4 Tips for Using Financial Management Benchmarks Wisely
Finance professionals naturally understand the rationale of measuring managerial and operating progress, so wielding those measures’ corresponding benchmarks should be a straightforward exercise. But a word of caution is due. The impulse to act quickly with benchmarks can take a finance group in the wrong direction. Slow down, step back, and carefully consider your next steps.
While helping our members leverage financial management (FM) metrics from APQC's Open Standards Benchmarking®(OSB) repository, we’ve seen people about to head the wrong way. In the spirit of sharing lessons learned, APQC’s FM research team has compiled a short list of mistakes to avoid.
1.Don’t rely solely on your organization’s definitions.
APQC Data Collections Specialist Matt Norman explained in our webinar Blueprint for Success—Process Efficiency in Financial Operations: Accounts Payable and General Accounting (Slides) that organizations may have nuanced definitions or usages, driven by their industry and regulatory requirements. For example, what constitutes general terms such as accounts payable and general accounting may not universally apply. When benchmarking, organizations need to rely on clear and commonly understood definitions for processes.
APQC’s Process Classification Framework (PCF) provides a standardized, horizontal viewpoint. It is taxonomy of categories, process groups, processes, and activities. As a process-focused framework, the PCF provides a common language for benchmarking. So when APQC gauges process performance, organizations can know exactly what is being scrutinized. The sure-fire rule is to refer to the PCF to know exactly what is and isn’t included in a process metric. It’s also useful to refer to our FM OSB measures lists. For each area of FM benchmarking, we provide a concise listing of all of the measures currently available, the formula used to compute it (in English and in algebra), and other key details. Here’s just one example: Summary of Open Standards Benchmarking Measures: General Accounting and Reporting.
2.Don’t look at metrics in isolation.
It is tempting to view the implementation of a performance metric as a panacea for an organizational problem. But it’s never a good idea to look at one or even two metrics in isolation. Some organizations spend years collecting data and tracking performance on a single metric with no improvements to show for it. Processes don’t operate in isolation, and metrics fit together in complex ways.
Organizations need to see how, for instance, a number of accounts payable (AP) metrics fit together as a piece and how they respond to process pressures “upstream,” perhaps in the procurement area. How do you balance AP staff productivity with cycle time and with supply-chain-based metrics? If the procurement managers are under pressure to reduce the cost of the procurement process overall—getting the procurement team to do more with less—the result could be a drop in P.O. data accuracy. So a wave of data errors starts flowing into the AP area, impacting AP staff performance. More errors mean more need for very expensive human intervention.
A portfolio of metrics directly tied to organizational goals tells a greater story regarding how a function or process is performing. When looking at staff productivity, how does the number of items processed per FTE affect overall process cost efficiency? Ask “are we making a decision that’s going to favor our cost efficiency but adversely affect our cycle time and ability to motivate and retain staff?” Instead of being the best at everything, organizations should prioritize based on organizational strategy and internal customer needs. It comes down to choosing what tradeoffs you’re willing to make from a dynamic set of factors.
3.Don’t look for trends over years.
An organization may look at a specific metric from the OSB repository over a couple of years and assume its performance has deteriorated or shifted in some manner. It’s not that simple. APQC is actively collecting data, which is continually increasing the sample size, which helps us to refine results.
APQC also regularly reviews data to evaluate whether data collected from a certain period is still relevant. We actively scrub data for relevancy so that the OSB results are valuable and useful to anyone who views it. For example, if APQC collects a lot of data regarding a total cost from a high-cost region or industry, then some variance may occur. So APQC seeks data from other regions or industries to correct the bias. Such factors make it unwise to randomly pick points in time to track for trending purposes.
4.Don’t look at a metric generally, without cutting it by peer groups.
Any metric worth examining at a high level is worth breaking down by peer groups. Organizations benefit from cutting metrics by industry, region, and revenue to compare similar business operating models. APQC can also help organizations identify companies who are top performers for networking opportunities. OSB metrics can be the starting point for industry conversations that dig down into context for specific benchmarks.
Although the PCF specifies what work constitutes a process, it does not specify how work is performed. And this represents a major learning opportunity.
When you see a compelling benchmark and want your finance function to reach it, it can be tempting to just take that number and run with it. But it’s important to provide context for metrics so your teams can deliberately examine implications and pursue goals carefully.Tweet