Ahead of the curve?

When it comes to balancing efficiency and effectiveness to achieve world-class performance, some financial services companies have a long way to go, writes Philip Carnelley of The Hackett Group.

The Hackett Group benchmarks the back-office operations – finance, HR and more – of large corporates, scoring them along a whole host of metrics to identify how efficient they are and how effective. The Hackett Group’s extensive benchmark database, compiled over the last 13 years, allows it to compile the metrics of world-class performers – those companies that stand out both in terms of efficiency and effectiveness – and to advise other companies which best practices will help them in their own quest for world-class operations.

Measuring up

Hackett has found that world-class performance in back-office operations such as finance can be achieved independent of industry sector. But some companies wish to know how they stand against others in their sector. Thus, Hackett, together with Accenture, recently performed a special study of interested financial services companies to look at how they performed against similar companies in Hackett’s database.

The study participants were large financial services companies from Europe and North America, including well-known names like Barclays, Commerzbank, Citibank and Lloyds TSB. We looked at the performance of the companies’ internal finance function, (and also procurement), and derived the first-quartile performance for efficiency and for effectiveness. Efficiency metrics include total cost of the finance function, staffing levels, transaction processing cost and cycle times. Effectiveness metrics include DSO levels and tax rates, information access and distribution, and quality of analysis.

What we found was very interesting. The companies in the first quartile for efficiency were as good or better than the ‘world-class’ companies in terms of the cost and staffing of finance. The first-quartile effectiveness firms were similar in effective performance to overall world-class medians.  But very few of the companies managed to be in the first quartile in both categories. For world-class performers, sacrificing efficiency for effectiveness, or vice versa, is clearly not an option, so they are in the first quartile for both.

In the study, the first-quartile efficiency companies scored poorly on several effectiveness metrics. Meanwhile, those who scored high in effectiveness had high costs: 31 per cent above the overall averages and 83 per cent above the first-quartile efficiency companies. The cost of providing first-quartile effectiveness in those companies could thus be judged to be unacceptable.

The companies that achieved first-quartile efficiency have leveraged technology in their transactional processes, such as processing suppliers’ payables or booking journal entries to close the monthly ledger. Meanwhile, higher effectiveness is achieved through a greater focus on value-added processes, such as planning and performance management and business analysis. Where financial services companies achieved high metrics of effectiveness, it was through very hard work, rather than leveraging of technology and automation.

Route to the top

So, while most companies are a long way from being world-class, a few companies are there. They have shown that it is possible to get the best of both worlds.

How have they done it?  There are many best practices that have been widely adopted by world-class companies to help them on their way. Which of these practices will work best for individual companies is a subject for a custom consulting project, but some stand out, such as reduced complexity. The more complex a company’s operations, the more expensive it is to run, and the more difficult it becomes to achieve effectiveness in, say, budgeting or reducing working capital requirements. So, for example, world-class performers have often worked to ensure a lower number of tax domains and legal entities for their size of company – with beneficial effects on efficiency and effectiveness.

Achieving world-class performance may be difficult, but it is do-able, and the benefits – including lower cost of operation, better support to the business units, and greater agility of operation – will be felt throughout the organisation.

Author

Philip Carnelley (pcarnelley@thehackettgroup.com) is senior research adviser for The Hackett Group in London.