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.
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.
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 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:
- 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.
- 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.
- 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.
- 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:
|Finance||Transactional||Compliance & Risk Management||Budgeting & Analysis||Management & Administration|
Account and External Reporting
|Budget Preparation and Reporting
|Finance Function Management
The HR/payroll benchmark focuses on nine discretely defined process groups:
|HR / Payroll||Transactional||Employee Life Cycle||Planning & Strategy||Management & Administration|
|Total Rewards Administration
Data Management, Reporting and Compliance
Workforce Development Services
|Total Rewards Planning
Strategic Workforce Planning
|HR Function Management
The IT benchmark focuses on eleven discretely defined process groups:
|IT||Technology Infrastructure||Application Management||Control & Risk Management||Planning & Strategy|
End User Support
Application Development and Implementation
|IT Business Planning
Enterprise Architecture Planning
|Management & Administration|
|IT Function Mgmt
The procurement benchmark focuses on eleven discretely defined process groups:
|Procure-ment||Operations & Compliance||Sourcing & Supplier Management||Planning and Strategy||Management & Administration|
|Supply Data Mgmt.
Requisition and P.O. Processing
Supplier Management and Development
|Function Strategy and Performance Management
Sourcing and Supply Base Strategy
All benchmark processes are further defined down to an activity level to ensure that data are collected, analyzed, and reported in a consistent manner.
Hackett’s benchmarks focus on measuring the drivers of world-class performance. Three types of drivers are collected and used to evaluate quantifiable and non-quantifiable factors that affect performance and costs:
- Performance Metrics: Performance metrics represent an organization’s performance as measured by costs, productivity, resource allocation, and value. These metrics reflect measured performance compared with world-class organizations and the state government peer group in terms of efficiency (cost and productivity) and effectiveness (quality and value).
- Demand Drivers: Demand drivers represent agency-related decisions that are beyond the control of most functional executives yet create demand for service from finance, HR/payroll, procurement, and IT functions. Examined here are issues of size (e.g., revenue/budget, employees) as well as complexity (e.g., agency structure, geographic structure, regulatory/statutory environment, and volatility).
- Structural Factors: Structural factors represent the great variety of methods adopted to meet demand for services, such as agency practices, strategies, process-sourcing strategies, staffing levels, available skill sets, organizational structure, and the selection and implementation of technology.
There are approximately 250 questions and 100 key metrics produced as part of the deliverable from each functional benchmark. In addition to capturing key functional metrics such as cost and full time employees (FTEs), Hackett also defines how and where each organization compares to world-class performers.
The major deliverable to the states participating in the benchmark is a detailed, customized benchmark report. This report includes the following:
- State-to-state peer group
- Median of chosen Hackett peer group
- World-class metrics in Hackett database
- Analysis of the state under- and over-investment opportunities
- Analysis of use of best practices
- Recommendations of improvement opportunities and a high-level action plan (listing areas to explore that show opportunities for significant improvement).
As of August 2006, three states have completed their benchmarks: Tennessee, Arizona and Massachusetts. Results from Tennessee and Arizona have been examined and are currently being shared. Results from Massachusetts have been delivered to the Commonwealth and are being reviewed by its leaders.
Even though only three states have completed the process so far, some interesting initial findings and observations have emerged
- State governments can actually operate at a lower cost level than their private peers because they are not faced with many of the complexities that typically drive up costs for businesses such as operating in multiple jurisdictions or mergers and acquisitions. Thus benchmarking gives states have unique opportunity to create more value from their scale at a lower cost.
- Organizational fragmentation of processes exists.
- Low overall labor rates are masking inefficiencies of current processes, especially in transaction processing.
- Overall best practice utilization is low.
- States are under-investing in technology and/or not realizing the benefits it provides in improving both efficiency and effectiveness.
- States have lower quality levels and cycle times than peer organizations.
- The Treasury Management area is performing favourably as compared to peers.
Several key challenges and emerging trends for state governments also became apparent upon initial review of results from the three states.
- Current HR practices within government make it difficult to attract and retain appropriate talent.
- The lack of an appropriate level of technology investment is having an adverse impact on state government performance.
- A lack of overall standards and state governance of back office functions exists.
- States have significant process fragmentation among agencies/departments.
- An increased adoption and utilization of dominant best practices.
- A shift from transaction processing/administrative support to decision support/strategy development.
- An increasing need to replace old and obsolete technology with solutions that have functionality that effectively supports technology-enabled best practices.
- An increased utilization of shared services will help improve effectiveness and optimize cost structure.
And as can be expected, putting the NASACT benchmarking project concept into practice resulted in many lessons learned – lessons that should improve the project as time passes and additional states join. Some of the major lessons learned include:
- There is a need to emphasize and sustain visible project support by state leaders.
- The ability to have data to support desired improvement initiatives is significant in efforts to drive change.
- Spending sufficient time during the planning and initiation phases of the project is crucial.
- Government is different from the private sector – customizing the benchmarking process to meet the needs of state governments has been and continues to be essential.
Costs and Benefits
Since the first Hackett/Accenture benchmarking study for Massachusetts has only recently been completed, the Commonwealth has yet to realize any gains from it. However, by finally having the ability to evaluate their functions against those of other states and world-class private companies, state executives will be able to identify weaknesses and devote thought and resources to remedying them. Benchmarking, however, is not only good for spotting underperformers, but its objective, quantitative profile also helps build consensus within and outside the state bureaucracy for change initiatives.
Because of the great strides that businesses have been making in improving efficiency, partly due to their implementation of benchmarking programs, state governments, especially in the core back office functions like finance, HR, IT, and procurement, are also being asked to do more with less, to be more efficient and effective. Benchmarking can give state functions the same boost in performance that it has given leading business organizations.
Benchmarking results identify, quantify, and prioritize improvement opportunities. As illustrated in the following chart, the performance of a state such as Massachusetts is compared to peer organizations and world-class performers, identifying areas where it exceeds or falls below the median. Furthermore, the potential cost savings are calculated, expressing in dollars the benefits of the state reforming its business practices to emulate the performance of organizations with median or world-class performance, respectively.
The comprehensiveness of the results and that improvement opportunities are translated into “dollarized” gaps enable states not only to compare themselves to peers and leaders, but also prioritize change and build a business case for change initiatives.
REPRESENTATIVE ANALYSES PROVIDED IN THE BENCHMARK REPORT
Benchmarking also provides a number of more specific benefits:
- It helps prioritize or re-prioritize key initiatives, quantifying with empirical data the methods and techniques most appropriate to each state’s situation.
- It ensures that standard metrics frameworks are used for accurate inter-entity comparisons.
- It helps forecast and define targets for major parameters such as cost and service levels.
- It identifies ways to improve and augment technology utilization.
- It provides insight into the improvement opportunities that will yield the highest ROI and prioritize best practices implementation initiatives.
- It allows for a broad understanding of costs and staffing levels to support prioritization efforts.
- It provides longitude and latitude—the ability to analyze systematic issues across the state and its agencies.
- It facilitates knowledge sharing with industry peers.
- It helps proactively identify issues related to internal controls.
- It supports efforts to mitigate tight labor markets.
- It provides data and context in order to determine which practices will yield the greatest return if implemented.
As for costs, Hackett’s fees and the extra work required of from state employees to carry out the benchmark study are a whole order of magnitude less than the benefits a state can realize through a focused business transformation effort.
NASACT’s contract with Hackett/Accenture provides benchmarking services at a competitive price. States contracting for more than one benchmark receive an incremental discount.
Finance, HR/Payroll, Procurement, and IT
Percent discount realized
Relevance to Massachusetts
Massachusetts participated in a benchmark study for its finance function. The executive sponsor is Martin Benison, the Commonwealth’s comptroller, and the statewide coordinator is Kathy Sheppard, deputy comptroller. More than 100 agencies participated in the study, including the major departments in the executive branch. The study was concluded and the Massachusetts benchmarking report delivered in August 2006. The Commonwealth is currently reviewing the results; however, based on preliminary examinations, it appears that the results will be valuable in two areas:
1) Balancing Accountability and Efficiency
Governments are continuously challenged to be more efficient, many times by adopting techniques proven in the private sector. At the same time citizens deserve and expect high levels of accountability over the use of their tax dollars –a level of accountability not always encountered in the private sector. One of the great challenges for government financial managers is continually evaluating and readjusting this balance between efficiency and accountability. Massachusetts will use its benchmark results to identify where its costs are higher than peer states, whether as a result of inefficiencies or gaps in accountability. The benchmark results will also help the Commonwealth understand the effectiveness of its accountability activities and identify ineffective activities that can be re-engineered or in some cases eliminated.
2) Identifying Opportunities to Invest in Automation
Ultimately, the benchmark results will allow the Commonwealth to identify areas in which it can increase efficiency though the use of automation without necessarily compromising accountability. This information will be extremely helpful to the incoming administration as it works to modernize financial operations.
If the Commonwealth builds on the financial benchmark by completing additional benchmarking projects in purchasing, human resources and information technology, the administration will be poised with a complete management agenda to improve it’s back–
The implications of this benchmarking program for state government are significant. For the first time, state governments have a common methodology, set of tools, and performance metrics that can give them a baseline of existing costs and productivity levels and an assessment of where the greatest opportunities for improvement lie. NASACT’s benchmark program gives state governments a factual starting point for transformation initiatives that will apply market principles and best practices to the task of improving the efficiency of their business processes and the quality of their services. It is estimated that the savings that any one state will achieve from efforts toward greater efficiencies and effectiveness in its business processes could be in the tens of millions of dollars. Extrapolated across the nation, the savings to state governments resulting from benchmarking projects would clearly run into the hundreds of millions of dollars.
Through this program, state governments now have their own way to make relevant comparisons with each other and with the private sector, and even more importantly–to adopt the best practices that have led to outstanding business performance.
 “Hackett Book of Numbers TM Insight,” May 25, 2006.
 “Business Finance: Winning Strategies for CFOs,” 2005.
 From Business to Business Magazine, April 2004.
 Accenture is the largest management-consulting firm in the world, and has developed a significant practice in the public sector, especially concerned with government transformation. Since it inception in 1992, Hackett has dedicated itself to benchmarking the finance, HR/payroll, procurement, and IT functions in all types of organizations. Its database of 3,500 benchmarks contains some of the most recognized corporations in the world.
Andy Opsahl, “Does This Benchmark Make Me Look Inefficient?” Governing Technology Magazine, February 2006, 23-28.
Database – Hackett database of over 3500 benchmarks (97% of Dow Jones Industrials)