How can we gauge the performance or productivity of our transactional teams? They are executing but we are not sure if they can scale with the expected growth of the Company or adapt to the changes in our market. They have asked for more resources but they cannot point to any driver of capacity other than revenue growth.
Metrics are like the government: necessary but often useless and, in certain instances, self-serving. They need to be implemented with care and close supervision. Beware of those industry surveys that use “cost as a percentage of revenue” or “employees per function” as a measurement of performance. They provide the illusion of mathematical certainty when, in reality, they are a concoction of firms that do not understand anything other than how to compute an average. Do not buy into their assertions.
These firms benchmark the back office headcount costs of your company against other companies with different products, different sales models, and customers in different countries. They compound this error by correlating your cost structure to a supposed cost driver (e.g., revenue) even if the driver is not the actual driver of costs in your organization. To top it off, they compare your costs to other companies without divulging that very few, if any, of these organizations are structured in the same manner as yours. The worst aspect of this quackery is that it is the first – and often last – analysis relied upon by the “internal consulting” teams that executives turn to when they want to evaluate their back office teams’ performance.
Why aren’t the purveyors of these surveys aware of their problems? First, they do not want to admit their cash cow business does not add real value. They stick to the fallacy that comparing hundreds of companies must add some benefits to an organization and essentially they cheat you by not telling you how they made their analysis fit your company. Second, they cannot be confronted with the results of their data in rigorous ways since companies that participate must remain anonymous. You cannot dig any deeper to understand if the survey is a true “apples to apples” comparison. Their fundamental data is flawed, and thus their results are worthless!
Can you benchmark to measure performance? Yes, but not through a survey.
Let us return to “Lean”, which has workers exercise critical thinking to measure their performance. According to this system, the individuals who perform work should continually take the initiative to tinker, experiment, and improve their processes. They are the planners. They do the work. And they need to evaluate their work to make it the most efficient, and thus profitable, for your company.
You cannot improve if you do not measure the timeliness, cost, or quality of your work and the satisfaction your product provides to customers. Measurements in these important areas communicate objective feedback about problems. They enable you to understand the root cause of your issues, whether manufacturing, distribution, or day-to-day transactional functions. Further, measurements can tell you if your efforts to improve processes have succeeded or not. The wrong metrics can lead, fatally, to misplaced priorities.
How can you overcome the traditional tradeoff notions between cost, time and quality, and implement the right metrics? By prioritizing. “Pursuing time” allows simultaneous improvement along all three dimensions, rather than a requirement that trade-offs must be made by dimension. Efforts that focus on cost usually achieve only temporary savings – a reduced headcount assigned to the same workload results in increased error rate and excessive delays in time. Efforts that focus on error reduction (e.g., SOX) inevitably build up redundancy checks resulting in increases in cost and cycle time. Focus on cycle time reduction targets the improvement effort on anything that causes delays, which are caused by quality problems or constraints. The effort to fix these problems is what drives up costs.
In a service context, long-cycle times (a long close, a long payroll cycle, large amounts of time to collect or pay bills, etc.) mask issues related to poor order entry, customer unfriendly purchasing, journal entry errors, inaccurate operating databases, unavailable personnel/systems, rework, etc. Focusing on dramatically reducing cycle time exposes these problems. Once exposed, you can categorize the problems and determine their root causes. Eventually, you can design error detection and prevention into your processes with the goal of achieving zero defects. A relentless focus and pursuit of this goal will dramatically improve the performance and work tempo of your team.
Consider the financial close, an orchestrated process that aggregates the results from a number of information streams. It is guaranteed that if you target a four-day close or less, you will discover quality issues that were not previously detected. Measure every late, adjusting and immaterial entry delivered during each day of close. Do the same for reconciliations and reports. Categorize the reasons for each issue every month. Also, track the time that every employee works during close and where they spent their time. This collection does not have to be precise. It just has to get a rough estimate of where work is performed each month. After a few months of tracking these measurements alone, you will discover the root cause of almost every error and constraint in the close. And you will quickly be able to reallocate resources to deliver the right information to the right customers at the right time each month.
As you kick off your improvement efforts, reach out to your service providers and employees. Ask them their thoughts on which companies have the best back office performance. Introduce yourself to the leaders of these organizations and ask to trade information on your processes. As long as they are not competitors, they usually will comply with your request. Like you, they want to improve, too. Ask how they measure themselves. Ask which initiatives have succeeded and which have not. Ask how they are organized and why. This type of benchmarking – investigating other companies’ processes in depth while simultaneously investigating your own – yields the best results. It allows workers to analyze “why” they do what they do in detail and “how” they or others can do it better. And it just might prevent another worthless survey from being purchased.
- Takeaway questions:
- How do you measure the performance of your back office teams? Do these measures include cost as a percentage of revenue or headcount?
- Does your company’s performance evaluations include measure of timeliness, cost, quality or customer satisfaction of your teams?
- Do you base headcount or budget allocations on industry survey results?
- Do your back office teams benchmark their performance or structure against other organizations?
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