Breathing Lessons, Issue 21Benchmarking Done Right: Relevant Industry Data, Insightful Decisions |
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How good of a job are you really doing? How does your performance measure up to that of your competitors? Likely, you’re too busy doing your job to find out. It’s hard enough to keep up, let alone figuring out how you compare with world-class competitors. But we believe you really should incorporate benchmarking into your strategy. And it’s not a difficult process – as long as you keep a few basic principles in mind. Nevertheless, there’s a lot more to benchmarking than simply charting your stock price against the S&P 500, or comparing margins to those of your peers. Done right – with both industry-specific and leading-practice-based data – benchmarking can help you pinpoint cost gaps across industries and in key industry peer groups, identify leading practices and set appropriate performance targets. That’s why forward-thinking finance executives use industry benchmarking to continuously improve efficiency while also controlling costs. Apples to apples Even within the same industry sector there can be important differences in risk tolerance, business strategy and the sense of urgency from one company to another. Take retail, for example. One retailer's goal may be to offer the lowest prices to its customers. For another, the Holy Grail might be customer retention, top-quality merchandise or a pleasant shopping experience. Different strategies, different benchmarks. And no single set of practices fits all. Think of it like getting a physical. A doctor can give you a very precise picture of your health, but how you use that information is a function of what you’re trying to accomplish. Each person’s diet and exercise adjustments will be completely different, whether that person is training for a marathon or just trying to lose a few pounds. Benchmarking is a similar exercise, but instead of measuring weight or heart rates, it can give executives a picture of how their organization’s processes stack up to the industry’s leading practices. It then becomes clearer where the most work needs to be done. Start at the end Perhaps you have a lean organization, but productivity is sub-par. If you’re an ultra-low-cost provider, your strategy will differ from a firm that is trying to maximize quality. Whatever your goals, benchmarking provides an objective baseline to set priorities and make decisions about people, processes and technology. More informed decisions. Faster decisions. Better decisions. Take a simple example like accounts payable. If your company processes 7,500 accounts payable transactions a year, but similar-sized competitors can handle 10,000 with the same cost base, there’s a gap. No rocket science there. But what’s the fastest and most cost-effective way to close that gap? Here’s where a benchmarking study can help. While most chief financial officers already intuitively know where the inefficiencies lie, they don’t always have the hard data to weigh the potential dollar savings against the costs. Or a map to the quickest solution. What’s your opportunity gap? For the insurance companies in the sample, median finance costs were 0.61 percent of total annual premiums. But there was a huge gap between the lowest-cost firm (0.27 percent of premiums) and the highest-cost firm (2.08 percent of premiums). Seemingly small, this “opportunity” gap between the median and low-cost performer translated into $11 million per $1 billion in annual premiums. Along the same lines, the study showed that opportunity gaps in process costs (with the lowest-cost firms at 0.20 percent and the median at 0.47 percent of annual premiums) equate to $8.7 million per $1 billion in annual premiums. Keep in mind that benchmarking does more than advise on where to cut costs. Many of the firms in this GBC study were under-invested in key areas like performance management. In other cases, companies over-invested in getting access to their data, but under-invested in interpreting it effectively. For other companies, talent management was the big issue. Your processes may be efficient, but if employees are consistently leaving your company, turnover and training costs can ruin your bottom line. Your time is valuable. But the insight that benchmarking can deliver can be pretty valuable too. So don’t think of benchmarking as yet another item on your to-do list. Think of it as a way to get to the right practices much faster. And to make your list shorter. Related Links Subscribe to Breathing Lessons CFO Insights and Breathing Lessons Newsletter Archive Learn more about Strategy & Operations Driving Enterprise Value –Upcoming Webcasts Driving Enterprise Value – Archived Webcasts Learn more about driving enterprise value
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