Work harder and smarter (compared to what?)

What exactly does an accountant do? How much resource is required to process and analyse financial data? How effective or ineffective is the outcome?

BCAB, the ICAEW’s Board for Chartered Accountants in Business, decided to confront these issues directly. They commissioned Manchester Business School to see if these questions were answerable and whether a reference framework could be built using BCAB members’ shared experience. The particular focus of the research was on enterprises with a turnover of less than #30m, since these are unlikely to have the funds or internal expertise to benchmark their activities against external competitors.

A first run pointed to major differences in efficiency, with the average firm using around twice as many resources as the best comparable company in the individual cycles – which included expenditure processes, production processes, sales administration and liability management.

However, this may not be the complete answer. Most companies recognise that productivity depends as much on working smarter as it does on working harder. To do this, research is needed to identify what accounting departments do other than simply process paperwork. In the past, benchmarking has worked best when the profit-sensitivities of measurable activities, such as the speed of new product introduction, were relatively clear cut.

For accounting, the question is not just how accountants spend their time but how to measure how well they are spending it. The first way to tackle this problem is not only to look for an association between accounting inputs, but to include profitability as well as turnover in order to measure output. The second way is to ask companies what performance benchmark they use in managing accounting resources.

It was discovered that using more than the bare minimum of accounting resource was not necessarily wasteful since many firms that did this used their assets better and made higher profits than a large proportion of those using the least accounting resources. However, some firms which used a lot of accounting resource underperformed on profitability, highlighting problems in both the efficiency and allocation of accounting resources within the firm.

The overall message from the survey and focus groups was less clear cut.

It appeared the majority of SMEs used no formal performance indicators for their accounting activities. Even those that did had sharply contrasting views on the balance between measurement criteria such as timeliness, cost, accuracy and value. There was even stronger disagreement over which practical measures should be used when translating these performance criteria into benchmarks.

Despite this, the research was successful in demonstrating that there are enough points of comparison between accounting activities in different sizes and types of companies to reach some valid conclusions, not only about physical productivity differences but also the profit impact of those differences.

The need to measure performance is given additional bite because of the number of outsource contractors bidding to take on some or all of the finance department’s work. Unless a company has a pretty good idea of what each of its accounting activities costs and what value it creates, it is impossible to judge whether the company would be better off contracting with an outside supplier. The shortage of performance evaluation schemes is a double concern because it is the accounting function that generally negotiates outsourcing contracts across the company, and without some very clear objectives and performance criteria it is difficult to see how to successfully negotiate such contracts. Interestingly, the companies in our sample that were most likely to be outsourcing were also those that undertook more benchmarking activity and were already achieving a better than average efficiency on their operations.

For larger firms, head office specialists are retained to re-engineer the businesses through outsourcing and alliances, but smaller companies without this resource find this process more difficult. Unfortunately, it is the smallest firms that have most to gain from benchmarking since they are the ones that are operating many of their support activities at a major scale disadvantage. For example, because benchmarking gives a good indication of what it would cost to pursue processes at 10 times their current volume, it can be used to indicate the prices a company should be looking for from outside suppliers or the price they should seek if they decide to insource or enter a joint venture.

Without this help it appeared finance function outsourcing in SMEs was concentrated heavily on wage payments and tax, both of which are relatively clearly defined tasks remote from the companies’ area of core activity.

But, increasingly, smaller companies are being left behind by the IT spend of bigger competitors. To survive SMEs will increasingly need either to eliminate their disadvantage by internal streamlining of their processes or lock into the scale advantages of their suppliers and concentrate resources on activities that add value to their customer relationships.

A copy of the Manchester Business School/BCAB report Benchmarking the Finance Function can be obtained from the ICAEW on (0171) 920 8465.