F&A Benchmarking

A recent benchmarking research released by APQC, an internationally recognised resource for process and performance improvement, now gives finance and accounting (F&A) executives and managers the ability to evaluate performance and benchmark accounting processes, regardless of industry or geography.

The results are published in a new book by APQC, 'by the numbers: Accounting,' designed to provide insight into which business practices are associated with improved performances, specifically in the areas of Accounts Payable (AP), Accounts Receivable (AR), General Ledger (GL) and payroll.

BENCHMARKING BASICS

Benchmarking has become synonymous with continuous improvement for best practice organisations in today's marketplace. How companies rate their business performance has increasingly come to depend on how they compare themselves to the competition. By matching up performance to relevant peer groups and world-class organisations, a company can target both what it does well and where it needs to improve.

Companies are asking key questions such as, 'Where are we the most effective? Where are we the least effective? How can we manage cost more effectively?' Today, it's all about the business case, and securing access to comparable data is especially critical in the areas of planning, budgeting and forecasting. The challenge lies in the reality that no two organisations conduct processes the same way. To begin our research effort, we sought to develop a common framework of measures, metrics and definitions that would allow organisations across industries, size and geographies to compare performance (and understand benchmarking) in like terms.

APQC's Open Standards Benchmarking CollaborativeSM (OSBC) research, has redefined the benchmarking process by creating open, free access to help organisations benchmark performance across functional areas such as F&A.

Using the OSBC database, professionals may compare their business practices with similar organisations and receive a comparative report with quantitative and qualitative information. The report targets key areas for improvement and ways in which the organisation can monitor its performance. This real-world view of where an organisation stands among its peers provides valuable insights, but the real payoff comes in the ability for an organisation to identify individual performance gaps and set forward a course of action to close those gaps.

ACCOUNTS PAYABLE

APQC's research indicates that there is a substantial gap in AP costs between organisations that have taken full advantage of centralisation and electronic processing options and those that have not. Furthermore, organisations that have made the effort to standardise their systems and policies achieve cost and productivity advantages.

Organisations using electronic invoicing tend to achieve markedly lower costs than organisations that do not. For example, centralised AP operations have an average cost per invoice of £2.86 (US$5.00) compared to an average of £4.44 ($7.77) among decentralised operations. A centralised structure is one that is concentrated into a single grouping of staff specialising in a specific function and/or processes that serve the organisation. A decentralised structure, on the other hand, is one in which like functions, processes and/or activities are carried out across multiple areas.

Meanwhile, shared service AP operations globally have an average cost per invoice of £3.02 ($5.29) compared to an average of £4.17 ($7.29) among operations without shared services. A shared service structure is one that is created for the purpose of combining common or repetitive processes from multiple business units and centralising them into one location, typically with service level agreements and charge-back / cost-recovery mechanisms in place.

Two conclusions can be made. First, implementation of centralised or shared AP services tends to decrease unit costs, and second, there is not much difference between shared services and centralised accounts payable functions.

ACCOUNTS RECEIVABLE

APQC found significant differences between high and low performers in the AR function, including performance on the most important output of the process: getting cash in the bank.

Organisations that have implemented shared services and AR capabilities enjoy large cost advantages over those that have not, as have organisations that have fully integrated their operational systems with their billing systems. The practice of imaging cheques and remittances is associated with cost benefits as well as notable improvements to quality and cycle time.

Cost savings associated with imaging of cheques and remittances, although evident, were smaller than cost savings associated with other practices. However, APQC's research reveals that organisations using this practice have an average remittance error rate of 5%, compared with an average error rate of 11% for other organisations.

Responding organisations using imaging also enjoyed an average collection period 15 days shorter than other organisations.

GENERAL LEDGER

APQC learned that GL has the most pronounced variance from high to low performers. The reason: automation. A number of different practices have a positive impact on managing GL processing costs, but the single biggest driver involves automated feeds between key systems. The high costs of manual effort in the GL arena is striking.

Using cost per journal entry line item as a normalised cost measure, APQC found that there was an order of magnitude difference between top and bottom quartile performers (Figure 3). Low performers spent over 13x more per line item than high performers.

Productivity metrics also display a wide variance, if not as pronounced as the pure cost variance, with high performers generating 7.5x as many line item entries per full time equivalent (FTE) as low performers (Figure 3). It should be noted that the 13x cost difference is not fully explained by a 7.5x productivity difference. This suggests that high performing FTEs are both more productive and less expensive. Increased reliance on systems and well-designed business processes limit the need for manual intervention by high-paid resources.

Organisations with automated feeds between key systems have a median cost per journal entry line of £0.43 ($0.77) compared to an average of £4.98 ($8.97) among other operations, a multiple of about 11 times. This business practice has far and away the greatest impact on unit cost of any of the practices APQC researched.

The prevalence of manual journal entries varies widely between high and low performers. Again, there is an order of magnitude difference between top and bottom performers: Bottom performers have more than 10x more manual journal entries than top performers

PAYROLL

Of the four areas covered in this book, the variance between high- and low-performing organisations was found to be lowest for the payroll function. The bottom quartile has unit costs a little more than twice that of a top quartile respondent. Still, the savings opportunity cannot be ignored, and again we found that certain practices were associated with better results.

The difference between top and bottom quartile performers is nearly £2.78 ($5) per payment, which means that an organisation with 10,000 employees5 could save £667,000 ($1.2m) per year by improving low performance to high performance, assuming it makes 24 payments per year.

Productivity differences between high- and low-performing organisations are in line with unit cost differences. Top performing organisations demonstrate 2.3x better cost performance than bottom quartile performers and 2.8x better productivity.

To help explain these variances, APQC researched the relationships between certain business practices and outcomes:

• Salaried workers are much more likely than hourly workers to choose direct deposit, which will impact an organisation's ability to take advantage of less expensive payroll processing methods

• Shared service payroll operations are significantly more productive per FTE

• Shared service payroll operations have an average cost per payroll payment of £3.77 (US$6.79) compared to an average of £4.58 (US$8.25) among other operations

• Shared service payroll operations average more than 21,324 payments per FTE compared to an average of 9,300 among other operations