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    Senior Finance Executive ~
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Who’s the Best? Benchmarking to Keep Ahead

“Competition is the keen cutting edge of business, always shaving away at costs” ~ Henry Ford

Being better than the next guy is a driving force for many businesses especially in highly competitive industries.  Everyone wants to be at the top of the heap and set the standard for excellence.  And for those who aren’t the best, they want to know how the best got there and how they can improve to surpass the current leader.  This is the essence of benchmarking.  Benchmarking is the act of comparing yourself against others to determine where you stand relative to the competition.  It may seem like an easy thing to accomplish on the surface but there are a few issues that need to be considered.

First, you need to determine who is your competition.  For industries with a few big players this is not difficult but when you are in an industry with lots of small players, sorting out the winners against which to compare yourself can be challenging.  You might want to consider focusing on companies that match your demographic profile like geographic reach or number of employees to make the comparisons of more value.  You can also benchmark against companies that might be national if this is the eventual strategic path your business wants to take.

Second, you need to determine what measures you want to use to compare yourself to the competition.  Do you want to measure market share, employee productivity (like sales dollars per employee), product quality, or other measures?  The selection of measures will be dependent upon your industry and what your motivation is behind benchmarking.

Third, you need to figure out how to get the information you want to complete your benchmarking study.  This may be the most daunting task of all.  Again, when dealing with public companies much information is available because of the reporting requirements they have to their shareholders and the public.  But getting information on private companies and industries can require more creativity and a strong penchant for research.  When seeking out information about other companies or industries, try some of these sources:

  • Industry associations & groups
  • Internet searches
  • Libraries (public library or universities & colleges especially ones that have a business school)
  • Dun & Bradstreet
  • Hoover’s

Most of the major accounting and business intelligence applications provide a benchmarking module or service.  There are also two online products that will provide benchmarking services that have been mentioned in internet searches on the subject.  Although I haven’t used either, in looking at the information about their products, it might be worthwhile to examine them to determine if they could bring value to your company:

  • webKPI (www.webkpi.com)
  • ProfitCents (www.profitcents.com)

You can also try to create a mutually advantageous relationship with your competitors to share information.  This may seem like a bit of a pipe dream but if the information being shared is not proprietary, it might behoove everyone to engage in friendly competition.  Competition spurs on creativity, innovation, and a desire to win.  And depending on the industry, this can serve both businesses and customers well.


Keeping Score: The Balanced Scorecard

Too many times there is a complete disconnect between the budget and the strategic plan of the business.  A strategic plan defines the direction the company wants to go in the longer-term and becomes the road map when making decisions about what avenues to pursue. This disconnect between budget and strategic plan is often the result of the strategic plan not being communicated throughout the organization and leads to situations where the budget is focused on allocating resources to the wrong initiatives or growing sales of the wrong products.

Enter the Balance Scorecard, the brain child of Dr. Robert Kaplan and Dr. David Norton, as a way to help align day-to-day actions with the strategies and vision of the business.  It is a performance management tool that includes both financial & non-financial measures as well as measures that lead and lag.  The measures are selected to reflect the strategic road map of the company to keep everyone focused on what really needs to be accomplished.

Realizing all actions within a business are interrelated, the Balanced Scorecard is created to reflect four perspectives:

  • Customer Perspective –  How should we be seen by our customers to achieve our vision?
  • Internal Business Perspective –  What business processes must we excel at to satisfy our shareholders and customers?
  • Learning & Growth Perspective –  To achieve our vision, how will we sustain our ability to change & improve?
  • Financial Perspective –  What kind of financial performance must we provide in our business?

The perspectives are linked together and are like a tree.  Learning & Growth are the roots of the tree and form the foundation of the business.  Good internal processes sprout from learning and growth, and become the trunk of the business.  By having good internal processes, you will get good customer results which are the branches.  Finally, customer results grow leaves which represent financial returns.

Within each perspective, objectives are set to reflect actions appropriate to executing the company’s strategy.  Measures (both financial & non-financial) are determined for the objectives, a target is attached to each measure and initiatives to attain the targets are put in motion.

This link will bring you to an example of how this all comes together: Building a Balanced Scorecard.

Creating a Balanced Scorecard is not an exercise that will happen within a day if it is done correctly.  In order for the scorecard to become a tool that is used and accepted by the business, its development should involve as many people as possible.  This is not an initiative that should be developed entirely at the top although senior management needs to be involved to ensure the final product is a reflection of the strategy.  Firstly, involving more people will ensure the message of the strategy is communicated to employees.  Secondly, with employee involvement you will gain a better picture of what is actually happening on a day-to-day basis and what information is currently available for the measures that are included on the scorecard.  New information may need to be gathered and the front-line employees might be better positioned to determine how this might be obtained.  Lastly, there is the issue of ownership.  If employees have a vested interest in the Balanced Scorecard because they helped develop it, it will gain acceptance quicker and be used within the business instead of being ignored as another executive program without merit or value.

One of the biggest dangers in Balanced Scorecard development is the selection of measures just because they are easy to obtain.  You must resist this temptation at all costs.  Just because you can gather information easily for a measure doesn’t make it the right measure for the business or the strategic plan.  The Balanced Scorecard is not an exercise of throwing a bunch of numbers on a page to justify current operations.  Every element of the scorecard should be careful considered and should only be included if it will help to move the business toward the strategic mission of the organization.  Also, the scorecard should be revisited at least yearly to ensure that the measures that are included are still relevant to the business and that nothing has changed due to a change in strategy.

As finance and accounting professionals, we will find ourselves needing to gain a complete understanding of the Balanced Scorecard.  Let’s be realistic — if it requires information to be gathered and numbers to be calculated, we become the de facto owners because we are seen as the information holders in the company.  However, we should avoid being the only ones having anything to do with scorecard development and review.  This is a tool requiring involvement from many parts of the business not just finance & accounting.

The Balanced Scorecard is a good way to augment the budget since it ensures the strategic plan of the business is clearly communicated to its employees.  Armed with a better understanding of what direction the business would like to go in, it is easier to ensure the budget reflects the allocation of resources to support the strategy.

Next to be discussed:  Benchmarking