Measuring the measurers

Manufacturing departments have long been subject to `benchmark' comparisons with competitors. Those responsible for such tests - in finance - can now be assessed in the same way, says Clive Lewis

Finance directors have their finger on the pulse, or so they would have you believe. Every month they provide their colleagues with data on the efficiency of the business, the departments, the products, and so on. But people in glass houses ... According to a report soon to be released by the Board for Chartered Accountants in Business (BCAB), the business accountants' arm of the Institute of Chartered Accountants in England and Wales, very few finance departments in small and medium-sized enterprises (SMEs) have compared the efficiency of their department to that of others. Why not?

Large businesses have the resources to pay for consultants to carry out comparisons - or "benchmarking exercises" - and finance directors have realised the potential for identifying inefficient activities via comparisons with other businesses performing the same tasks. The ICAEW launched a benchmarking service for the finance function through its Faculty of Finance and Management, in conjunction with the Hackett Group. Until recently, it was for companies with turnover above pounds 100m, but the lower limit has been reduced to pounds 30m and - for members of the ICAEW's Faculty of Finance and Management - the service is free.

But the service does not cover companies with a turnover below pounds 30m and finance directors in smaller companies often do not have the resources to pay external consultants. They have had to resort to other methods, including self-help groups. But benchmarking requires a robust database to ensure that comparisons are valid - and that can be a problem for self- help groups. For example, how can you meaningfully compare the finance department of a large retailer with that of a medium-sized manufacturing company?

Other methods of benchmarking have been tried, such as expressing finance department costs as a percentage of turnover. In a study of 750 companies and public sector organisations in Europe, the average cost of financial management was close to 1 per cent of turnover. But in the worst 10 per cent of the sample it was close to 3.5 per cent and the top 10 per cent it was just 0.25 per cent.

So what can finance directors of small companies do to measure the effectiveness of their departments, and who can help them? As it happens, the BCAB has received an increasing number of requests for help in this area - particularly from SMEs. Its response was to commission Manchester Business School to research the subject and come up with a solution.

MBS began by conducting group sessions with finance directors, aimed at identifying the key finance function processes and performance measurement issues. The consensus that emerged is reflected in the comment of an SME finance director: "If you break down the business into its different activities you find a lot of similarities, not only in your industry, but in several others. Only then can you develop yardsticks and measure performance."

The focus groups were followed by individual interviews with finance directors. A questionnaire was developed and sent to 4,000 chartered accountants in business. The findings make up one of the largest databases on the activities of the finance function in the UK, which includes information on 440 finance departments in SMEs.

The survey revealed that there was potential for significant efficiency gains in SME finance departments. In some activities, the scope for improvement was up to 60 per cent of staff resources for the average firm when measured against best practice. Other activities offered less scope but no area suggested a saving of less than 30 per cent.

The other main finding was the limited extent to which finance directors had employed benchmarking in their own bailiwick. Less than 20 per cent of businesses reported using benchmarking to track the performance of their finance departments. Those using benchmarking were more likely to be close to best practice than others. Within these businesses, purchase and sales ledger performance was twice as likely to be benchmarked than IT management or personnel support. Perhaps, most surprisingly, financial accounting and treasury - two core finance department activities - were benchmarked by fewer than one in three of the responding companies.

The survey also found that many companies reporting performance measurement in finance activities were more concerned with internal monitoring than with external benchmarking. Some 67 per cent of best practice companies measured finance department performance using a number of informal criteria such as the number of errors reported, while only 30 per cent of the less efficient businesses had comparable measures.

But are internal measures sufficient? Finance function "inefficiencies" may reflect problems earlier in the process. Previously finance directors, particularly in SMEs, have been hampered because valid comparisons were not available at an economic cost. Not any longer.

BCAB and MBS have decided to make their database available to finance professionals throughout the UK. MBS has set up a benchmarking service that can be accessed at low cost. It produces an easy-to-understand measure of efficiency within all the key finance function activities, taking into account differences in operating conditions. So finance directors now have the opportunity to see how their department measures upn

`Benchmarking the Finance Function', available by the end of this month, can be obtained from BCAB (0171-920 8680, fax 0171-920 8699). For information on the MBS Benchmarking Service contact Julian Jones, Doug Wood or Pete Barrar at MBS (0161-275 6333, fax 0161-275 6489) or write to MBS at the University of Manchester, Booth Street West, Manchester M15 6PB.

The writer is the head of the ICAEW's Business Bureau.