure, sophisticated computer networks. Very little of that technology power has been used on the business side. We must capitalize on technology to a far greater extent because we have people doing things computers can do better, faster and more accurately. This will enable us to expand the use of best practices."

One example, he says, is in billing. "We found we have multiple billing systems, each function-specific and needing a lot of human intervention. We want to consolidate and make them more common." He also cites the example of proctors hired throughout the U.S. to monitor tests: "We still have to send 1099s at the end of the year to all those people, which is very paper- and labor-intensive."

Another area in which the company scored low was its cash remittance processing. "It's volume-sensitive, manual and labor-intensive," Gatti says. "We bring in temps to handle the checks. Benchmarking showed us we were not depositing our funds in the most efficient, expeditious manner."

ETS has about 2,400 employees, "with over 100 involved in the finance function spread throughout," Gatti says. "We're asking if they should be more centralized and assigned to a specific area."

In addition, he explains, "We found we're not spending enough time on decision support and analyses. We have huge amounts of data but little information. Our data warehouse lets you drill down as far as the names of the people who worked on a specific project, but people aren't trained on how to access that information. We need to conduct education and training so employees can better use and understand what we already have."

ETS purchases about $200 million in goods and services each year, ranging from paper, printing, software and hardware to a worldwide network of test administrators. The company has established a procurement council through which major purchasers work with the head of the purchasing function. It intends to phase in procurement cards after establishing parameters like how many cards it will need, who will be authorized to use them and in which areas, for which vendors and with what dollar limits.

"We deal with too many vendors," Gatti admits, "so we're narrowing the number to a preferred list, to negotiate the best prices with a handful of key suppliers who will become our partners in a strategic sense. We want to keep it to a handful for a natural level of competition and to leverage our purchasing. An enormous number of purchases are under $1,000 but must be handled the same way as a purchase of $50,000, and in some cases we send one vendor multiple monthly checks. Procurement cards will help us create a higher level of efficiency."

Benchmarking the budgeting, planning and forecasting functions "highlighted that the kind of work we should be doing wasn't going on here," Gatti says. "It took too long, wasn't focusing on key drivers and wasn't well integrated across the organization. We moved to a three-year planning cycle that will be updated each year. Internally, there's monthly reporting. Now we'll focus on working better and smarter."

SELLING THE SIZZLE

But benchmarking "has to be absorbed and understood by the organization," Gatti points out. "Once people begin to see the power of what's there, that's when the ultimate sale takes place."

And the company isn't the only one to reap benefits. Employees also can improve their abilities and performance. "They learn different skills and are exposed to knowledge and information they weren't aware of before. Individuals on teams start to develop new skills. The classic is presentation skills," Gatti notes. "On every sports team you get a chance to practice. There are few such opportunities in business. The more you can give employees that, the better they feel out on the field. It's an important subtlety for them, not only as professionals but as people."

Yet despite its seeming win/win status, getting people to buy into benchmarking isn't always a piece of cake - although upper management may be more receptive to the idea since, as Gatti notes, "the organization's financial viability is higher on their list." It was easier at ETS, he says, because "Nobody wants to receive low grades. And here, people understand testing and percentile rankings."

In addition, he says, "Cross-functional involvement is critical. You need finance, human resources, technology, analytic and business type skills to look at problems from different perspectives and incorporate all the different concerns. You need dedicated resources. And you need a fixed timetable."

That said, how does Gatti think others should approach the process?

a) "Don't move until you know you have top management support."

b) "If you don't have buy-in at the very top, don't even attempt it."

c) "Once you have it, be open and honest about the process even though you don't know what the outcome will be."

d) All of the above.

Carol Lippert Gray is managing editor of Financial Executive.
COPYRIGHT 1999 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1999, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:nonprofit entity Educational Testing Service
Author:Gray, Carol Lippert
Publication:Financial Executive
Date:Mar 1, 1999
Words:1938
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