Benchmarking to Make State Government More Efficient

Introduction

Benchmarking has long been used in the private sector as an effective tool to support operational change, improve processes, increase efficiency, and cut costs. In the private sector, benchmarking is used to gain a competitive edge. It gives companies a means of seeking insight from outside typical industry models and offers them the promise of moving and staying ahead of the competition. Many case study examples illustrate how companies have used benchmarking to reshape their business strategies based on proven practices centered on excellence. U.S. Steel is one such company:.

Perhaps no industry has suffered more in the transition from the industrial era knowledge economy than steel, and indeed, U.S. Steel Corporation has experienced its fair share of pain in recent years. Yet while increasing numbers of its competitors have succumbed to bankruptcy, U.S. Steel, headquartered in Pittsburgh, Pennsylvania, has emerged a stronger, fitter and more successful company. Since 2001, it has doubled in size, to $14 billion in revenue; its stock price has grown about 750 percent since 2003. Helping the firm succeed is its world-class finance organization, as benchmarked by The Hackett Group.1]

Benchmarking has been successfully used to increase profits by world-class companies in a variety of industries, from manufacturing to hospitality markets.

When Steven Porter talks about striving for organizational excellence, he doesn’t limit his discourse to a mission statement and set of long-term objectives. Although the president of Atlanta-based InterContinental Hotels Group of the Americas recognizes the importance of lofty goals, he also points out that it’s the day-to-day management of processes and practices that determine success. “It’s essential to support the growth objectives with solid business practices” he says.

  After evaluating operations throughout the organization, Intercontinental Hotels Group build a framework for success. The end result of the initiative? The organization grew its net income by more than 1,500 percent in 2004 while slashing waste and overhead.[2

Decisions based on benchmark study results may take many forms – reorganizations, mergers and acquisitions, or sometimes merely a simplification of processes.

At GE Energy, the largest of General Electric’s industrial subsidiaries, CIO John Seral says simplification will mean less cost and more effectiveness for the power generation giant.

Late last year, GE Energy and the rest of GE began working with The Hackett Group to cut operational complexity.

Ultimately, simplification is a common-sense solution. “The simpler your processes are, the better you interact with your customers because you have fewer errors and greater speed ” 3]

Although it may seem logical to carry proven successes based on benchmark studies from the private sector to the public, the transition has not historically been so simple. Compared to the private sector, the public sector is organized in a much more idiosyncratic manner. As a result, not only has government failed to close the gap with private sector performance, it has fallen further behind, exacerbating public dissatisfaction. State governments that have attempted to undertake benchmarking projects have found that since each state approaches the task so differently, it has not been feasible to use benchmark results in any meaningful way to compare one state or agency to another.

In 2005, the National Association of State Auditors, Comptrollers, and Treasurers (NASACT) embarked on national project to bring benchmarking to the states. Working with the Hackett Group and Accenture, two consultancies with a long experience in benchmarking in the private and public sectors, it has begun to do the difficult work of creating standard definitions, protocols, and measures, and recruiting states as participants. While the program is young, it has already had some success in creating benchmarks and beginning to build a database in the areas of finance, HR/payroll, procurement, and IT. Massachusetts is one of the eight states participating, and, in August 2006, it completed the first stage of the project.

The Problem

In the private sector, benchmarking has become standard practice for helping businesses identify processes that need improvement and has enabled many of the world’s most well-known and successful businesses to drive down administrative costs. However, although benchmarking studies target administrative areas (e.g., finance, HR/payroll, procurement, and IT) and government is largely administrative in nature, benchmarking has rarely been applied to the public sector. The conventional wisdom has been that state governments are organized and funded so idiosyncratically that benchmarking lacked application.

For a variety of reasons, functions and processes vary in the way that they are organized from state to state, to the point that the same processes may fall under different rubrics, categories, and chains of command. Sometimes these variations have their roots in organizational structure.  For example, in many states, the state comptroller’s office manages payroll and HR functions, while in other states they are handled by completely separate administrative offices. Variations may also result from differences in funding strategies. For example, some states fund administrative operations with general fund resources, while in others, administrative agencies are allowed to charge other state agencies to recover administrative costs. To complicate the matter further, these functions are sometimes performed and accounted for by private sector consultants outside of government.

Benchmarking is all about making comparisons, and comparability requires consistent definitions—apples must be compared to apples. Comparability also requires a consistent methodology, including how data are defined, collected, cleansed, validated, analyzed, and summarized into performance metrics. Discrepancies between definitions and methodologies can invalidate meaningful comparisons between states, which are, after all, the point of benchmarking.

Until recently, each state that adopted benchmarking had to independently establish definitions, determine methodology, and chart its own course. Not only has this been expensive, but the results have been unreliable. Without a coordinated multi-state program that creates a single, consistent set of definitions and methodologies, state governments will never be able to get the same benefits from benchmarking that the private sector has received.

Proposed Solution

Inception, Objective, and Organization 

Responding to this need, the Executive Committee of the National Association of State Comptrollers (NASC), an affiliate of NASACT, created a Benchmarking Committee in March 2004 to investigate alternatives for a benchmarking program for state accounting and payroll functions. As it was considering its options, the Hackett Group and Accenture[4] offered to conduct a pilot benchmarking project of four finance processes: cash disbursements, general accounting, external reporting, and performance management (management reporting).

Five states participated in the pilot project: Alaska, Arizona, Nebraska, Oregon, and Tennessee.  The pilot confirmed the potential for a national project and helped identify some conceptual refinements. NASC’s Benchmarking Committee recommended to its parent organization, NASACT, that a national project be launched, with NASACT serving as the primary contractor. Subsequently, NASACT issued an RFP to identify vendors to assist with implementing the national program. Two vendors responded to the RFP. After an extensive interview and examination process, NASACT chose The Hackett Group and Accenture as the successful bidder on the project in August 2005.

The objective of the benchmarking program is to provide a performance measurement system with a methodology and database to support benchmarking in these four areas: finance, HR/payroll, procurement, and IT. Each state will gain the ability to measure functional areas across a series of efficiency and effectiveness measures, giving it the information it needs to improve performance relative to state peers and world-class private sector performers.

Within a standardized methodology and framework, the program offers much flexibility. States can specify a schedule that meets their priorities and needs. They may choose to complete one or more of the four available benchmarks, and may include any number of their agencies in the process. Once a statistically valid number of states (seven per function) participate in the benchmarking process, states will be able to compare their results to data from other participating states and to world-class best practices. In addition, states may opt to perform a subsequent benchmark, referred to as a re-assessment, at a later point in time. This enables states to make “before and after” comparisons after enterprise resource planning (ERP) implementations or other internal business process improvements.

Eight states have contracted for one or more of the four benchmarks available through the program:

• Tennessee (finance, HR/payroll, procurement, and IT: initial and reassessment)
• Arizona (finance)
• Massachusetts (finance)
• Delaware (finance and procurement)
• Colorado (finance)
• Mississippi (finance, HR/payroll, procurement, and IT)
• Alaska (HR/payroll: initial and reassessment)
• Georgia (finance and IT)

Projects in Tennessee and Arizona were completed in June 2006. Massachusetts’ project was completed in August 2006.

The benchmarking program has well-defined and effective partner roles. NASACT serves as the contracting agent and overall project manager for each state’s benchmarking project, develops the statement of work, and aids the state in developing its contract. Hackett/Accenture works with NASACT to identify prospective participants and define states’ desired benchmarks. It also works directly with the participating state to conduct the benchmarking process, analyze the data, formulate recommendations, and in some cases perform re-assessments. NASACT and Hackett/Accenture employ monthly status calls to provide ongoing planning and to assess the program and make improvements as needed. They also work together to publish and present research from the benchmarking studies at scheduled NASC and NASACT conferences throughout the year.

Process and Measurement Categories 

The workflow of the NASACT benchmarking program has a four-part sequence:

1. Overall program management and development of state contracts. Interested states exercise a statement of work, referring to the NASACT master contract with Hackett/Accenture. In it, a state indicates which of the four available functions it wants to benchmark, identifies the relevant state coordinators and contact people, and sets the schedule. All three parties are involved in varying degrees during this part of the process.
2. Use of benchmarking tools with states. Once the final contract has been approved and signed, Hackett uses its benchmarking methodology and tools to begin a process that typically follows five steps: (1) planning/kickoff, (2) data collection and executive interviews, (3) data validation (cleansing), (4) analysis/crafting of a report, and (5) presentation of results. A typical benchmark study takes 12 weeks from initiation to completion. Data is collected for both quantitative and qualitative measures. Costs are organized and collected in major categories. This includes a full accounting for all state employee labor costs based on the business processes and activities employees actually perform, no matter which organization they may belong to or what their job description may be. Costs related to outsourcing, if any, are also collected. Technology costs represent the third category and any other costs, for example space or travel, comprise the final category. Other examples of quantitative data include transaction volumes and cycle times. Qualitative data is collected from interviews and stakeholder surveys and may include information about the alignment of the administrative function to support the mission of the program, error rates, and customer satisfaction.
3. Evaluation of state feedback and program refinement. At the completion of each state’s project, NASACT and Hackett/Accenture examine feedback from the state to identify ways to implement future program improvements.
4. Development of research reports, findings, and special presentations. Hackett/Accenture, with assistance from NASACT, works to extrapolate relevant and interesting data to present at NASC and NASACT conferences in order to promote the project and benchmarking in the public sector in general.

Because the partners worked together at the outset to modify the standard approach, data collection tools, and taxonomy so that they would apply to state government, NASACT’s benchmarking program is the only one that satisfies the unique requirements of state governments. Data and metrics are developed further at the level of a “process” within the domain of an administrative “function.” A state that enrolls for a benchmark of a function, for example, finance, collects data for all of the processes under the finance function. This allows the development of performance metrics and apples-to-apples comparisons between the finance functions of the respective states. This approach also maintains the integrity of comparisons of state data to that of non-governmental organizations.

The finance benchmark focuses on eight discretely defined process groups: