Google’s People Operations: The Three-Thirds HR Team

For the fifth year in a row, Fortune Magazine and the Great Place to Work Institute have named Google the “Best Company to Work for.” From innovative technology to a renowned corporate culture, it’s no wonder why everyone wants to land a job at Google. The company has come a long way since Larry Page and Sergey Brin began working out of Susan Silverstein’s garage with a mission to “organize the world’s information and make it universally accessible and useful.” While these two brilliant entrepreneurs can be credited for the establishment of this incredible organization, the global enterprise that we see today would not have been possible without the department of People Operations attracting the best talent, creating and maintaining culture and diversity, and analyzing data to establish the best hiring and retention strategies. 



Google’s “Three-Thirds” HR Team 

Google’s Human Resources department, called People Operations, operates on what is called the “three-thirds” staffing model. One-third of the HR team has “HR backgrounds and bring expertise in client relations as well as specialty skill areas such as employment law and compensation and benefits." Another third lacks human resource experience but displays great problem-solving skills and an understanding of how things work outside of HR. The final third is all about analytics; a group of statistically-minded professionals that analyze data to create and refine best practices for hiring, retention, culture, and more. These three thirds come together to share their respective knowledge and skills to make People Operations at Google more objective and successful.

Turning Three Thirds into “Three-Thirds”

There would be little use in having three groups in People Operations if each third worked independently without sharing their expertise with the rest of the department. The objective of “Three-Thirds” is not to segment but rather to diversity. Turning this work group into an efficient team requires certain conditions to be met. In such a diverse group, it is important that leadership is a shared activity. Responsibility and accountability should be established on both the individual and collective level to facilitate a team mindset. Another way to facilitate this mindset is through the establishment of a group mission. Additionally, problem solving should become a regular habit throughout the group. Finally, effectiveness should be measured according to collective rather than individual outcomes.

Teamwork Competencies

A great way for Google to promote effective teamwork in their HR department would be to hold regular training on teamwork competencies. An individual who is competent in teamwork helps the group come to a mutual understanding of a situation. In this way, the team can work together to solve problems from a more objective perspective. An effective team player also assists in the organization and management of team performance. Establishing team goals and providing feedback is not the responsibility of a single individual, but rather something that each individual in the team should be responsible for. Another teamwork competency is the ability to promote a positive team environment by maintaining norms such as respect and tolerance. It is also important that each individual develops strong conflict management skills. Finally, it is important that each team member has the ability to promote their own perspectives respectfully while considering the opinions of others objectively.

Trust in a Cross-Functional Team 

For this diverse cross-functional team to operate cohesively, it is paramount that trust is established throughout the department. This is no small matter, considering that “it takes years to build trust, but only a second to destroy it” according to Harvey Mackey. If trust is “believing that you can count on others in a relationship,” then it is a vital component of working together as a team. Management professor Fernando Bartolomé outlines six guidelines for building team trust: Communication, support, respect, fairness, predictability, and competence. While each of these elements are of vital importance, open and honest communication is key. All of these basic principles tie into a person’s credibility, which is the anchor of trust. 

Instrumental Cohesiveness

There are two types of cohesiveness that bind groups of individuals together: Socio-emotional and instrumental. Socio-emotional cohesiveness is “a sense of togetherness that develops when individuals derive emotional satisfaction from group participation." While this type of cohesiveness is effective and rewarding in many contexts, it can be argued that Google’s cross-functional team would benefit more from instrumental cohesiveness. This sense of togetherness is derived from mutual dependence when the group members believe that the group’s goals would not be possible by acting separately. The purpose of Google’s three workgroups is to diversify the collective. Each workgroup should understand that without one of the other groups, their operations would be limited. In other words, it’s important that the team sees each workgroup as being instrumental to the whole. 

Conclusion

Google’s People Operations are extremely successful due to the diversity of their cross-functional team. For this reason, it is important that diversity is celebrated to truly emphasize its importance in the workplace. Maintaining group cohesiveness is an ongoing struggle, as members of the group are constantly being replaced and trust is fragile. Employees should be reminded of teamwork competencies regularly and effectiveness should be measured on a collective level. Regular group meetings should be enforced to facilitate communication and to ensure that everyone is on the same page. This also provides the opportunity to share ideas to offer the group a more objective picture. The success of Google at large is dependent on the success of this cross-functional team; therefore, the progressive refinement of People Operations is of upmost importance for this global technology enterprise.

References

Kreitner, R., & Kinicki, A. (2013). Organizational Behavior (10th ed.). New York, NY: McGraw-Hill Irwin.

Google - About Google. (n.d.). Google - About Google. Retrieved June 6, 2014, from http://www.google.com/about/

Our history in depth. (n.d.). Google. Retrieved June 6, 2014, from http://www.google.com/about/company/history/

Life at Google - Google Careers. (n.d.). Life at Google - Google Careers. Retrieved June 6, 2014, from http://www.google.com/about/careers/lifeatgoogle/

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Improving Employees' Attitudes during Recession

The fear of layoff prominent during a recession can have a huge impact on morale throughout an organization. While management is busy considering where to cut costs and how to properly invest during the economic hardship, employees become disengaged due to their concern about what the future holds. Finding inspiration and motivation can be a real challenge when anxious about whether your position will be available tomorrow. It is during these times that management must carefully consider their strategy for keeping employees optimistic and engaged. Planning to survive the recession could have fatal implications if management is too short-sighted. Cutting costs alone will not see the company through the recession without seeing the investment opportunities that exist during these times; the most important of which is the investment in people.



Managers at Bain & Company, Home Depot, and Best Buy have taken a variety of steps in the past to build and maintain talent during the recession; utilizing Schwartz’s value theory to keep employees engaged and motivated. According to Schwartz, values “represent broad goals that apply across contexts and time." He proposed that there are ten primary values that guide human behavior: Power, achievement, hedonism, simulation, self-direction, universalism, benevolence, tradition, conformity, and security. Shalom Schwartz, PhD (2012) explains that “values are critical motivators of behaviors and attitudes." Because of this, organizations often create strategy based on one or more these values to influence employee attitudes.

Home Depot is aware of the importance of these values; utilizing achievement to boost morale during the recession. Chief Executive Frank Blake lowered hourly employees’ sales and profit targets required for bonuses, resulting in a record-breaking percentage of bonuses for in-store employees. While these companies can use values such as achievement to improve employees’ attitudes, there is one primary value that is threatened in a recession that influences the behavior of managers and employees: security. Edward Lawler III explains that “people are looking for reassurances, for transparency, and they’re not looking for surprises." Managers are aware of the loss of productivity resulting from the security threat, and so they must work to create an atmosphere of transparency while seeking creative ways to build morale.

Steve Ellis looks at a recession with an optimistic outlook; recognizing the opportunities rather than the obstacles. He asserts that the recession is “a huge opportunity to grab very talented people,” explaining that talent is cheaper during this time and companies have the opportunity to grab valuable market share while other companies are cutting back. He believes that such investments offer a head start when the economy picks back up. His outlook offers a bit of insight into the general nature of attitudes, which is composed of three components: affective, cognitive, and behavioral.

The affective component of our attitudes is about feelings. Obviously Ellis feels positive about the recession, although this isn’t explicitly stated. This assumption is based on the cognitive and behavioral components that we can see. The cognitive component is about our thoughts. The thoughts that Ellis shared are about opportunity rather than any negative aspects; indicative of positive feelings. The behavioral component is about our actions in response to the thoughts and feelings. Ellis’ actions are in-line with the thoughts that he expressed; using the opportunity to hire and invest.

While Steve Ellis is looking to the future, Home Depot and Best Buy are seeking creative ways to increase employee involvement. For example, Best Buy set up online surveys to give employees an opportunity to share ideas for cutting costs. This not only gets the employees engaged, but it also gives them a sense of security in knowing that they are contributing to the solution rather than just worrying. As John Pershing, Best Buy’s executive vice president for human capital explains: “When you know you can make a difference and you’re part of the solution, it can change your mind completely." This involvement in the solution process also serves to build employee loyalty, as they feel as though they are actually a part of the team and can better identify with the organization.

Icek Ajzen’s theory of planned behavior offers insight that can be used by managers to increase employee performance during a recession. Katherine Margolis explains that this theory is based on the theory of reasoned action (TRA), which “posits that attitudes (toward the behavior) and subjective norms (beliefs about whether individuals who are important to the person approve or disapprove of the behavior) lead to behavioral intention which leads to behavior." Ajzen’s theory added that perceived behavioral control also predicts behavioral intention. Perceived behavior control “refers to the perceived ease or difficulty of performing the behavior and is assumed to reflect past experience as well as anticipated impediments and obstacles." Ajzen’s model explains the nature and role of the three determinants of intentions.

By understanding attitudes, subjective norms, and perceived behavioral control, managers can create more effective plans for facilitating desired behavior. These determinants could be solicited via survey and used to counter unwanted behavior through the implementation of behavioral controls. We’ve discussed a few ways that managers go about influencing attitudes, and attitudes throughout the organization are the foundation of subjective norms. The main takeaway from Ajzen’s theory is that these three determinants are vitally important because they form our intentions which lead to behavior. This means that the application of this theory could help companies predict behavior before it happens and create an effective response to prevent unwanted behavior while encouraging desired behavior. The primary determinants that management can influence are attitudes and controls.

While managers cannot control the state of the economy, they can influence employee attitudes. Some ways to do this include transparency, encouraging engagement, motivating through values, and most importantly; taking good care of them. Job satisfaction can boost employee engagement and organizational commitment, reducing the negative side-effects of a recession. Causes of job satisfaction influenced by management include need fulfillment, met expectations, value attainment, and equity. By taking good care of employees and being transparent during difficult times, managers can keep employees engaged and working to do their part in keeping the organization afloat during the turbulence.

References

Kreitner, R., & Kinicki, A. (2013). Organizational Behavior (10th ed.). New York, NY: McGraw-Hill Irwin.

Schwartz, S. (2012, December 1). An Overview of the Schwartz Theory of Basic Values. Retrieved May 23, 2014, from http://scholarworks.gvsu.edu/cgi/viewcontent.cgi?article=1116&context=orpc

Margolis, K. (2011, August 2). Theory of Planned Behavior/Theory of Reasoned Action.SurroundHealth. Retrieved May 23, 2014, from http://surroundhealth.net/Topics/Education-and-Learning-approaches/Behavior-change-strategies/Articles/Theory-of-Planned-Behavior-Theory-of-Reasoned-Acti.aspx

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Culture Change at Chrysler Group, LLC: PE Fit and Competing Values Framework

The story of Chrysler Group, LLC is one of significant paradigm change led by Chief Executive Sergio Marchionne in response to the company’s bankruptcy. Joann Muller (2011) explains that Marchionne “forced Chrysler to confront problems it had long ignored such as inefficient plants, production overcapacity and value-destroying incentives." Of these problems, Marchionne expressed a great deal of contempt for the use of heavy rebates and other incentives to boost sales; explaining that heavy discounting rarely helps auto makers generate profits in the long run.


Among the significant changes that helped to bring the company out of bankruptcy, Marchionne put a great deal of emphasis on building a new corporate culture that serves the goals of the organization. His aggressive redesign resulted in drastic restructuring of the executive ranks; laying off several veteran executives and flattening the bureaucracy. He called for weekly management meetings that include video equipment to allow the presence of Fiat SpA executives, where Marchionne also serves as CEO. These meetings serve as an opportunity for Marchionne to point out deficiencies such as vehicle quality, profit margins, and pricing controls.

To better understand the culture change that took place at Chrysler Group, it is necessary to evaluate the layers of organizational culture. These layers are comprised of observable artifacts, espoused values, and basic assumptions. Observable artifacts represent the more visible level of culture. This includes acronyms, manner of dress, awards, myths and stories told about the organization, published lists of values, observable rituals and ceremonies, special parking spaces, decorations, and so on. We can look to the company’s website as an observable artifact to better understand their culture. Chrysler explains that the five traits that make their culture distinctive are innovation, leadership, passion, cooperation, and responsibility. The long and impressive list of awards and recognition listed on their website are supportive of these values. Along with the five listed values outlined in their culture overview, their website places a great deal of emphasis on diversity, sustainability, and community; three noteworthy values that can be seen as important subsets of cooperation and sustainability.

While the company’s website and awards represent observable artifacts, the values described there make up the espoused values that guide behavior and define the company’s culture. The goal is to convert these espoused values into enacted values, becoming a part of the basic assumptions that represent the core of the organization. Basic assumptions are unobserved and highly resistant to change, requiring persistent effort on behalf of management to influence these underlying assumptions. The main takeaway from assessing the levels of culture within an organization is called PE fit, defined as the compatibility between an individual and a work environment that occurs when their characteristics are well matched.

The major restructuring of management previously discussed represents Marchionne’s effort to improve the PE fit of his direct reports. At the end of the restructuring process, Marchionne had twenty-three people reporting to him that were specifically selected to ensure that they each possessed the appropriate skills, values, abilities, and personalities to match the job requirements of each specific position. PE fit is especially important in managerial positions to ensure the perpetuation of appropriate values throughout each level of the organization. Written values hold little weight if they are not consistently reinforced through the example of the leaders within the organization.

One way to further assess Chrysler’s new culture is to classify it using the competing values framework (CVF). This “provides a practical way for managers to understand, measure, and change organizational culture." There are four basic types of cultures outlined in the CVF: Clan, adhocracy, hierarchy, and market. As is the case with Chrysler, organizations can possess characteristics of each type, but generally have one that is more dominant than the others. By looking at the two fundamental dimensions or axes, we can determine the new type of organizational culture manifested through the changes orchestrated by Marchionne.

The x-axis represents whether the organization focuses its efforts on the internal or external environment. It is clear that the primary goal of Marchionne is profitability, giving the company an external positioning. The values outlined on the company’s website, however, seem to indicate qualities of both internal and external focus. For example, innovation and cooperation represent two opposing sides of the spectrum. Also, Marchionne stressed quality which is an internal focus most related to a hierarchy culture, but yet he disseminated much of the executive power in the fashion of a clan culture. Many of the changes would seem to suggest an internal focus, although the desired ends of profitability and innovation are drivers of external positioning. For the sake of the assessment, we will base it on means rather than ends and say that the new culture is internally focused.

The y-axis represents an organizations preference for flexibility and discretion or control and stability. Marchionne’s micromanaging style of leadership and his desire for control over pricing and quality would suggest stability and control, although the company’s stated value of cooperation is contrary to this. During the weekly meetings with managers, little is said about cooperation and communication; but rather how Mr. Marchionne often spelled out what he saw as Chrysler’s many deficiencies. Despite stated values, it seems that the new culture is about control and internal focus, making it a hierarchy culture.

It is clear that Marchionne took charge of Chrysler Group with a vision of restoring profitability and the company’s brand image. His approach involved a dramatic change to the organizational structure, systems, and procedures; shaking the company to the core. 

References

Kreitner, R., & Kinicki, A. (2013). Organizational Behavior (10th ed.). New York, NY: McGraw-Hill Irwin.

Muller, J. (2011). Sergio's Star Turn. Forbes, 188(4), 64-66.

Chrysler Group, LLC. (n.d.). Our Culture. Retrieved May 16, 2014, from http://www.chryslercareers.com/OurCulture/Pages/home.aspx

Image retrieved from http://www.artsjournal.com/fieldnotes/2012/12/the-competing-values-framework/

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Inventory Management and Logistics: RFID, 3PL and 4PL

Wal-Mart maintains a strong competitive edge through unmatchable consumer prices and a wide variety of products and services in a single location. This pursuit of maintaining the lowest prices possible on such a diverse selection of consumer products requires strict supply chain and inventory management systems. Through the use of technology, Wal-Mart has managed to reach astounding efficiency in the way that its inventory is managed in stores around the world. Their innovation has revolutionized the way that retail inventory is tracked and restocked, leading to unbelievably low costs which translates to direct customer savings. As explained by Army Col. Vernon Beatty, “supply chain management is moving the right items to the right customer at the right time by the most efficient means, and no one does that better than Wal-Mart".




One very important practice that allows Wal-Mart to maintain such a competitive edge is the use of radio frequency identification (RFID) technology. Through the use of RFID and point-of-sales data, the company is able to track their inventory all throughout the supply chain to locate and remotely control inventory in locations even outside of its own facilities. The RFID system consists of three primary components: tags, readers, and a computer system. The tags contain radio antennas with a microchip and can generally store about two kilobytes of data. These tags are attached to products and may contain such data as the manufacture date, unique product identification, price, expiration, etc. The readers are used to detect and decode the data that is stored on each tag. Finally, the computer system is used to collect and store the data to be used for a variety of purposes including identification of bottlenecks and the generation of information to support decisions.

The use of RFID technology saves a great deal of time and greatly improves the efficiency of supply chain and inventory management systems. Additionally, RFID implementation reduces costs that are associated with the flow of goods and demand information. Mal-Mart is able to see their supply in real time to compare to demand forecasts for accurate and timely ordering. This total supply chain visibility from production to consumption offers remarkable insight that allows companies to continuously refine their processes towards maximum efficiency and minimal costs. Finally, the data collected from RFID technology facilitates highly accurate financial reports and improves managerial decisions throughout the organization.

An extremely important aspect of inventory and supply chain management is logistics. While Wal-Mart has its own private fleet, many companies outsource transportation to third-party logistics (3PL) providers. Some of the advantages of a private fleet include guaranteed capacity, enhanced customer service, scheduling flexibility, free advertising on company vehicles, and the ability to design the fleet to meet specific needs. While these advantages are significant, some companies outsource to 3PL providers for various reasons including the large amount of capital needed to establish a private fleet and the difficulty or inability to maximize efficiency through hauling freight on return trips.

While 3PL is concerned primarily with the outsourcing of shipping and distribution, fourth-party logistics (4PL) offers complete supply chain solutions through the accumulation of resources, capabilities, and technologies. This includes procurement, storage, distribution, processes, and IT solutions. Some advantages of 4PL include access to more potential suppliers, reduced procurement costs and order cycle time, automation and standardization of order placement, back-end system integration, and more. 4PL solutions are becoming increasingly popular due to the capability to improve efficiency and increase a company’s bottom line. Experienced 4PL providers have the capability to bring value to an organization’s logistics process through a reengineered approach to managing people, processes, and technology.

For a local company looking to expand its presence globally, the implementation of RFID technology and 3PL/4PL providers could be of great benefit. Early adoption of RFID technology could streamline the supply chain and inventory management systems to offer greater control and insight; lowering the costs of expansion while maintaining outstanding efficiency. The data generated during this expansion would allow the growing company to closely monitor its processes and refine problem areas during developmental stages which could save the company millions of dollars over time. The data collected during the expansion would also be useful for generating valuable information to support managerial decisions in the future.

Considering the vast capital requirements of establishing in-house logistics such as a transportation fleet, distribution centers, IT infrastructure, etc, the outsourcing of logistics to 3PL and 4PL providers could allow the global expansion to happen smoothly with lower costs and less trial and error. An experienced 4PL provider would already have the capital resources in place and its processes refined; eliminating much of the risk that is involved in the establishment of these services and infrastructures. While well-established global retailers such as Wal-Mart greatly benefit from in-house logistics, developing companies with limited resources could improve and expedite their growth process by implementing these outsourced services early on. This decision should be considered in great detail, as each industry and individual company has specific business requirements that may or may not benefit from these services as much as others. 

References

Russell, R., & Taylor, B. (2011). Operations Management (7th ed.). Hoboken, NJ : John Wiley and Sons, Inc.

Millsap, D. (2012, January 1). Wal-Mart's Use of RFID in Global Supply Chain Management.Daniel Millsap > Research > MBA School Research > WAL-MART'S USE OF RFID IN GLOBAL SUPPLY CHAIN MANAGEMENT. Retrieved June 7, 2014, from http://www.danielmillsap.com/research/rfid-in-wal-mart-global-supply-chain-management.html

Traub, T. (2012, July 2). Wal-Mart Used Technology to Become Supply Chain Leader.Arkansas Business. Retrieved June 7, 2014, from http://www.arkansasbusiness.com/article/85508/wal-mart-used-technology-to-become-supply-chain-leader?page=all

Snapp, S. (2012, April 7). The Overestimation of Outsourced Logistics. Fourth Party Logistics RSS. Retrieved June 7, 2014, from http://www.scmfocus.com/fourthpartylogistics/2012/04/the-overestimation-of-outsourced-logistics/

Third Party Logistics (3PL) and Fourth Party Logistics (4PL). (n.d.). Cquential. Retrieved June 7, 2014, from http://www.cquential.co.za/industries/3pl-4pl/

Jordan, D. (2010, September 7). Fourth Party Logistics (4PLP); what this means for your Supply Chain. Fourth Party Logistics (4PLP); what this means for your Supply Chain. Retrieved June 7, 2014, from http://supplychain.enchange.com/bid/24156/Fourth-Party-Logistics-4PLP-what-this-means-for-your-Supply-Chain

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Managing Customer Queuing Systems

Regardless of where we go to receive some form of service, there is a good chance that there will be waiting involved. Whether it is the doctor’s office, the grocery store, the movie theater, or a restaurant, we can expect to find ourselves in some type of queuing system prior to receiving service. It is inevitable for waiting lines to form due to the arbitrary nature of customer arrival time. Since customers do not arrive at a steady pace and each customer takes a different amount of time to be served, it is impossible for service providers to avoid queuing systems. Although waiting lines are inevitable, they can be managed to improve efficiency and mitigate wasted time and customer frustration.



There are two basic types of waiting line structures: the basic single-server system and the multiple-server system. The single-server system has one server waiting on a single line of customers. This is often in the form of a multiple single-server queuing system, such as we see in most large grocery stores. An example of a company that uses a single-server waiting line would be Kroger. Since Kroger uses multiple single-server waiting lines, it is common for customers to move from one line to another in hopes of getting served faster. This is referred to as jockeying. Having multiple lines can help to reduce balking and reneging due to the reduced wait time. Balking is when customers refuse to join the queue to wait for service, and reneging is when customers join the queue but leave before receiving service.

The multiple-server line structure consists of multiple servers waiting on a single line of customers. An example of a company that uses this queuing system is Comcast. Whether going in to pay a bill in person or dropping off equipment when terminating services, one must wait in a single line that is processed in turn by several servers. When a server becomes available, the next customer in line moves to this server. Since there are multiple servers, the line moves much faster than in a single-server line; although since the lines are often much longer customers sometimes perceive longer wait time which increases balking and reneging. However, since there is only one line, multiple-server systems completely eliminate jockeying. Multiple-server waiting lines are very similar to multiple single-server waiting lines. The main difference is the tradeoff in jockeying, balking, and reneging.

Assume that both Kroger and Comcast have the same number of servers. Now assume that in a given moment they each have the same number of customers in their queuing system. Kroger would have several short lines while Comcast would have one long line. Kroger could expect to see jockeying as customers move around to get served faster. Comcast does not have to worry about jockeying, but since their line is much longer there is a higher chance of reneging and balking. This illustrates the primary difference between the two systems, as Kroger will likely serve more customers but in a less systematic way. Since more customers will receive service, the multiple single-server line structure seems to be a better option for both the customer and the company. In some contexts, however, multiple single-server lines would be impractical; especially where there is limited space or a need to manage queue order.

Each company should take measures to reduce waiting time, and where it cannot be reduced measures should be taken to make the wait more palatable for the customer. One way that Kroger could reduce waiting time without increasing the cost of human labor is by offering additional self-checkout lanes. They could also install televisions to distract customers from the wait. Both companies could benefit from data analysis and statistical calculations to determine specific times of higher customer volume. This would allow them to be better prepared at any given moment. Comcast could make the wait more tolerable and mitigate balking and reneging by installing a number queue system and providing seating for customers to be called when it is their turn in queue. This is common in many health and public service facilities.

Waiting lines are inevitable in service industries and must be managed to balance customer satisfaction and the company’s cost of labor. Companies should carefully consider which queue system is right for their service, and diligently monitor data to continuously refine their operations to best serve the customer. When waiting time cannot be mitigated for whatever reason, companies should consider ways to make the wait more palatable for the customers. This can be achieved through an automated queue system that allows customers to be seated while waiting, and/or entertainment such as television, magazines, or other forms of entertainment that may be relevant to the service being provided. Customer satisfaction should always be a high priority, and in such a busy world time is our most valuable resource. Every manager in a company should value the time of their customers as much as they do their own.

References

Russell, R., & Taylor, B. (2011). Operations Management (7th ed.). Hoboken, NJ : John Wiley and Sons, Inc.

ContentConnections. (2008, December 17). Customer Queuing Systems. [Video File]. Retrieved May 17, 2014, from https://www.youtube.com/watch?v=YlUJ4qPjt1o&feature=related/

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The Importance of Benchmarking in Financial Analysis

Analyzing a company’s financial performance requires an understanding of various financial statements as well as the ability to interpret important financial ratios. The main financial statements detailing the financial performance of an organization are the balance sheet, statement of cash flows, and the income statement. These statements provide information that can be used to calculate various financial ratios to better understand the financial performance of a company. Some important ratios include the current ratio, profit margin, return on assets, price-earnings ratio, etc. Each of the financial statements and ratios provide important information relevant to the financial aspect that each represents; however, without applying context and comparison, all of these numbers mean very little. Benchmarking is a method of establishing a standard for comparison to add context to the financial information provided in financial statements and ratios to derive meaning from these valuable data.




The first step to benchmarking is to analyze the financial statements and consider the context in which the company operates to determine appropriate measures and standards to apply for comparison. Financial competitive benchmarking uses financial information, most often in the form of ratios, to perform these comparisons. These financial metrics and ratios show average ranges of financial performance by firms in a given industry or specific context. When we use benchmarks, the main question we are trying to answer is: what is the average level of performance for a given ratio/metric in a specific industry. The use of various benchmarking methods allows the application of relevant context to interpret the financial performance accordingly.

The type of context and standards to be applied to a given firm often depends on a variety of factors as well as the type of information that we seek. One method of benchmarking is to conduct a time trend analysis, looking at financial performance over time. This method is particularly important to determine if the company’s performance is improving or declining. Perhaps comparatively the company seems to be doing poorly based on industry standards, but if we consider the age of the firm and discover consistent improvement year after year, perhaps we can derive that the company is performing very well for its level of maturity. This example highlights the importance of context and considering various factors when conducting financial ratio analysis.

Another method of benchmarking is peer group analysis. To establish this form of benchmark, one must identify firms similar in the sense that they compete in the same markets, have similar assets, and operate in similar ways. This method is obviously problematic, as no two companies are identical. Standard Industrial Classification (SIC) codes are four digit codes that were established by the U.S. government for statistical reporting, serving as one method of identifying potential peers for comparison. Firms with the same SIC code are frequently assumed to be similar. Once the benchmark is established, we can use financial ratios to compare the two companies on various performance attributes.

The financial information that is needed for financial benchmarking is available only from large commercial databases or from specialized reports and publications, from where it must be gleaned with difficulty. For the information to be brought closer to the active user, it must be processed, refined, and classified. The pre-processing of the financial benchmarking information “can be used in computerized benchmarking systems and executive support systems, making the task of competitive financial benchmarking easier and more effective." Brian Hamilton also points out the challenge of obtaining quality industry benchmark data, explaining that many companies that sell benchmark data gathered the data from tax return filings. The problem with this is that the data from tax returns provide inaccurate numbers for operating profits. Another challenge in acquiring good benchmark data is that “private companies are not compelled to publish their financial data,” limiting the amount of data that is available for accurate comparison.

Brad Schaefer explains that while benchmarking is an incredibly useful tool, it can be easy to make mistakes that misconstrue the findings of the analysis. For example, when comparisons become too subjective by focusing on a single business, the number of differences between the two businesses often precludes useful comparisons. Schaefer explains that "it is important to remember that a benchmark report is not the conclusion of your analysis, but rather the beginning. Once you have created a report that can clearly display these metrics as compared to the industry at large, you can begin to create a plan of action." By framing the problematic areas as opportunities for improvement, businesses can create a plan that makes the benchmarking process worth their time and money. It is also important for companies to note the areas that they excel in to understand the business aspects that are doing well as they are. Otherwise businesses could implement changes that were unnecessary and actually hurt the company’s financial performance.

In conclusion, financial benchmarking is an effective way that organizations can establish standards for comparison. This can be accomplished by viewing the company’s performance over time or by comparing the company’s performance to industry benchmarks; however, conducting both a time trend analysis and a peer group analysis will likely be most effective. When comparing a company’s financial performance with another company or an industry benchmark, it is important to consider context as objectively as possible before drawing any conclusions. The basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to guide us in establishing benchmarks. For this reason, the benchmarking process requires an assessment of a wide variety of circumstances and information to develop relevant insights.

References

Ross, S., Westerfield, R., & Jordan, B. (2013). Fundamentals of corporate finance. (11th ed.). New York, NY: McGraw-Hill/Irwin.

Back, B., Irjala, M., Sere, K., & Vanharanta, H. (1995).Competitive financial benchmarking using self-organizing maps. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.45.5529&rep=re 1&type=pdf

Hamilton, B. (2008, March 17). Understanding and using benchmark data. Retrieved from http://www.accountingweb.com/topic/technology/understanding-and-using-benchmark- data

Schaefer, B. (2013). Benefits of Benchmarking: Tactics and Techniques to Maximize Financial Analysis. CPA Practice Advisor, 23(10), 24.

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Why is Business Intelligence so Important?

Business intelligence is used by most large organizations today for the purpose of managing day-to-day operational data as well as to store this operational data to generate insights to support decisions. This article will explore the differences between operational data and decision support data and explain the roles they play within a business environment. We will also consider the business intelligence framework and how its components interact to form a cohesive and integrated system.

Business intelligence (BI) is “a term that describes a comprehensive, cohesive, and integrated set of tools and processes used to capture, collect, integrate, store, and analyze data with the purpose of generating and presenting information to support business decisions." Daniel Marino explains in a recent article written for Insurance News Net that business intelligence is being used to help reduce healthcare costs for patients. He explains that there are four information strategies that make up an effective BI strategy for the healthcare industry: Population health analytics, risk-based cost analysis, performance analytics, and care management. All of this comes down to database management to capture, store, process, and analyze the data.

The BI framework allows an organization to take raw data and analyze it to be transformed into information. The information is transformed into knowledge and knowledge is then transformed into wisdom. This makes the organization more intelligent as a whole by allowing for the constant monitoring of data to continuously improve the organization through decision support. Business intelligence is a framework for “collecting and storing operational data,” aggregating this data into decision support data, generating information with the data, presenting this information to support decisions, making decisions which generates more data, monitoring results, and predicting future outcomes.

Business intelligence requires the use of a wide range of technologies and applications; the culmination of which represents the architecture required to store, transform, integrate, present, analyze, monitor, and archive data. This architecture is made up of data, people, processes, technology, and management of all of these components. The BI framework begins with external and operational data to be extracted, transformed, and loaded into a data warehouse or data mart. From here we can query the desired data to generate analytics and visual reports for the end-user. Data monitoring and alerts is also used to monitor business activities through the use of metrics revealing specific performance.

People and processes are integrated using technology to add value to the organization through the end-user application of the information. With traditional information systems, the key focus was operational automation and reporting. Business intelligence tools take this one step further by allowing the strategic and tactical use of information to constantly improve the company. Business intelligence has evolved over the years from the traditional mainframe-based OLTP system to managerial information systems (MIS), first-generation departmental decisions support systems (DSS), first generation BI, second generation BI (OLAP), and finally third generation mobile BI and cloud-based systems.

Prior to the business intelligence environment, the first-generation decision support system was widely used. A decision support system (DSS) “is an arrangement of computerized tools used to assist managerial decision making." A DSS is generally narrower in scope than BI, initially only used by a few managers within an organization. Through the advancement of technology the applications of DSS and user access grew; expanding the usefulness of DSS and leading to further evolution into the realm of the more agile BI systems.

It is worth noting that there are key differences between operational and decision support data, each serving a very different purpose and requiring a different data format and structure. Operational data is most often stored in a relational database with highly normalized tables to support high volume transactions that are frequently updated. On the other hand, decision support data is typically stored in a data warehouse or data mart and is characterized by lower volume transactions with less normalized tables than operational data. Operational data represents real time data supporting operations as they happen, whereas decision support data is historical and used to generate time slices of the operational data to inform decisions. While operational data is more often stored in many tables, decision support data has been aggregated to be stored in few tables.

In summary, business intelligence is used by organizations to manage operational data while storing this data to later analyze to generate insights. These insights allow organizations to constantly refine their operations which generates more data for further refinement. The evolution of decision support systems has broadened the application of data as well as the access of end-users. Business intelligence is made up of a variety of components to produce the end applications to include the integration of people, data, processes, technology, and the management of these integrated components. BI makes organizations smarter; offering the ability to see empirical trends to back decisions rather than guessing and hoping for the best.

References

Coronel, C., Morris, S., & Rob, P. (2013). Database Systems: Design, Implementation, and

Management (10th ed.). New Jersey: Cengage Learning, Course Technology, Inc.

Marino, D. (2014, March 27). Using business intelligence to reduce the cost of

care.InsuranceNewsNet. Retrieved April 17, 2014, from http://insurancenewsnet.com/oarticle/2014/03/27/using-business-intelligence-to-reduce-the-cost-of-care-a-480858.html#.U1BKSPldX8k

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