This book is designed for finance executives and managers who want to understand meaningful measures adopted throughout a wide range of industries to evaluate performance and identify areas of improvement. The information provided includes standard measures used in evaluating performance regardless of industry or geography and identifies gaps among poor, average, and excellent performance in the overall finance function as well as within three key finance processes:
1. planning, budgeting, and forecasting;
2. internal controls; and
3. order to cash (revenue accounting).
Perhaps more important, it is also designed to provide insight into which business practices are associated with improved performance. We believe it is not enough just to know where the top quartile and bottom quartile lie. Our research goes beyond to explain what practices drive the variation in performance.
Executive Summary 1
Benchmarking and Best Practices 5
The Open Standards Benchmarking CollaborativeSM(OSBC) Research Overview 7
APQC’s Process Classification FrameworkSM (PCF) 10
Commonly Used Measures for Finance 14
The Metrics: What Are the Numbers, and What Do They Tell Us? 17
The Finance Organization 17
Perform Planning and Management Accounting 34
Manage Internal Controls 45
Order to Cash (Revenue Accounting) 61
The Bottom Line 71
The Business Case 73
Benchmarking Future Performance 77
PCF Section 8.0 Manage Financial Resources 79
Standard Measures: Finance Organization Planning, Budgeting, and Forecasting; Internal Control; General Accounting and Reporting; and Revenue Accounting 89
OSBC Methodology and Data Validation 119
IBM White Paper 121
List of Figures
Figure 1: Participating Industries 8
Figure 2: Business Entity Size by Revenue 9
Figure 3: Business Entity Size by Number of Employees 9
Figure 4 Finance Function Cost as a Percentage of Revenue 18
Figure 5: Finance Cost Breakdown 19
Figure 6: Total Finance Function Costs as a Percentage of Revenue 20
Figure 7: Resources by Process 21
Figure 8: Time Allocation by Activity 23
Figure 9: Outsourcing by Process 24
Figure 10: Planned Outsourcing 25
Figure 11: Perceived Process Performance 26
Figure 12: Percentage of FTEs Allocated and Perceived Performance 27
Figure 13: Use of Shared Services in Finance 29
Figure 14: Processes Using Shared Services 30
Figure 15: Impact of Shared Services on Cost of Finance Processes per $1,000 Revenue 31
Figure 16: Technology Within Finance Processes 32
Figure 17: Relationship of Budget to Corporate Strategy 36
Figure 18: Budget Linkages to Strategy/Cycle Time for Forecasting 37
Figure 19: Spend Within Planning, Budgeting, and Forecasting 37
Figure 20: Potential Savings Planning, Budgeting, and Forecasting 38
Figure 21: Directional Spending by Process 39
Figure 22: Total Cost to Perform Planning, Budgeting, and Forecasting 40
Figure 23: Budgeting and Forecasting Techniques 41
Figure 24: Budget Cycle Time in Days 42
Figure 25: Budget and Forecast Cycle in Days 43
Figure 26: Reporting Profitability 43
Figure 27: Benefits Realized Through Profitability Reporting 44
Figure 28: Implementation of Formal Risk Assessment 46
Figure 29: Cycle Time of Identification and Remediation of Control Violations 47
Figure 30: Cycle Time and Frequency Risk Assessment 48
Figure 31: Internal Controls Cost and Productivity 49
Figure 32: Total Cost to Manage Internal Control Processes per $1,000 Revenue 50
Figure 33: Cycle Time to Report Violations and Complete Remediation 52
Figure 34: Structure of Internal Controls 53
Figure 35: Cost and Productivity in Internal Controls 54
Figure 36: Organization Structure Impact on Cycle Time Within Internal Controls 55
Figure 37: Culture and the Internal Control Environment 56
Figure 38: Technology Used as Part of Sarbanes-Oxley Compliance Processes 57
Figure 39: Technology in Control-Monitoring Functions 58
Figure 40: Accountability for Risk Assessment 59
Figure 41: Risk Assessment Methods 60
Figure 42: Invoices Processed 62
Figure 43: Total Cost of Processing Accounts Receivable per $1,000 Revenue 63
Figure 44: Revenue Accounting Business Models 64
Figure 45: Total Cost by Business Model per $1,000 Revenue 65
Figure 46: Technology Used in Revenue Accounting 65
Figure 47: Technology Impact on Cost 66
Figure 48: Methods Most Often Used in Handling Customer Inquiries 67
Figure 49: Days Sales Outstanding 67
Figure 50: Cycle Time in Days to Resolve Adjustments 68
Figure 51: Finance: Performance at a Glance 75
This report’s research efforts show a substantial gap between high- and low-performing organizations. In addition to gaps in quantitative performance, this report uncovers several insights into performance.
- For the second consecutive year, managers and overall staff within finance and accounting continue to spend a disproportionate share of time on transactional processing tasks while demonstrating a strong desire to redirect time to internal controls and decision-support activities.
- Finance costs increased from 2004 to 2005 by 18.75 percent. Organizations with $1 billion revenue are on average spending $9.5 million on their finance functions.
- A significant portion of this increase is a result of increased spending on compliance activities.
- Shared-service business models continue to demonstrate lower cost while maintaining high quality.
- The trend in outsourcing continues to grow with organizations indicating a desire to outsource up to 47 percent of all finance and accounting activities over the next three years, with accounts payable, payroll, and tax leading as the most outsourced processes within finance and accounting.
- Performance continues to be measured primarily in unit costs (e.g., cost per invoice processed).Over time, we have confirmed that lower cost, improved productivity, reduced cycle time, and higher quality can go hand in hand. The important relationship among cost, quality, and cycle time cannot be ignored.
- Therefore, this report supplements traditional cost measures with other key measures such as quality, productivity, and cycle time. Our research indicates that better performance is correlated with the use of certain business practices. This book quantifies the unit cost and productivity differences associated with the use of these practices.
The practices examined include:
- planning, budgeting, and forecasting vs. cost control and cost management;
- business models such as outsourcing, shared services, centralized organizations, and decentralized organizations;
- use of technology in enabling performance;
- deployment of standardized processes and procedures; and
- resource allocation and the relationship to cost and performance.
In short, finance practices can be significantly improved, resulting in bottom-line savings. The Open Standards Benchmarking CollaborativeSM (OSBC) research, from which this data is drawn, quantifies these gaps and goes on to explore specific business practices that are linked with better performance.