Creating Value with Business Benchmarking

Joe WestonCreating Value with Business Benchmarking
Presented by Joe Weston
Associate, Gerke & Associates
Contact Joe at jweston@gerke.com

July 31, 2001, 1:00-2:00 p.m. EDT

Visit the AccountingWEB Workshop Calendar for upcoming sessions.


Summary

Build your consulting business in competitive/changing markets.

  • Benefits of targeted benchmarking
  • Types and processes of benchmarking
  • Sources of comparison data
  • Using benchmarking output


July 31, 2001 Session Sponsored by BizBench Business Benchmarking Software


Transcripts:

Session Moderator: I would like to thank you for joining us today for this session on Benchmarking. This session is presented and sponsored by Mr. Joe Weston of "Gerke and Associates". Thank you for making this session possible. During today's session, we will be covering the following topics--

1. Benefits of targeted benchmarking
2. Types and processes of benchmarking
3. Sources of comparison data and
4. Using benchmarking output

Joe Weston has a unique management experience base of twenty-five years which includes Industrial Engineering in manufacturing, owner / operator of a regional retail business and Sales and Marketing management for a consumer products company with international distribution. The latter two included full profit responsibility. Joe understands the importance of performance standards and the need to develop plans for the results that will achieve those standards. Gerke & Associates has served as consultants to management since 1977. The firm specializes in assisting management develop strategic perspectives to strengthen the key drivers of business success for each client.

His work with Gerke & Associates has included customized benchmarking projects in wholesale and distribution industries, new product feasibility studies and development of financial benchmarking software. Specialties of the firm include Strategic Planning, Business Benchmarking, Site Evaluation, and development of Business Plans and Marketing Plans.

In recent years, Gerke & Associates has fine-tuned the business benchmarking process to include sophisticated data collection and group comparisons for various industries:

Benchmarking software for a network of pet food distributors in North America and Europe.

Internet benchmarking service for convenience store companies

Benchmarking software for independent video retailers nationwide

Operating cost study for major wholesale growers of nursery crops

Customized financial analysis software called BizBench® that benchmarks all companies with an SIC code in the Robert Morris Associates database

Welcome Joe, the floor is yours!

Joe Weston: Greetings from the state of Missouri, or Misery as some pronounce it during our hot humid summers. Thanks very much for participating in this workshop. Some of you may do a lot of benchmarking while others are just beginning, or thinking about it. We will discuss things that apply to everyone today.

Here's what we will learn today:

  1. Definition of benchmarking
  2. Benefits to you and your clients from using benchmarking
  3. Practical types of benchmarking to use
  4. Sources of data
  5. Getting started

As a bit of brief background, Gerke & Associates is a management-consulting firm that has specialized in customized benchmarking for over 23 years, so we leap to our feet in excitement when the subject arises. We believe strongly in the value of identifying competitive strengths and weaknesses for clients, as a prelude to developing targeted Profit Improvement action steps through Strategic Planning. And, we believe accountants are perfectly suited to provide this service to clients. Besides, why should consultants have all the fun?

Accountants have more access than anyone to confidential information about clients businesses. Add the element of trust that accountants have earned with owners and managers of businesses, and the potential for expanding your business advisory relationship with clients is great. One key area of need for most clients is facilitation of strategic planning, and that often involves identifying strengths and weaknesses through business benchmarking.

The mention of business benchmarking may not always cause accountants or managers to leap to their feet in excitement, at least for the moment. In fact, many business managers may not know what to do with good benchmarking information, and that's where you come in. We will review ways to develop customized benchmarking for your clients, and how to put the information to good use.

Change is rapidly upon us in all segments of the accounting marketplace. The competition for conventional tax preparation work is increasing, inheritance tax laws are changing and everybody is getting into the act with financial planning. To meet this challenge, many CPAs are expanding the mix of services offered by their firms.

At the same time, the current business slowdown is challenging many client companies to re-evaluate operating and marketing strategies. These companies need sound financial consulting to guide this process.

Both of these scenarios make a compelling case for accountants to leverage their position of trust and access to client data, and to move into financial management consulting, with emphasis on strategic planning.

Today's topic of Creating Value With Business Benchmarking represents the first step in positioning yourself as a strategic management consultant to your clients.

Let's discuss the general concept of business benchmarking and then cover more specific types of benchmarking and ways to use the output data.

WHAT IS BENCHMARKING?

Benchmarking is the process of continuously comparing and measuring an operation against a standard, so as to improve performance. The key word in this definition is ?continuous.? A one-time snapshot may identify a company's competitive position at that point in time but periodic snapshots are needed to measure progress.

Whether we think consciously about it or not, we benchmark things all the time. Many of us begin the day with a casual benchmark from the morning paper: checking the baseball standings to see our team's ranking against the other teams.

As a long-time fan of the St. Louis Cardinals, I am accustomed to bad news here. If your team is 10 games behind the first place team on the Fourth of July you know they are in trouble. You also know that two things must happen for them to win the pennant:

1. Your team must increase its winning percentage
2. The team(s) ahead in the standings must lose more frequently

Your team can control only Option (1) but team management can project how many victories will be necessary to win the pennant by making assumptions about how many victories the other teams will have by the end of the season and comparing that to your current number of victories.

Once the target number of victories is set, the team must evaluate the strengths and weaknesses of its assets (players, coaches) and potential resources (revenue from sales and the owner's available wealth) to see if they are sufficient for the task. Strengths must be leveraged and weaknesses must be addressed to achieve the objective of winning the pennant. Remember that this whole series of events is driven by the team's overall performance benchmark, as expressed by the league standings.

The team's strategic plan must be reviewed continuously (there's that word again!) to develop new action steps if sufficient progress is not being made against the plan. The notion of measuring by percentiles is reflected in the comparative winning percentages of the teams, which shows how far your team has to go to close the gap. This concept of benchmarking is exactly the way you will show your clients how they compare to the best in their industries.

In order to succeed in increasingly competitive markets, your clients must also be able to develop strategic plans that are based on identification of their relative strengths and weaknesses, when compared against the best of their peers. That is the basis of business benchmarking.

Naturally, the first requirement for any work you perform is to generate profit for your firm. Let's discuss how business benchmarking will create value for your firm and its clients.

BENEFITS OF BENCHMARKING

Immediate benefits for your firm from providing business benchmarking services to clients include: Positioning the firm as a complete financial advisor to clients. Many managers are not comfortable with building specific plans based on financial statements they do not understand. Performing competitive benchmarking for your clients opens the door to many opportunities for additional consulting work for your firm.

Establishing expertise in the minds of your clients. By leading your clients into the strategic planning arena, you will demonstrate that you are skilled at turning financial statements into workable documents that do not threaten managers. This comfort may result in you becoming the go-to person for many of your clients other business needs and may lead to considerable follow-up work.

Building a reputation as a source of innovative business solutions. Any growth strategy must involve change and expanding your firm's services beyond the traditional offering can position you for growth into many service areas. If you develop this reputation, you may find that clients will come to you with needs that will continuously lead you in new directions.

Adds variety and interest to the work of your employees. Many accounting firms are hiring marketers and business analysts that are not necessarily CPAs. Business benchmarking work will provide greater professional interest and more billable hours for these employees, as well as increasing your firm's revenues.

Have some of you experienced additional benefits from performing business benchmarking for your clients?

Please feel free to comment!

John Lamond: My clients appreciate the extra services I can provide.

Richard Stinson: Business benchmarking can, and often does, lead to additional work due to identified needs.

Session Moderator: Any other comments?

Joe Weston: Good response, Richard. Benchmarking is often the diagnostic tool for opening the doors to a variety of engagements.
Joe Weston: Immediate benefits for your clients from the business benchmarking services you perform for them include:

Motivation for change. If you can show your client the empirical extent to which its productivity is lagging, you will have provided the owner/manager with a strong incentive to change.

Financial and operational gap analysis. From this analysis, your clients can see the distance between their goals and reality. Your primary consulting work then is to lead them in strategic thinking and planning to develop action steps to close the gaps.

Improved competitive position in the clients industries. The most obvious benefit is to begin correcting competitive weaknesses. In addition, benchmarking that identifies relative competitive strength will provide leverage to a business owner that is selling the business.

Greater financial productivity. Many managers of small businesses use annual profit as the primary measure of success for their companies and give little attention to whether the profit is sufficient to justify current investment in assets and whether it is building sufficient equity for the shareholder(s). The use of industry-wide financial ratios will demonstrate to your clients whether their businesses are creating wealth and capital as successfully as their competitors.

Improved quality of products and services. Benchmarking can reveal strengths and weaknesses of both internal and external services, from accounts receivable turnover to customer satisfaction. Any work process that can be defined can be benchmarked.

Joe Weston: Before we move into Types of Benchmarking, would anyone like to share success stories from client benchmarking work?

John Lamond: I've used it to help distributors.

Session Moderator: In what way John?

John Lamond: We've benchmarked their operating and financial data and this has made them more profitable.

Richard Stinson: We are in the process of benchmarking our firm and its efforts. What we have learned could never have happened without that effort. As an example, our collection efforts, though comparable to a MAP study, fell short of the RMA.

Joe Weston: Those are two good uses of benchmarking. Competitive analysis like Richard described provides a broader comparisons to competitors and peers. The RMA data is used frequently because it contains so many SIC codes. Our firm performed productivity analysis benchmarking for a distributor of consumer products. By using the competitive strengths and weaknesses that were revealed in the benchmarking, the distributors were able to nearly double profit percentage, while gross margin percentage decreased.

TYPES AND PROCESSES OF BENCHMARKING

Most benchmarking involves measuring financial or operating performance, from both internal and external perspectives. When choosing elements to benchmark, it is important to select processes that are generic enough for external comparisons (labor as a percentage of sales, gross margin per square foot, or acre, of production space, return on assets, etc.). Otherwise, the number of companies in the sample may be so small as to be meaningless. The most important step, and most difficult one, is getting started.

First, identify a significant problem to be benchmarked for your client and link it to a desired outcome. An example could be labor costs as a percentage of sales.

Second, define the benchmarking objectives and expectations and assign accountability for the project to one of the client's managers. You may want to aim for a benchmark that is typical of the industry's leaders.

Third, keep it simple, especially in the beginning. An overly complex benchmarking project may not receive the full support of management and staff that it requires.

Now, let's look at some typical types of benchmarks and do a little brainstorming.

Internal financial benchmarks. Many companies create revenue and expense projections for the year but many do not have a process for monitoring progress against projections, and for revising the plan as the year goes along. This process takes discipline and good data. Accountants can help clients project the anticipated revenue and expense flows for the year, based on historical financials and on the client's operating plan for the year. The projection should be reviewed at least monthly so that plans can be made to boost lagging sales, or cut expenses, while the changes are still manageable.

What methods have you used to assist clients with annual financial projections?

Steven Phillips: I've compared with published industry reports to get percentages.

Joe Weston: Steven, Do you do this annually, and do you help the client monitor their actual performance against the projection?

Steven Phillips: Just a "one time" projection, but I recognize the need for "continuous" checking.

Joe Weston: Good response. Let's move on to some additional types of important benchmarks.

Joe Weston: Internal operating benchmarks are probably the most frequently used benchmarks. They can range from production measurements, such as tons per hour, to general and administrative benchmarks, such as the distribution of employees in each department. Any repetitive action can be benchmarked.

I once worked with a company that benchmarked the number of toll-free customer service calls per hour that each representative handled. The average time per call was then matched with successful resolution of issues for customers. The resultant Key Performance Indicator was used in performance reviews for the customer service representatives. In this case, keeping the calls brief, and less expensive, was not enough. If the customer wasn't satisfied, the customer service representative had not done the job.

External financial benchmarks. Data for this important type of benchmarking can be difficult to find but is available from a variety of sources. While a comparison of pure ratio values can be revealing, a ranking against the sample using percentile rankings is the most meaningful comparison. Percentile values tell you what percentage of the sample ranks below you. For instance, if your client's ROA is at the 60th percentile of the comparison database, it means their ratio is higher than 60% of the companies in the database. Looking at percentiles over a range of ratios helps in rapid analysis.

External operating benchmarks. Finding a commercially available database of operating benchmarks and ratios is more difficult than finding financial benchmarks. Commercial sources of this type of data will be discussed later. Often, groups of companies in the same industry or region will join together and hire consultants to perform a very confidential and customized benchmarking analysis of the group. Summary data is calculated and percentile rankings can be developed for a number of key performance indicators. Confidential comparison reports are then shared with each participating company, comparing each company's performance for a number of indicators with those of the group.

Joe Weston: Remember that:

1. Effective benchmarking must be done continuously. This is particularly important when measuring a company's performance against its industry.

Other companies are not standing still while you and your client are building Profit Improvement action steps. Continuous benchmarking will demonstrate if your client's performance is improving on pace with the rest of the industry. Hopefully, your client will be leading the curve.

2. External benchmarking using percentiles allows you to identify traits of top performers and build action steps to improve your client's performance, in pursuit of those top performers

3. All benchmarking must factor customers into the process. The Benchmarking Exchange (TBE), an internet benchmarking service, reported in January 2001 that Customer Satisfaction was ranked #2 among business processes most frequently benchmarked. As competition for customers increases, this process will continue to gain in importance.

While customers might not be directly influenced by a specific benchmark, they will be affected by the cost and quality of the processes you are benchmarking. Reducing costs to a specific goal that serves the company well may compromise quality, and make the product or service less desirable. Looking outward, customer satisfaction benchmarking may disclose an issue that can be corrected before an erosion of the customer base begins.

Now, let's examine some sources of comparison data.

Financial data. Commercial sources for financial databases summarized by SIC code include:

Risk Management Association (formerly Robert Morris Associates)

Dun & Bradstreet

Internal Revenue Service

Moody's

Go to www.bizbench.com/articles-sources for more information about these and other data sources.

Taking the process a step further, software is now available that will automatically calculate your clients? ratios and compare them against a commercial database.

From this ratio analysis, the software will generate a report that includes an Executive Summary, comparison graphs and a narrative interpretation of the comparisons. This kind of report effectively sets the table for accountants that are pursuing a management consultant role for clients.

Operational data. State, regional and national trade associations are often sources of operational data that is summarized from periodic industry surveys association members for a nominal fee The value of this type of information may justify the cost of belonging to a trade association.

Joe Weston: But please don't limit the benchmarking universe to your clients? industries.

The strategy of Southwest Airlines using NASCAR pit crews as models for quick turnarounds led to Southwest's legendary ability to unload and reload a plane very quickly. It is no accident that Southwest has been one of the few airlines to be consistently profitable in recent years. This is a good example of process benchmarking.

Internet searches frequently reveal industry metrics of various types and the Department of Commerce maintains large databases of information for many industries. Various benchmarking exchanges can also be found through Internet searches.

Session Moderator: We are about out of time, are there any questions or comments?

Joe Weston: Summary:

1. Anything that can be measured can be benchmarked ? including financial statements, marketing data, human resource information and many more processes.

2. Effective benchmarking must be done continuously. This is particularly important when measuring a company's performance against its industry. Other companies are not standing still while you are building Profit Improvement action steps with your clients. Continuous benchmarking will demonstrate if your client's performance is improving on pace with the rest of the industry. Hopefully, they will be leading the curve.

3. External benchmarking using percentiles identifies top performers. Build action steps to improve your client's performance, in pursuit of those top performers.

4. All benchmarking must factor customers into the process. The Benchmarking Exchange reported in January 2001 that Customer Satisfaction was ranked #2 among business processes most frequently benchmarked. As competition for customers increases, this process will continue to gain in importance.

Session Moderator: I would like to thank Mr. Joe Weston and Gerke & Associates for this informative workshop. Are there any questions? AccountingWEB would also like to thank Gerke & Associates for sponsoring this session, you can visit them at http://www.bizbench.com and enter to win free software.

Joe Weston: Best wishes for success with Profit Improvement through BUSINESS BENCHMARKING!

Session Moderator: You can contact Joe at jweston@gerke.com - Thanks Joe, great job.


Biography

Joe Weston has a unique management experience base of twenty-five years which includes Industrial Engineering in manufacturing, owner / operator of a regional retail business and Sales and Marketing management for a consumer products company with international distribution. The latter two included full profit responsibility.

Joe understands the importance of performance standards and the need to develop plans for the results that will achieve those standards.

His work with Gerke & Associates has included customized benchmarking projects in wholesale and distribution industries, new product feasibility studies and development of financial benchmarking software.

Joe is a distance swimmer and enjoys creating photographs in the darkroom.

Gerke & Associates has served as consultants to management since 1977. The firm specializes in assisting management develop strategic perspectives to strengthen the key drivers of business success for each client.

Specialties of the firm include Strategic Planning, Business Benchmarking, Site Evaluation, and development of Business Plans and Marketing Plans.

In recent years, Gerke & Associates has fine-tuned the business benchmarking process to include sophisticated data collection and group comparisons for various industries:

  • Benchmarking software for a network of pet food distributors in North America and Europe

  • Internet benchmarking service for convenience store companies

  • Benchmarking software for independent video retailers nationwide

  • Operating cost study for major wholesale growers of nursery crops

  • Customized financial analysis software called BizBench® that benchmarks all companies with an SIC code in the Robert Morris Associates database

Gerke & Associates’ client list includes Fortune 100 companies, national trade associations and small independent businesses.

E-mail: jweston@gerke.com
Web site: www.gerke.com

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