Kinetic Consulting

The challenge with benchmarking is how to find something similar and relevant to compare yourself against...

The order to cash process is fundamentally simple: provide a service or supply a product, invoice the customer and collect the money. From that starting point, comparing one organisation with another would seem simple. However, if we have learnt one thing from working with the 50+ CICMQ organisations it is this: everyone is different. Just when we think we have seen it all before, we are pleasantly surprised to see a new way of working as companies strive to find constant improvements. Given that everyone is different, it is therefore interesting that there is such a desire to compare one organisation’s metrics with another to see who is ‘better’. It isn’t just how we do things that is different, but also how and what we measure, and what we include or exclude in those measures, which differentiates one result from another. So why should we compare? And what do we hope to achieve by doing so?

BENCHMARKING

One of our long-standing CICMQ organisations recently broke their own unwritten rule by becoming the biggest in their industry. Being number One was always something they avoided, not least as it brings greater pressure to maintain that status and the high expectations of shareholders. There is a competitive streak embedded in all Credit Managers to beat the target and to be better next month. One CICMQ organisation, which is also a Centre of Excellence, has the saying ‘Be better tomorrow than we are today’. Being faster, bigger, more skilled, leaner, stronger is part of human competitiveness, but you wouldn’t compare Usain Bolt with Andy Murray in tennis or Lewis Hamilton’s car for straight line speed with a 1969 VW Beetle (unless it is Herbie obviously), and that is the issue with benchmarking: how do you know you are comparing apples with apples?

Benchmarking is now an industry fuelled by finance who strive to compare and contrast results, reduce costs, become lean, and improve efficiency and effectiveness, so it is no surprise that the ‘Big Four’ consulting firms provide benchmarking services to satisfy this demand. I spoke to a recently retired partner of one of these firms and asked him how they provided benchmarks to their clients. In short, he said they compared organisations in the same industry and then took a best guess as to what the numbers should be. Not exactly scientific, but when you look at the variables involved, being scientific and creating an algorithm for this would be just impossible, not least because a great deal of measurement in operational management is subjective (for example staff capability). How do you compare one credit management team against another in terms of their skills, experience, competence etc? Which system is better or more appropriate for that company, in that industry, handling their specific customer base? If you are benchmarking against another organisation you will never be comparing apples with apples.

DIRECTION OF TRAVEL

Benchmarking is at best a guide, a pointer for the direction of travel, not a destination. It may be that the benchmarks you receive are wholly unachievable with the team, systems, processes, and customer base that you have. When I was working in industry there were a number of initiatives designed to reduce costs and improve performance, one of which was to look at costs and then match it to a level of service that could be provided. Logical you would say, but what happened was that finance requested ‘Bronze’ levels of costs for ‘Gold’ levels of service. It was the standard ‘do more with less’ wrapped up in a ‘benchmarking’ study. When challenged the answer came back ‘Well that is what our competitors achieve’ with no validation.

As mentioned, benchmarks are a direction of travel rather than a destination, and on that journey to improvement investment is required, in people, systems and processes, but where do you draw the line? Getting to the nirvana of ‘Best in Class’ comes at a price and as the actions mount up, and the closer you get to the golden number, the more expensive it becomes. In the law of diminishing returns you have to consider how much more you are prepared to pay in new systems, training, process improvements to gain that extra two percent reduction in debt, one day DSO reduction or five second faster call answering.

‘Best Practice’ from a CICMQ perspective isn’t about numbers or DSO; yes we look at measurement and dashboards, and we look at span of control within teams, but this is looking more at what is appropriate for the organisation not the results themselves. We see on LinkedIn regular questions asking ‘How many customers should there be per credit controller?’ This is probably a question finance may ask but an operational credit manager would understand it is impossible to answer. Organisations in the CICM Best Practice Network have a huge range of DSO from less than 10 days to greater than 70, and overdues from zero to 40 percent. One client was targeting £3m collection from a ledger with more than £300m in debt, but once you understand the organisation, industry and customer base it puts a very different perspective on things.

MEASURING PERFORMANCE

If benchmarking is only a guide, how do you know what your KPIs and performance measures should be? As professional credit managers we do not look at one thing and say ‘nailed it’. It isn’t just about DSO, percentage overdue or queries resolved, applications processed etc. there is no ‘golden number’ that says you are doing a great job. We can all reduce DSO but will we have any customers at the end of it? Like all things it’s a balance. The Credit Managers we work with understand what good looks like and it doesn’t come easy. So instead of striving for what could be an impossible arbitrary ‘Best in Class’ number, perhaps it is time we looked internally for benchmarking and ask ourselves a few questions:

What is driving the debt on the sales ledger?

There is the normal DSO measure… then there is the ‘Terms DSO’ in other words the terms sales offer to customers. If you can understand this, then apply this measure. It will make the sales teams more accountable. The benchmark is of course the standard payment terms your organisations offer.

What is the billing accuracy of your organisation?

Last time I did a survey of 100 credit managers only five percent measured billing accuracy. This is a key driver for debt. It is widely accepted that as a guide that a >0.5 percent error rate (credits as a percentage of invoices) is reasonable. What is the percentage of revenue (including VAT) that you leave behind each month? (i.e. What rolls to the next aged bucket). For every organisation this will be different for various reasons and is as much to do with your billing cycle as it is the customers’ payment cycle.

What are the ‘DSO Drivers’?

This is one of my all-time favourite bits of analysis, thanks to long time CICMQ Accredited ABAgri and Frank Anderson FCICM. Understanding what proportion of your DSO is tied up in overdue, disputed, extended terms, payment plans etc. Start with what is a DSO day worth in £GBP.

Only when you have asked these questions, and you have the answers, is it possible to start to set your internal benchmarks, which of course will then be based on your organisation and not someone else’s. If everything was perfect what would be the measure? This is only the starting point. Next you should look at all of the elements and results that are under your control and the control of the credit control team. Only then should you engage with stakeholders on those items that are generally outside of your control.

In five easy steps:

Decide on the measure you want to ‘benchmark

Understand in detail what are the drivers for these measures and results

Understand what the result would be if everything was perfect

Figure out and fix what you have influence over

Work with stakeholders to drive improvements in their teams for the issues you don’t

If you do want to compare yourself to others… make sure that these comparisons are only ever used as a guide or direction of travel and not a destination or you could be forever chasing the pot at the end of the rainbow which as we all know is impossible to find.