Good evening and thank you for taking time out of your schedules
to join me on this chilly February evening.
I am truly honored and delighted to have been invited to speak this
evening at my alma mater (Class of 1967). This state-of-the-art library
and technology center represents just one more example of how this
highly regarded institution is positioning itself now and for the
future as a linchpin in The City University of New York, the nation's
leading public urban university. But first, I would like to say a
few words about the past.
Baruch College provided me with a well-rounded, quality education
that served as an excellent foundation upon which to build my career
in both public accounting and private industry. The range and diversity
of my educational experiences at Baruch enabled me to not only develop
technical business skills but also to think creatively and communicate
effectively. From my first experience with Accounting 101, when a
textbook entitled Fundamental Accounting: Theory and Practice
by Professor [Stanley] Tunick and Dean [Emanuel] Saxe was used, to
the excellent array of core and elective courses offered, it was evident
that at Baruch College, the professors and staff truly cared about
the knowledge and experiences they were sharing with the students.
I will always be grateful for the quality and breadth of the education
I was fortunate enough to have received at Baruch.
Since the early days of my career as an auditor in public accounting,
I developed a natural tendency to want to see supporting documentation
and to make the necessary inquiries. This "curiosity factor"
enabled me to validate a transaction or representation and carry out
my professional responsibilities for my clients as well as the accounting
firm I was representing. In private industry this same tendency has
always driven me to go beyond just the financial results to understand
the underlying business drivers.
In the spirit of reciprocity and as supporting documentation for
my initial representation about being a graduate of this fine institution,
here is my Baruch College Alumni Association membership card, which
on its face certifies that "I am a member in good standing."
This is a status I hope will still be in effect at the conclusion
of this evening.
Now, let's move on to this evening's topic, "Benchmarking the
Finance Function." To help guide us, my remarks are organized
into five segments:
- Rules of the Road
- Getting Started
- The Journey
- Next Steps
In each segment I plan to share with you my experiences and insights
into how the benchmarking technique can be used to benefit any organization
as it positions itself to not only face a constantly changing business
environment but also to address some of the challenges that lie ahead
as it tries to become highly adaptive and service-oriented. The creative
use of benchmarking has significant strategic, operational, and financial
implications that will become evident during the course of my remarks.
The application of benchmarking concepts and techniques is relevant
to any company, regardless of industry or size. However, one of the
most critical determinations that must be made is an assessment of
whether or not the timing is right for a particular organization.
If it is, the cascading implications of an organization effectively
using and embracing benchmarking will generate enormous paybacks in
both the short and long term.
By way of background, I would like to take a few minutes to describe
my organization so that you will have a context within which to place
my remarks. However, the use of benchmarking is by no means limited
to organizations with a similar profile.
The New York Times Company ("NYTCO"), a public company
listed on the AMEX, is a diversified, decentralized media organization
with consolidated revenues of $2.4 billion in 1995. It publishes 24
newspapers and operates news, photo and graphic services, news and
feature syndicates, and various electronic publishing activities.
In addition, NYTCO publishes 10 sports/leisure magazines; operates
six television and two radio stations; and has minority interests
in two paper manufacturers.
Despite the diversity of the operations included in NYTCO's portfolio
of businesses and the different means of distribution employed --
that is, print and electronic -- a great deal of emphasis is placed
throughout the organization on the editorial quality and independence
of each product and service. This is reinforced by constantly focusing
on the interrelationship between the editorial product and the audience
or market served. Since the markets that are served across the company
and the country vary both demographically and geographically, addressing
the specific needs and wants of its external customers -- advertisers,
readers, viewers, and listeners -- has enabled NYTCO to prosper and
grow in size and complexity. This focus on the core competencies of
each of the businesses has resulted in the enhancement of the individual
brand names and franchises and the economic health of the company.
Now let's move to the business side of the organization, which is
where I have spent my career. Growth in the organization over the
last 25 years has come from a combination of acquisitions, internal
development, and investments in and focus on core businesses. During
this period in the organization's 100-year history, revenues have
grown from about $400 million in 1974 to $2.4 billion in 1995, and
the number of business units has increased to about 50.
Concurrent with this explosive growth has been an operating philosophy
that provides a high level of operational autonomy so that each business
can react quickly to its changing market conditions and customer needs.
One implication of an operating philosophy that is built on such autonomy
has been the purchase, development, and implementation of a mosaic
of financial business processes and supporting technology that are
generally highly customized and business specific.
This business-specific approach was also driven, in part, by the
lack in the marketplace of flexible, cost-effective software applications
in the 1970s and 1980s that could adequately meet the needs of businesses
that differed not only in location and industry but also in size,
complexity, and needs. The result of such a decentralized approach,
as one might expect, is heavily customized financial processes and
systems that, in many instances, cannot be elegantly integrated, along
with a high degree of incompatibility of hardware and software as
one looks across the enterprise. Many of these systems capture and
store enormous amounts of financial data but are difficult to blend
and align with nonfinancial data residing in still other customized
internal systems or available from external sources or databases.
So it is difficult, costly, and time-consuming to transform this internal
and external data into information to be used for business analysis
and decision support and, therefore, add value to the overall management
These factors have collectively resulted in a full menu of highly
customized, business-specific financial functions being performed
at each business unit. This approach does not permit optimization
and results in the inability to redeploy resources across multiple
businesses as needs vary at different points in the life cycle of
each business. Further, as the organization's portfolio of businesses
changes as a result of acquisitions, the array of business-specific
financial processes and technology becomes even more diverse and fragmented.
With the availability in the 1990s of scaleable hardware and flexible,
user-friendly software, coupled with a more intensely competitive
environment in all markets, regardless of industry or location, the
timing was right for management to re-examine the implications of
the decentralized operating philosophy, with respect to the finance
function that had worked so well for the past two decades. The strategic,
operational, and financial implications of having each business unit
devote financial, human, and capital resources to generic transaction-processing
activities that are common across all businesses, regardless of industry
and size, needed to be objectively quantified, analyzed, and evaluated.
Clearly, these financial processing activities are not the core competencies
referred to earlier that made each of the business units and the company
successful, nor are such activities critical aspects of the long-term
strategic mission and vision of each of the businesses. However, on
a decentralized basis, no one business unit or cluster of like businesses
could develop a business case with a return on investment that would
be high enough to justify the investment required to transform the
business processes and legacy systems and technology that have evolved
over the last several decades from their current state to the "best
practices" currently employed by many other organizations. This
is due in part to the inability of any single business to have enough
transaction volume to take advantage of economies of scale. Further,
no single business would have the financial and human resources over
which to spread the investment and the risk associated with the redesign
and implementation of new business processes supported by an enhanced
What I have just described about legacy systems and the investment
associated with a transformation to new business processes and technology
is not unique to my organization. In fact, it is relevant to many
other companies in the media industry and in other industries, as
well as organizations in the public sector. Let's spend a few minutes
examining why that is the case.
Need for Benchmarking
Typically, as organizations expand, their need to remain close to
their customer base sometimes blurs their vision with respect to activities
that are not within their core competency and, more importantly, that
do not add value to the products and services they sell. The focus
becomes so intense with respect to acting locally that the organization
is not able to step back and think globally across the enterprise
in an objective manner.
One of the many ramifications of this is that business units evolve
into self-contained silos of financial activities that often replicate
business processes, technology, and expertise throughout the organization.
Further, in many instances, multiple business units unknowingly are
simultaneously developing and implementing solutions to issues that
are common across different parts of the enterprise. It is at this
point in its life cycle that an organization becomes a prime candidate
for benchmarking its finance functions in order to objectively quantify
the size of these silos. This technique will enable a company to objectively
evaluate the operational and cost implications at both the macro and
micro levels of conducting its finance functions.
The benchmarking process, which can serve as a wake-up call, is a
useful tool that assists the organization in its analysis and evaluation
of its financial activities. Through benchmarking, one can not only
quantify how much but also understand in what ways the organization
is expending its resources on financial processes and activities.
Benchmarking enables management to focus on common issues. It also
highlights specific opportunities for improvement by identifying competitive
gaps through a comparison of the best practices of other organizations
with a company's own financial processes and costs.
This effort can also serve as a catalyst for change that will reach
deep into the organization and, in many cases, transcend the financial
function. The impartial findings from benchmarking have caused many
companies to re-examine how they have organized their businesses and
how effectively and efficiently they operate. In some cases, benchmarking
has also provided the incentive to reassess the financial, human,
and capital resources allocated to business units to achieve their
core missions. Additionally, benchmarking may focus attention on how
business units interact with each other as well as with vendors and
customers that are common to multiple parts of the organization. Information
about a company's relationships with other organizations with whom
there is both a vendor and customer link is also highlighted through
RULES OF THE ROAD
With that as background, I would now like to establish some "rules
of the road" for the balance of my remarks. This will enable
us to move through the rest of my material in a productive and efficient
In order to maximize the process of sharing information this evening,
I would like to suggest that we keep the session informal and interactive.
Also, let's rely on a dialogue as opposed to a lecture format. Despite
the importance of accuracy, you will quickly see why focusing on the
relevance of information as opposed to its precision is critical.
It will also be extremely helpful if you suspend your individual assumptions
and biases about financial processes and controls as we share ideas
and information in an area where there is no one right answer. Finally,
let's have some fun.
In benchmarking there are a handful of critical considerations that
apply to most companies. Though the importance of each varies by organization,
getting started requires assessing a number of critical issues in
order to know when and how to proceed. As indicated earlier, the timing
of a benchmarking project and top management support are critical
to the credibility of the effort and its ultimate success. This is
further enhanced by the level of partnering and collaboration among
colleagues throughout the organization.
Recognizing up front that multiple cultures exist within any organization
also plays a key role in how and when one should proceed. Also, linked
with the aforementioned is the necessity to clearly communicate the
purpose, scope, and timetable of the benchmarking process. And, last
but by no means least, continually selling the technique and a project
of this magnitude is a must.
In connection with our efforts at NYTCO, we experienced the four
identifiable phases noted below during the course of our journey,
which is now in the final phase.
- Business case for change
- Business process redesign
- Best practices implementation
Within each of these four phases there are subsets that relate to
specific activities covered by each phase of the journey. In the interest
of time, my remarks will focus on the first phase -- benchmarking.
Time permitting, we will spend a few minutes briefly discussing the
other three phases before the conclusion of my remarks.
In order to ensure clarity, let me define "benchmarking."
Benchmarking is the comparison of similar processes across organizations,
companies, and industries to identify best practices, some of which
may exist inside an organization and others outside. The challenge
is to identify these best practices and to apply as many practices
as possible across one's own organization. We used benchmarking in
early 1994 to compare our financial processes to a database of more
than 100 other companies developed by The Hackett Group ("THG"),
a well-known consulting firm that specializes in this area. Their
database is updated periodically as companies provide more current
information and new companies are added.
Planning the benchmarking effort is a critical first step in order
to ensure the integrity and credibility of the entire process. As
part of the planning, it is important to clearly define and articulate
the scope and timetable of the benchmarking effort to avoid "scope
creep" into areas beyond the project's originally defined scope.
This is accomplished by specifically identifying the business units
and processes to be included, along with the use of consistent methods
and definitions throughout the organization to ensure comparability
of the data collected and aggregated. This approach provides valid
comparisons with the database as well as within the organization.
Once the data has been electronically aggregated for each process
and business unit, the finance processes and related costs can be
compared across internal business units of similar industry, size,
or geography, as well as against the external database. After all
of the business units review and understand the results of the benchmark
comparisons by business unit and for the entire enterprise, the findings
are communicated to management. This is a key step in the overall
process because the sharing of the benchmark comparisons provides
the initial forum from which a common understanding of the results
must evolve. The determination of the appropriate next steps in large
part is based upon the quality of this sharing process and forms the
basis for the buy-in necessary to begin the change process. The sharing
sets the stage so that a dialogue can begin based upon a common set
of facts rather than perceptions, and enables the organization to
objectively consider alternative approaches to handling its business
processes and technology on a company-wide basis versus a business-unit
To maximize the value of the results of our benchmarking project,
we included the 22 financial processes shown below.
A comprehensive approach was taken so that we could gain valuable
insight into the interrelationship among these processes. This insight
was critical in the later phases of our journey as we redesigned our
business processes and selected technology that is compatible with
To benchmark these processes, we accumulated costs and operating
statistics for 1993; for example, the annual number of customer billings,
customer remittances, payroll checks, expense reports, and vendor
invoices, to name a few. The accumulation of both costs and statistical
data enabled us to make comparisons against the database in multiple
ways, such as by process, by business unit, and for the total enterprise.
The information gathered as part of the benchmark process enabled
us to compare ourselves with other organizations that were employing
best practices in specific processes.
Given the size and diversity of THG's database, benchmark comparisons
for each of the finance functions can be made across multiple industries.
While some companies have demonstrated noteworthy best practices in
selected processes, no one company can claim "best-in-class"
in all its finance processes. To identify improvement opportunities,
comparisons are made at the individual process level with best practices
in the database. Identifying the gap between an organization's current
processes and best practices generates a "wake-up call"
for change if an organization wants to be able to take advantage of
specific process improvement opportunities.
The information gathered from each business unit and aggregated on
a company-wide basis provides a look at an organization's finance
function from a number of viewpoints. One viewpoint is financial staffing
by job classification -- management, professional, and clerical. Another
is the portion of the financial staff's time devoted to activities
such as transaction processing, control and risk, decision support,
and management. This technique also enables us to compare the years
of experience of the financial staff -- management, professional,
and clerical -- to the benchmark database and provides an opportunity
to identify and evaluate differences in these parameters.
In addition, the costs of the financial function are aggregated by
process under three broad categories -- personnel, systems, and other.
In the case of personnel costs, the methodology results in each business
unit aggregating salaries, wages, overtime, bonuses, and fringe benefits.
The systems costs category aggregates system support and processing
costs. The final category -- other costs -- includes items such as
facilities, travel, training, supplies, postage, communications, outsourcing,
With that as a backdrop, let's consider how to compare individual
companies with the benchmark database. Having aggregated the total
costs of the finance function, one now calculates such costs as a
percentage of revenues and compares that percentage to the database
average, as well as the first quartile, which is a proxy for best-in-class.
These comparisons can be performed not only for total finance costs
but also for each of the three aforementioned categories of costs
-- personnel, systems, and other.
At the time of our benchmark effort, THG's database average based
on 1993 information indicated that finance function costs represented
1.50 percent of revenues, but first quartile companies expended only
1.36 percent of revenues to perform the same functions. An analysis
of these reference points indicates that the primary reason for the
difference between the two percentages is lower personnel costs. See
Exhibit 1 below.
A closer look at the database also reveals a difference in the distribution
of these costs among four discrete activities -- transaction processing,
control and risk, decision support, and management. For the benchmark
average the cost distribution is 64 percent, 19 percent, 11 percent,
and 6 percent, respectively. However, for first quartile companies
we see a different distribution, where transaction processing is significantly
lower at 46 percent, whereas control and risk at 25 percent and decision
support at 24 percent are actually higher than the benchmark average.
See Exhibit 2 below.
By linking financial function costs as a percentage of revenues and
their related cost distribution, we observe two critical differences
between the database average and the first quartile. The data reveal
that best-in-class companies not only had lower overall finance costs
as a percentage of revenues (1.50 percent versus 1.36 percent) but
also focus a greater portion of finance expenditures on control and
risk and decision support. This approach adds value to the overall
management of an organization and devotes significantly less expenditures
to transaction processing (64 percent versus 46 percent).
Having gathered, quantified, analyzed, and shared the benchmark results,
NYTCO considered the multidimensional implications of the changes
necessary to move from the current environment to a world-class finance
organization with business processes, technology, and a cost structure
that paralleled organizations in the first quartile of the THG database.
To accomplish this, the future is viewed as a comprehensive program
that takes into account the full spectrum of internal and external
pressures and issues that have an impact on the organization.
Exhibit 3 by no means represents a complete list of the areas requiring
an organization's focus as it evaluates the implications of alternatives,
but rather a number of major areas that are common to most organizations.
However, all of these pressures and issues exert varying degrees of
influence on how a company should proceed as it develops a comprehensive
vision for the future. Obviously, technology plays a critical role
in virtually every decision that is made today, but it should be viewed
as a tool to enable the redesigned business processes to function.
The organization's control philosophy must also be considered to ensure
compatibility with the new vision that will require greater empowerment
of employees relative to the old "command and control" environment.
In addition, the organizational structure plays a role. How the whole
enterprise "fits" together may have significant implications.
This depends, in part, upon the legal entities that are involved,
state and local tax requirements for companies operating in multiple
jurisdictions, and the level of centralization or decentralization
of some finance functions within the organization.
The importance of understanding the multiple cultures that exist
within any organization was mentioned earlier. Such insight is also
critical to the development and ultimate buy-in to a shared vision
of the financial processes and technology necessary to move from the
current state to a future state that maximizes the use of best practices.
The mix of employee skills and capabilities must also be considered,
even if staff levels compare favorably to THG's database. It is essential
to determine if the workforce has the skill sets required for the
environment envisioned. Wage rates and geographic locations must also
be analyzed in developing a comprehensive plan. Collective bargaining
agreements must be taken into account because they may influence the
organization's cost structure and flexibility. In addition, regulatory
requirements (FCC, SEC, IRS, etc.) and a company's current policies,
practices, and procedures must also be considered. The organization
must evaluate the strategic and competitive implications of specific
service target levels and determine how much it can expend to provide
quality internal and external customer service.
The most important point to keep in mind is that none of these pressures
or issues should cause one to construct a vision that is constrained
from the outset by an unwillingness to embrace change. Even though
some of these pressures or issues may influence the implementation
plan, the organization must resist allowing them to become roadblocks
to moving forward.
Hierarchy of Improvement
One of the primary objectives of benchmarking is to assist in the
development of a comprehensive program that will enable the organization
to move up the "Hierarchy of Improvement" triangle, as illustrated
below in Exhibit 4.
Companies first re-engineer their financial transaction processes
because these activities usually span the entire organization and
represent the greatest opportunity for improvement through the use
of best practices. This leads to an improvement in management information
and a refocusing of resources to higher value activities such as decision
support and analysis. Addressing all three of these initiatives enables
the financial functions to move up the hierarchy and become a business
partner with operating executives.
We talked earlier about best practices and some of the pressures
that might cause the timing to be right in a particular organization.
The benchmark enables an organization to objectively identify and
evaluate opportunities and aids in the formulation of a cohesive best
practices vision that is shared throughout the organization.
It is critical to communicate the benchmark results in order to initiate
the transformation cycle and facilitate the development of a vision
that fits a particular organization and enables the implementation
of best practices. As part of this effort, the organization must select
the right technology and use shared services in order to aggregate
and standardize common activities across the enterprise. Exhibit 5
(see below) illustrates that the communication and selling of such
radical change must be continually performed at all levels in the
organization and reinforced by top management if it is to be successful.
Having already validated the benchmark data and results, what is
next? The organization needs to form a cross-functional, high-caliber
project team comprised of individuals with a diversity of skills and
from different business units to lead the process redesign effort.
Early in this effort, a timetable with specific objectives and milestones
must be developed and communicated within the organization, and management
must be updated on a predetermined basis. The project team should
focus their attention on those processes with the greatest leverage
and payback for the organization. In addition, the team's major responsibilities
should include developing a business case, implementation plan, and
Earlier I mentioned that we experienced four distinct phases to our
journey. Let me share with you the time frame each one required for
our organization. The benchmarking effort occurred in the months of
March and April 1994. Following several months of communicating and
selling throughout the organization to ensure buy-in at the conceptual
level, a project team was formed in September 1994. A comprehensive
vision, business case, and implementation plan were developed by February
1995, when the Board of Directors gave its approval to move ahead.
From April 1995 to April 1996, with the assistance of outside consultants
to supplement our project team, we focused our efforts on a number
of areas, such as best-practice process mapping, software and hardware
selections, shared service-center site selection, and outsourcing
of certain activities. A detailed implementation plan and a communication
and training program were also developed to ensure a successful rollout.
The implementation process began in mid-1996 and will continue through
Once you're fully implemented, you may want to go back and re-benchmark
to ensure you've actually achieved the return on investment in the
business case and are providing the quality of service planned since
the structural change in transaction processing has taken place. In
addition, the benchmark average (1.50 percent) and first quartile
(1.36 percent) finance costs as a percentage of revenues were based
on 1993 information before many of the organizations in the database
redesigned their business processes. A current look at the database
reveals much lower percentages and, therefore, a wider gap between
best practices organizations and others that have not redesigned their
Hopefully, the value of benchmarking the finance function, as well
as the techniques and methodologies used, is somewhat clearer, and
my remarks have provided you with insight into this powerful technique.
Thank you for your patience and for joining me this evening.