But like all good things, benchmarking has some drawbacks that keep it from being any kind of silver bullet for business. First and foremost is the problem of getting comparable data. Since companies organize themselves in many different ways, what one company calls accounts payable might fall under expense reimbursement in another company. Companies that get together to compare the way they do things may find out that they're comparing dissimilar processes, says Richard Roth, chief research officer for The Hackett Group, which claims that it has benchmarked finance for 81% of the Fortune 100. This puts a premium on information.

Case in point: Geri Westphal, assistant treasurer at $10.1 billion Oracle Corp., began benchmarking in the last year to assess the progress of Oracle's move toward a centralized treasury. But she says that talking about benchmarking is like discussing straight-through processing: "Everyone has a different definition."

Thus, her biggest challenge initially has been tracking down the right information. In her search for benchmarking data from companies with structures similar to Oracle's, Westphal has worked with Hackett and The Corporate Executive Board's Treasury Leadership Roundtable, and she also participates in a benchmarking group of treasury executives from 20 big technology companies. Finally, she says that Oracle is also approaching other companies directly for information. "We're in the process of moving through different kinds of organizations and information to find the information that is most comparable," Westphal says.

Concerned about the apples-to-apples problem, The American Productivity and Quality Center Inc. (APQC), a Houston-based benchmarking clearinghouse, and a group of companies that includes Bank of America, IBM Corp. and Procter & Gamble are promoting a standard framework of business processes to be used in benchmarking efforts. The Open Standards Benchmarking Collaborative has made its taxonomy available free of charge on the Internet and is encouraging companies to use it.

The framework "lets companies look at their processes [to] be able to benchmark them in a standard fashion with other organizations," says Lisa Higgins, APQC's chief operating officer. "If I call it treasury and someone else calls it risk management, we can agree that in the taxonomy, it's under managed financial resources."

Tom Elsenbrook, managing director of the business consulting group at turnaround firm Alvarez & Marsal Inc., another supporter of the open standards, says the confusion about definitions isn't just a problem when a company tries to compare itself to other companies. It also occurs, he notes, among different units of the same company. "You won't have a common understanding of the payables process even within an organization," Elsenbrook says. "What the process classification scheme does is give you a language, a common language within your own organization as to what work is done, and then you can talk about how you do that work."

On the other hand, some consultants see so much possibility for confusion with detailed comparisons that they advise companies that they are better off using only the broadest benchmarking measures. "Benchmarking is most efficient and has the most bang for the buck at the top level," says Frank Galioto, a principal specializing in the finance function at the management consulting firm Booz Allen Hamilton Inc. He cites the measure of finance costs as a percentage of company revenues: "The most knowledge for the least effort comes from getting that number and finding out where you stand overall."

Scott Bohannan, executive director of the finance practice at The Corporate Executive Board Co., a Washington D.C.-based provider of business research to corporate executives, sees another pitfall. Even if companies are comparing the same processes, they may be ignoring important differences in the business environments in which those processes occur, like their strategies or levels of complexity, he says. "Two companies are talking about the same kind of process, but the way those two companies do business, the way you would want to think about that process, is different." For example, all companies want to reduce their days sales outstanding (DSO), Bohannon says. "But the context is important. Maybe you can get much better pricing by extending DSOs. There's more than one way to say, 'Is my DSO comparable to his DSO?'"

Instead of benchmarking at finer and finer levels of detail, companies might be better off using process engineering, Bohannon says. "Some of the people with the best processes never benchmarked the granular levels. They said, 'The overall number is high,' and they ripped the process apart to find bottlenecks." When a company is trying to figure out how to improve a process, it might be valuable to visit other companies to find out how they do things, Bohannon says, describing that effort as "qualitative benchmarking." Alvarez & Marsal's Elsenbrook suggests a ratio of 15-to-85: Companies should spend 15% of their time gathering benchmarking data and the other 85% examining how they do things. "It's changing the methods and practices that causes the improvement to occur," he says.

Elsenbrook also argues that companies should focus the benchmarking effort by defining key objectives and strategies and then looking only at the processes involved in achieving those objectives. "So go down from 12 core processes to the two that matter to you."

PREDICTABLE PAYBACK

There may be a debate over what is necessary to benchmark but there's little question that benchmarking gives many companies information that they use to achieve significant savings. Carlson's Redgrave hopes that his three-year program to centralize the controller's function will save 20% on finance costs. Jonathan Tanz, director of research at Best Practices LLC, a benchmarking and consulting firm in Chapel Hill, N.C., says that a typical benchmarking costs $70,000 to $150,000, while a high-end one might cost as much as $300,000. But the potential savings that can be identified by a benchmarking dwarf those costs, he says. "Typically, finance organizations can save 20% to 30% of their total costs. That comes in at about $3 million to $5 million of annual savings per $1 billion of revenues," Tanz says. "The ROI on benchmarking is absolutely clear."

He adds that the potential return from benchmarking is related to its scope, with work on broad-based processes likely to produce bigger savings. "If you have processes like order management, sales contracting and credit that cut across multiple functional silos, you have a huge opportunity not just for cost savings, but also improvement in the business itself and the speed at which business can happen," he says.

Of course, the savings that companies realize from the changes they make in the wake of benchmarking also reflect the skill with which they put changes in place and the organization's commitment to making the changes. "You've got to get everyone on board with the benefits of doing the benchmark and understanding clearly what you're going to do with the information after you've collected it," says Hackett's Roth. Experts say that support from top management is one key to a successful implementation. Redgrave notes that the last time Carlson reorganized finance, the team was led by consultants. This time, as the company tackles the very complex problem of standardizing processes used by business units operating in different industries, Redgrave has assigned senior Carlson executives, with an average tenure of 15 years with the company, to lead the effort.

One caution: Booz Allen's Galioto warns that some companies take the drive to reduce finance costs too far. "They cut so much expertise that they can't add value, and finance doesn't have the stature it should in decision support," he says. "It's almost like you've shut the headlights off. You lose the ability to do a bunch of the important expertise processes that matter."

Beyond cost, there are many different measures that companies track–Higgins says APQC has more than 350 metrics just related to finance–and new ones are added all the time. A recent report from the Corporate Executive Board argues that treasuries could benefit if they used more measures that take risk into account.

Michael Griffin, project manager for the Corporate Executive Board's Treasury Leadership Roundtable, says the suggestion came in response to treasurers' concerns about how best to communicate their contributions to senior management and how to measure their performance. "The value of so much of what treasury does, whether it's securing credit, rightsizing cash buffers, hedging financial risk or partnering with business units, is not reflected in the P&L or today's balance sheet. The value that treasury creates is through problem avoidance," Griffin says. "It's very difficult to measure the value of problem avoidance."

Griffin looked for companies that had already implemented solutions to this problem among the Treasury Leadership Roundtable's members. He found that it's fairly common for companies to calculate gains or losses on foreign exchange hedges, and some companies calculate their savings from natural hedges. Some calculate the opportunity cost of cash, he says, by measuring the amount of cash in bank accounts or sweep accounts, versus what's in investment accounts, and then multiplying those values by the difference in investment returns. Griffin says a few companies look at earnings at risk or economic value at risk, but those are usually either financial companies or big energy companies, rather than industrials. "In general, I would say the majority of treasury organizations have not made a lot of progress in being able to effectively quantify the value treasury creates through problem avoidance," he says.

Tanz of Best Practices argues that other parts of the corporation besides treasury could benefit from incorporating more measures that take risk into account when they're benchmarking. Standard benchmarking metrics don't take risk into account because of the difficulty of measuring it, he says, and companies have been willing to stick to the standard measures. But "some of the biggest savings opportunities come from risk reduction and quantification of risk," Tanz says.

APQC's Higgins says companies should focus their benchmarking on forward-looking measures, including those that take risk into account. And they need to use the data to make improvements, not just gather it. "Data is the impetus for change," she says. "But what happens is that organizations get hung up on the need to collect the data and forget to use it." But Hackett's Roth says that the biggest mistake companies might make would be not to benchmark at all, given the speed at which the world is changing. "If we were in a static environment where technology wasn't changing, processes weren't changing, offshoring wasn't happening–but we're in such a state of flux in terms of what's going on and what companies are able to do, how do you establish appropriate metrics if you don't benchmark?"