In a competitive business environment, organizations are mainly looking at two things: revenue enhancement and cost reduction. These two factors together define winning businesses. Organizations take different approaches to achieve these two goals. This paper discusses the importance of operational benchmarking in helping organizations improve efficiencies and reduce costs.
An organization’s vision and mission statements act as the guiding principles to envision the long term goals and achieve the short term goals of the organization. The day-to-day activities are modeled along those principles to achieve the business objectives. Various departments across the organization performing different functions work together, to achieve the overall vision of the organization. Though the different departments work towards a common goal, they have individual objectives to achieve. For example, Accounts Payable department has to ensure timely payments to all vendors and suppliers. IT Department has to ensure that all the systems and in house solutions are operating in perfect order. The manufacturing department has to take care of the manufacturing schedules and inventory etc.
Benchmarking as a practice helps an organization get a comparative view of these functions across the organization as well as across industries and identify gaps in performance. Benchmarking is important whether these activities are performed in house or outsourced to service providers. A service provider benchmarking its operations adds value to the clients’ business by proactively highlighting improvement areas and best practices.
However, benchmarking is a very dynamic process as the measures and metrics involved change frequently depending on industry performance. In a competitive business landscape it is important to stay abreast with the latest trends in benchmarking to ensure that all organizational processes adhere to industry best practices. Process upgrades usually result in large cost savings for the organization and also lead to a more streamlined approach ensuring maximum quality.
Operational benchmarking helps organizations achieve their slated business objectives using the best in industry practices across verticals to optimize their operations. It drives process optimization by comparing different activities, performed for different clients, across industries. It also compares the efficiency or automation level of the activity performed and consequently its importance to the business. The benchmarking focuses on resource optimization by making changes in the process design.
Operational Benchmarking can result in several changes across the organization. They include:
Policy Changes: Lack of certain policies can be a high cost and effort situation. For example:
- Lack of standard policies across different geographies of the same client can lead to confusions in inter-office activities and transactions
- Lack of a policy on vendor deactivations can result in an unmanageable number of active vendors
If the benchmarking activities identify such gaps in the existing policies of the organization then corrective actions can be taken and appropriate policy created or modified.
Process Changes: Non-value added activities such as manual trackers maintained where system reports can be generated; entering travel expense data manually in the mainframe system in place of automating using macros etc. drive down the efficiency of an organization. Such processes, identified through benchmarking can then be upgraded to match the best in class available at that point in time.
Technology Changes: There maybe a lack of automation such as raising queries through the emails in place of raising queries within the ERP workflow, or lack of integration of the scanning workflow with the ERP. These outdated systems cause delays and errors costing time and effort to resolve issues, not to mention the resource cost. Benchmarking identifies the best practices in automation across industries and the same can be implemented by the organization to drive efficiencies.
How to Benchmark Your Operations?
Operational benchmarking involves identifying the best practices in the industry and then comparing them with the current practices in the company and making recommendations for change. This is a two step process.
Benchmark activities against the industry best practices
In the first step, a detailed description of the organization’s processes is listed out. The details include the type of activity performed, how is it performed, extent of automation and its importance to the business. These lists are then benchmarked against the best practices in the industry. This is known as the “Best-in-Comparison” process.
The process helps identify:
Does not impact Business Objective
(e.g. Updating excel tracker, Validating signature on invoice without knowing approval matrix)
Remove these activities
Impacts achievement of Business Objective
(e.g. Automate manual data entry in Mainframe, Cancel check online at 0 cost instead of stop payment at $15 per check)
Replicable Best Practices
Required to achieve Business Objective
(e.g. Split report, Using ‘R-Block’ to increase STP rate for exception invoices)
Add these activities
Calculate process efficiency scores and propose design changes
The second step is to assess the efficiency of the existing process and propose process design changes to increase the process efficiency. Process efficiency score is calculated as below:
Activity Score (1, 0, NA):
- Rate 1: If activity is performed by the company and benchmark
- Rate 0: If activity is benchmark and not being performed by company or activity is not benchmark but being performed by company
- Rate NA: If activity is specific to the business
Efficiency Level (1,3,9):
- Rate 1: If activity performed by the company is Low on Efficiency / Manual process
- Rate 3: If activity performed by the company is Medium Efficient / Semi-Automated
- Rate 9: If activity performed by the company is Highly Efficient / Automated
Business Importance (1,3,9):
- Rate 1: If activity performed has Low Impact on the process
- Rate 3: If activity performed has Medium Impact on the process
- Rate 9: If activity performed has High Impact on the process
Activity Efficiency Score: Activity Efficiency is a product of Activity Score, Efficiency Level Score and Business Importance Score
Possible Efficiency Score: Possible Efficiency is product of Best-in-comparison Efficiency Level (always 9) and Business Importance Score.
Process Efficiency Score: Process Efficiency Score is ratio of Total Activity Efficiency Score and Total Possible Efficiency Score.
An example of this scorecard for an Accounts Payable process is shown in Figure1.