Does Better Benchmarking Equal Better Performance?
Bain & Co.’s 2017 annual survey of management tools and trends used by executives showed benchmarking ranked third behind strategic planning and customer relationship management, both tied for first place.
Companies fancy looking over their shoulders to see what others are doing. Entrepreneurs have engaged in this practice since time immemorial to make sure they have an edge over their competition. This is no different for the finance function in different organizations — most of the data produced by this function lends itself well to benchmarking, and astute finance leaders benchmark their function regularly to identify whether it is underperforming. The finance benchmarking data released by most benchmarking organizations shows that finance teams remain under pressure to become more productive and more strategic.
People have strong views on benchmarking data. Personally, I believe they are a good way of providing directional information on the performance of processes, units, groups or functions. However, they should never be used as absolute numbers to follow. I have seen clients trying to justify their head count based on the benchmarking data they found. This is a very dangerous practice.
Here are a few comments on the subject from a recent exchange on LinkedIn:
“I think benchmarking is good but not the be all and end all that some people think it is. If you are the leader in your industry what good is it to compare yourself to anyone else? Spend your time to make your company better rather than look at what you already know. Several examples come to mind from sports and companies. Roger Bannister did not benchmark how he was doing in the mile compared to others. He has (sic) his goal set on the impossible at the time, the sub 4 minute mile. The same with Apple and the iPhone. They did not benchmark phones, they looked at what could be and made it happen. So cast a careful eye at benchmarks, you still need to know how everyone is doing, but then raise the bar and disrupt your industry.”
“I find that the usefulness and/or availability of benchmarks vary from industry to industry and are very much dependent on the method in which a business operates as well. Take a printing company for example; are those benchmarks based on the bricks and mortar printing company or an online printing company? I doubt that benchmark figures would drill down in that detail to signify much of any difference. So one has to be very careful in the interpretation and use of the data.”
“If benchmarking starts a good conversation within an organization about why certain metrics are above and below benchmark values and where they should be based on the overall corporate strategy, then I think that is valuable. A publicly listed organization will always be subject to benchmarking ... all the various financial metrics, comparison with indices, credit risk ratings, etc. ... So there is no escaping it.”
Based on the comments of the participants in the exchange, there are important issues to consider when undertaking a benchmarking analysis.
The amount of time and effort required to obtain data that is comparable to that in the benchmarking database can be significant. To ease this effort, there are tools that automatically pull data out of a company’s enterprise resource planning system to track processes that the business is aiming to improve.
The benchmarking data you are comparing your organization or finance function to may not be the most appropriate. It can range from the very broad, including a large number of companies in various industries, to the very narrow, such as few companies in a very specific industry group. The question to consider is whether the number of companies in the peer group is statistically valid to be comparable. (Refer to the side insert for what to consider when selecting a benchmarking database.)
Benchmarking data is available through various sources. The larger known sources are Gartner, The Hackett Group and the American Productivity & Quality Center (APQC). It is also collected by some industry groups or functional associations, such as The Institute of Financial Operations — a merger of International Accounts Payable Professionals (IAPP), International Accounts Receivable Professionals (IARP), the National Association of Purchasing and Payables (NAPP) and The Association for Work Process Improvement (TAWPI).
Selecting a benchmarking database
How comparable is the benchmarking data to your internal data?
How close is the process that you are measuring to the data collected in the benchmarking database? Are you trying to compare an online printing company with a bricks-and-mortar printing house? Selecting the appropriate peer group to compare against is extremely important.
Make sure you compare companies of similar sizes. A company with revenues of $15 billion operates very differently than one with $50 million in revenues.
Find out the size of the peer group you are comparing against. In order to have statistically valid data, the size of the sample must be reasonable. Comparing yourself to three other companies is not as useful as comparing against 400 companies similar to yours.
The location where the peer group operates can also be a factor. If the peer group is all European and your operations are all in Canada, this can affect the results given the differences in regulatory rules and economic environment.
About the author
Daniel (Dan) Zbacnik, FCPA, FCMA, is a seasoned results-oriented financial management professional. He is president and founder of zf Management Inc., a consulting firm specializing in all aspects of financial management. With a passion for improving and transforming finance functions for companies, he helps financial management executives succeed by finding innovative and profitable solutions.