Collecting baseline Finance data

In a previous post on the challenges of collecting baseline data for use in benchmarking, I covered five points to overcome in the collection of data.  In this post, I'll capture a few quick points to keep in mind when collecting data.

1. Collect data based on a predefined taxonomy.  A taxonomy is simply the classification of activities in an organization.  For example, in Accounts Payable, some of the activties that would be defined include invoice receipt, invoice entry into the A/P system, printing the check or creating the EFT, and sending the payment.  It's important that data be collected in the same way it will be compared to the benchmark data.  Otherwise you'll have an Apples to Oranges comparison.  So it really makes sense to understand the data set for benchmarking that you'll be comparing your baseline data with.  Many industry organizations have benchmark data available to their members.  Many consulting organizations also have benchmark data for use.
2. Define FTEs in terms of activities, not titles.  I touched on this in a previous post, but it can't be emphasized enough that the FTE and cost capture needs to be based on activities, not titles.  If you have an Admin Assistant in a Business Unit that is responsible for opening all the mail and forwarding vendor invoices to the B.U.'s payables group. then that person is a partial FTE for Accounts Payable.  This is a common cause of missing FTE, and the related costs, during a baseline exercise.  Spread over a large organization, these discrepancies can be substantial.
3. Scrub data and perform additional research.  There are certain guarantees in life:  Death, taxes, and that cost data submitted will be incomplete and flat out wrong.  You'll ask for cost data in one format and you'll get it in another.  Departments will combine different categories of FTE and costs that you wanted broken out.  They'll leave blanks when common sense tells you they must have someone performing that activity.  Your job is to identify all of these possible discrepancies and track them down.  In a perfect world you wouldn't have to do it, but hey, we all know how that works.

By keeping these three points in mind, the quality and comparability of the data you collect will be greatly enhanced.

Baselining the Finance cost structure

You would be amazed at the number of companies I go into who have little to no idea what they're spending on the Finance function.  There are several reasons for it but there really is no excuse.  Without understanding what is currently being spent to deliver Finance services across the organization, companies have no idea where they stand relative to high-performing companies or which areas they should focus on first to gain efficiencies and reduce cost.

Some of the reasons for this include:

1. Absence of a mandate to cut inefficiencies out of the Finance organization.  In an era when CFOs are being asked to do more with less, this seems like an unlikely proposition.  And with the poor economy it's even less so.  However, there are still Finance organizations that don't have an ongoing mandate to continuously cut their costs.  Without a mandate, there is little incentive to understand the existing cost structure.  Even if the CFO wants to cut costs, and who doesn't, it won't happen until it becomes a highly visible initiative.  Very few managers want to voluntarily cut costs in their organizations, so it won't happen unless they are pushed.
2. Vague definition of what constitutes a Finance process.  In some organizations the Finance organization is fragmented, with many resources residing in the Business Units.  Even within Corporate, some Finance resources can reside in areas directly outside the control of the CFO. Yes, I know this seems incredible but I have personally witnessed it.  Some organizations consider customer invoicing to be in Operations; most consider it a Finance function.  Is manufacturing costing part of the manufacturing process, or is it part of Finance?  If a company intends to use the cost data it captures for the purpose of benchmarking, and it should, then the company will need to understand which processes are typically captured in Finance benchmark data.
3. Existence of a "shadow" organization.  When collecting cost data on the Finance function, it's not always easy to track every FTE, or partial FTE, that has a role in the Finance function.  Many times people in the Business Units wear multiple hats, and even the most determined effort may miss people who are contributing to Finance.  They often have titles that would indicate they are part of a different organization outside of Finance.  A common example are personnel in the Business Units that actually perform some type of financial analysis but have a non-Finance title.
4. Inaccurate definitions of what constitutes a cost of Finance.  When collecting the cost to deliver Finance services, it isn't enough to look at salaries and benefits.  There are always support costs that should be incorporated into the cost calculation.  If they're not doing so already, CFOs need to think about their operations as an independent business.  If it were truly a separate business, what are all the costs that would go into running it?
5. Political resistance.  Sometimes people don't want you to know what Finance resources exist in their operations (see "shadow" organization above).  Many managers know that the baseline costs you collect can be used to make decisions that impact them.  For instance, the decision to outsource an entire function will be based in part on what you're spending today on that process.  Since not every manager will be completely forthcoming about their staff and expenses, it's important for the individuals collecting the data to review it with a skeptical eye.  Does the data make sense?  If not, it's important to go back to the source and push harder for explanations.

Baselining the cost of Finance should be an on-going process as part of a continuous improvement effort.  Only when costs are accurately tracked can a Finance organization begin its journey to high performance.  In a subsequent post, I'll discuss the costs that should be tracked as part of this effort.