Defining process costs for benchmarking - personnel costs

Note: This is part of an ongoing series on benchmarking process costs.

When benchmarking for process costs, employee expenses are going to be a large portion of the cost for the typical organization.  Consequently, it's critical that companies understand their FTE structure for a given process and what that FTE count actually costs the organization.  One of the challenges in tracking down FTEs is that there is often a shadow organization.  That means there are personnel in the organization, often in far-flung plants or distribution centers, where employees perform finance process related functions but don't necessarily have a finance title.  They may not even officially be counted as part of the finance organization, but if they're involved with in-scope activities, the cost should be included.

In order to count personnel cost properly, it's important to include compensation and fringe benefits for both full-time and part-time employees, either salaried or hourly.  Specifically, compensation should include salaries, wages, overtime pay, bonuses and the cost of all benefits.  Fringe benefits include expenses such as medical, dental and life insurance, pension contributions, 401k matches, and employee stock programs.

A question often comes up if salaries for special projects should be included in the definition of process costs.  If the salaries are part of a permanent position such as Project Manager, and those costs are expected to continue for the foreseeable future, then they should be included.  If the compensation costs are related to a one-time effort, such as the implementation of a new software program, then those expenses should be excluded.

By properly identifying the actual FTE count and including compensation expenses, companies can receive a higher degree of assurance that their calculated costs are accurately represented.

Defining process costs for benchmarking - overview

Benchmarking is a valuable exercise for companies as a way of determining how to prioritize transformation efforts.  Benchmarking is a great way of holding your organization accountable for the costs incurred in delivering finance and accounting services.  Of course, benchmarking has value beyond the cost dimension, particularly around cycle times and quality.  For now, this series of posts will focus on the cost perspective.

A common challenge is that it can be difficult to determine which costs to include to get arrive at a realistic assessment of process cost.  At Pangaea, we believe there are five main categories of costs that companies must incorporate into their benchmark assessment.  They are:

1. Personnel costs

2. Systems costs

3. Overhead costs

4. Outsourcing costs

5. Miscellaneous costs

In subsequent posts, we delve into the individual categories to define the exact costs that should be captured as part of a benchmarking project.

After the Go-live: Ten focus areas for effective Shared Service delivery - Part 6 - Benchmark to Monitor Performance

When a Shared Service implementation is performed correctly, a benchmark exercise will have been completed as part of the current state discovery process.  At that point in the transformation effort, baseline performance metrics are established to understand the gap to high-performing companies and to help prioritize the road map for the journey to high-performance.  It also sets the baseline for monitoring performance and ensuring that the Shared Service Organization fulfills the goals set out in the business case.  This is valuable information and should be leveraged as part of the performance monitoring process.

A benchmarking exercise should be conducted on a regular basis after the go-live.  A successful benchmarking program will have clearly defined metrics to measure both the effectiveness of service delivery (i.e. cycle time, defect rates) and the efficiency of the processes (i.e. the cost and organizational structure required to deliver the services).  It's important to create a specific focus for the benchmarking exercise.  While it's possible to benchmark the entire Finance function, it often makes sense to benchmark a specific process or activity.  For example, benchmarking the Accounts Payable process is much more manageable that a far broader scope. 

One of the biggest challenges in a benchmarking project is deciding which benchmark data to use to evaluate the Shared Services operations.  There are a number of consulting companies and industry organizations that have benchmark data available.  A question I often get is if it's necessary to benchmark against a strict set of peers in a specific industry rather than a cross-industry set of data.  My belief is that while benchmarking against a limited peer set can have value, there is also great value in benchmarking across industries.  If your company is in an industry that is not very progressive, you might be shooting for mediocre performance instead of truly world-class performance.  Organizational complexity such as lines of business, number of products, and the number of countries the company is operating in are better factors for determining a peer group than is the idea that only companies in a specific industry are valid comparisons.

One consideration that shouldn't be overlooked is the idea of benchmarking against an internal peer group.  A global company could easily have at least one Shared Service Center in each major region they operate in (i.e. North America, Europe, Latin America and Asia).  Successful companies have used the internal benchmarking perspective to evaluate where their operations are strong and how those lessons learned can be transferred to other internal operating units.

A final consideration (for this post anyway) is that the systems must be configured to automate the majority of the data collection.  Otherwise, the demands and associated costs of collecting the information will soon outweigh the benefits of the benchmarking program and the program will eventually be dropped.  Consequently it's important to select performance metrics that can be measured without a large amount of manual effort.  If you know it's going to be near impossible to collect data for a specific metric, look for a proxy measurement that may be easier to measure.

Benchmarking is an important activity within a Shared Service Organization to understand how existing performance compares to that of leading companies.  There is a specific skill set around benchmarking that should exist either within the Shared Service Organization itself or in the broader company.  By benchmarking regularly, a company has a realistic understanding of where it performs well and where potential opportunities for improvement exist.  This is critical as part of the continuous improvement effort to attain world-class performance.

TrendView designed to automate data collection for benchmarking

As readers of this blog know, I think it's important for companies to regularly baseline their Finance organization to understand how effectively they're delivering services and how much it costs to deliver those services.  The challenge is that collecting the necessary data is typically time consuming and fraught with errors and estimates as personnel manually collect the data.

An application highlighted at CFO.com aims to solve those problems.  TrendView, from 3cInsight,  is a Software-as-a-Service solution that captures data from an organization's transactional systems to automate the data collection process.  (Full disclosure: 3cInsight's Director of Operations, Kelly Noto, and I worked together at The Hackett Group).  There are approximately 300 pre-defined metrics that a company can use to evaluate it's performance.

That's the baseline side of the equation.  It's the intention of 3cInsight to aggregate the data from its customers into meaningful benchmark data so that the companies will have access to the data without having to commission a formal benchmark every few years.  As of now 3CInsight has around 20 customers, which isn't necessarily large enough to smooth out outlying data points.  However, as the company grows its customer base this problem will be eliminated.

It sounds like a great idea and I wish 3cInsight the best.

Here's the link to the full story: 

CFO.com article on TrendView application

Collecting baseline Finance data

In a previous post on the challenges of collecting baseline data for use in benchmarking, I covered five points to overcome in the collection of data.  In this post, I'll capture a few quick points to keep in mind when collecting data.

1. Collect data based on a predefined taxonomy.  A taxonomy is simply the classification of activities in an organization.  For example, in Accounts Payable, some of the activties that would be defined include invoice receipt, invoice entry into the A/P system, printing the check or creating the EFT, and sending the payment.  It's important that data be collected in the same way it will be compared to the benchmark data.  Otherwise you'll have an Apples to Oranges comparison.  So it really makes sense to understand the data set for benchmarking that you'll be comparing your baseline data with.  Many industry organizations have benchmark data available to their members.  Many consulting organizations also have benchmark data for use.
2. Define FTEs in terms of activities, not titles.  I touched on this in a previous post, but it can't be emphasized enough that the FTE and cost capture needs to be based on activities, not titles.  If you have an Admin Assistant in a Business Unit that is responsible for opening all the mail and forwarding vendor invoices to the B.U.'s payables group. then that person is a partial FTE for Accounts Payable.  This is a common cause of missing FTE, and the related costs, during a baseline exercise.  Spread over a large organization, these discrepancies can be substantial.
3. Scrub data and perform additional research.  There are certain guarantees in life:  Death, taxes, and that cost data submitted will be incomplete and flat out wrong.  You'll ask for cost data in one format and you'll get it in another.  Departments will combine different categories of FTE and costs that you wanted broken out.  They'll leave blanks when common sense tells you they must have someone performing that activity.  Your job is to identify all of these possible discrepancies and track them down.  In a perfect world you wouldn't have to do it, but hey, we all know how that works.

By keeping these three points in mind, the quality and comparability of the data you collect will be greatly enhanced.

Baselining the Finance cost structure

You would be amazed at the number of companies I go into who have little to no idea what they're spending on the Finance function.  There are several reasons for it but there really is no excuse.  Without understanding what is currently being spent to deliver Finance services across the organization, companies have no idea where they stand relative to high-performing companies or which areas they should focus on first to gain efficiencies and reduce cost.

Some of the reasons for this include:

1. Absence of a mandate to cut inefficiencies out of the Finance organization.  In an era when CFOs are being asked to do more with less, this seems like an unlikely proposition.  And with the poor economy it's even less so.  However, there are still Finance organizations that don't have an ongoing mandate to continuously cut their costs.  Without a mandate, there is little incentive to understand the existing cost structure.  Even if the CFO wants to cut costs, and who doesn't, it won't happen until it becomes a highly visible initiative.  Very few managers want to voluntarily cut costs in their organizations, so it won't happen unless they are pushed.
2. Vague definition of what constitutes a Finance process.  In some organizations the Finance organization is fragmented, with many resources residing in the Business Units.  Even within Corporate, some Finance resources can reside in areas directly outside the control of the CFO. Yes, I know this seems incredible but I have personally witnessed it.  Some organizations consider customer invoicing to be in Operations; most consider it a Finance function.  Is manufacturing costing part of the manufacturing process, or is it part of Finance?  If a company intends to use the cost data it captures for the purpose of benchmarking, and it should, then the company will need to understand which processes are typically captured in Finance benchmark data.
3. Existence of a "shadow" organization.  When collecting cost data on the Finance function, it's not always easy to track every FTE, or partial FTE, that has a role in the Finance function.  Many times people in the Business Units wear multiple hats, and even the most determined effort may miss people who are contributing to Finance.  They often have titles that would indicate they are part of a different organization outside of Finance.  A common example are personnel in the Business Units that actually perform some type of financial analysis but have a non-Finance title.
4. Inaccurate definitions of what constitutes a cost of Finance.  When collecting the cost to deliver Finance services, it isn't enough to look at salaries and benefits.  There are always support costs that should be incorporated into the cost calculation.  If they're not doing so already, CFOs need to think about their operations as an independent business.  If it were truly a separate business, what are all the costs that would go into running it?
5. Political resistance.  Sometimes people don't want you to know what Finance resources exist in their operations (see "shadow" organization above).  Many managers know that the baseline costs you collect can be used to make decisions that impact them.  For instance, the decision to outsource an entire function will be based in part on what you're spending today on that process.  Since not every manager will be completely forthcoming about their staff and expenses, it's important for the individuals collecting the data to review it with a skeptical eye.  Does the data make sense?  If not, it's important to go back to the source and push harder for explanations.

Baselining the cost of Finance should be an on-going process as part of a continuous improvement effort.  Only when costs are accurately tracked can a Finance organization begin its journey to high performance.  In a subsequent post, I'll discuss the costs that should be tracked as part of this effort.