Benchmarking groundbreaker Greg Hackett's radical new message for CFOs.

by Jay Whitehead

Greg Hackett, the Benchmarking Behemoth of Bath (Ohio), fathered the finance, operations, and HR metrics revolution of the 1990s. But today, he has a radical new message for CFOs: Outsource all transaction processing functions and get out of metrics management and performance reporting. Ignore him at your own peril.

By Jay Whitehead

For a numbers guy, Greg Hackett sure has coined a lot of words. Among Hacketts verb and noun inventions are such commonly-used business phrases as benchmarking and shared services. After stints at Booz, Allen & Hamilton and A.T. Kearney, Hackett founded The Hackett Group in 1991 and became the father of modern business metrics. His firm measured operational performance numbers for more than one thousand big firms and established the concept of industry-wide best practices. Ever since, the Hackett Groups advice and its regularly-published Book of Numbers have been closely followed by C-suite officers and have yielded hundreds of millions of dollars in savings to each of Hacketts big company clients.

In October 1997, The Hackett Group was purchased by and rolled into Answerthink Consulting Group, a Miami-based firm that subsequently went public. In March 1999, Greg Hackett waived his earn-out agreement with Answerthink and left to pursue his next chapter. With the resources from the buyout in his pocket and time to think, Hackett set out to find The Next Big Management Thing. 

Fast forward to today, and Greg Hackett would tell you that his manage-by-the-metrics revolution was so successful that the bulk of the benefits have been realized already by the leading companies. And managing by the metrics now is so common that the additional gains from them are nominal. So nominal, in fact, that the dangers of continuing to focus on continuous internal incremental improvements will sink your company. Thats right: sink your company.

Does that make Hackett a heretic in his own church? If you ask Greg himself, the answer is clearly no. You see, Hackett, like many management gurus from Tom Peters to Jack Trout and Al Ries to Peter Drucker, has adapted his message to the market. The competitive landscape looked much different in 1990 than it does today. To see how different, lets step back a few years. 

In the late 1990s, more than 1,200 major firms participated in The Hackett Groups benchmarks. Gregs measurement machine could create industry-wide benchmarks of internal performance and establish a list of best practices. Hacketts message to CFOs in the 90s was simple and compelling. Since finance functions then cost companies an average of 2.2 percent of their revenues, there was a huge opportunity to measure these functions then streamline, systematize, and cut costssavings that were directly driven to the bottom line. His benchmarks were the key to identifying areas ripe for improvement. CEOs and CFOs executed on his advice. As a result, finance typically costs a company less than 1.0 percent of sales, a 55 percent reduction in only a little more than one decade. The same holds true for other knowledge worker functions like HR, procurement, and IT.

Yeah, I stole a lot of successful CFOs learning curves, Hackett says, with a Midwestern matter-of-fact approach. I packaged them up and spread them around for the betterment of all.

Hacketts success spawned a boiling pot full of competitors. Between 1990 and 2004, FAO Todays research counts no fewer than 125 major consulting, research, and accounting firms and government agencies that have offered or continue to offer benchmarking or best practice management advice similar to Hacketts. A benchmarking whos who list includes the Saratoga Institute for human resources, Cornerstone Advisors for financial institutions, and Total Benchmark Solution for healthcare. Then in the area of total quality management (TQM), there is the work of W. Edwards Deming and his Six Sigma disciple former GE CEO Neutron Jack Welch. A quick poll of CFOs who grew up during The Hackett Groups heyday will reveal that nearly every one of them became a devotee of one flavor of best practices and managing by the measures.

First, Finish the JobOutsource the Clutter

Fast forward to today and Greg Hacketts new mission. While benchmarking and best practices have a safe, logical, intellectual, even accountant-like appeal, Gregs new gig seems much more dangerous. In an exclusive FAO Today interview atop a windblown Cleveland high rise on one of 2005s coldest winter days, Hackett laid out his new view. The picture he paints, like the weather outside, is not pretty. 

The CFOs job of the future should be the EVP of Were Gonna Get Hit By A Meteor, Hackett says with an electric passion. His new message is uncomfortably cutting-edge. But his emotional argument, drawn in classically logical, data-driven terms, makes magnificent sense.

Even though finance costs have fallen, Hackett tells FAO Today, transaction processing still comprises the bulk of finance work. Decision support is not noticeably better. Finance still focuses internally. And risk management has, in many cases, weakened.

Hackett has stayed close to the operational evolution of the same big companies that he followed at his former firm. And after considerable study, he has become convinced that by continuing to polish the apple, his phrase for the slight marginal cost improvements that come from benchmarking and best practice management, critical resources are diverted from becoming true business partners with CEOs and Boards of Directors. Sarbox [shorthand for the Sarbanes-Oxley corporate compliance act] is refocusing attention back on transaction processing, he laments. End it. Get out of it. Bring it to closure. Move on. Focus on the critical stuff.

Listen, if you are still benchmarking and implementing best practices or running a shared service center or implementing a dot.x version of your ERP system, you are way behind the curve, says Hackett. Give it to third parties. Outsource transaction processing to professionals who can do it better than you do it and do it much cheaper than can an in-house department. Whacking an extra 2 cents off an accounting or HR transaction will not keep your company out of the impending doom it faces.

In todays dangerously hyper-competitive world, Hackett concludes that Finance should not be in the business of transaction processing or management reporting in the twenty-first century. Outsourcing transaction processing is finances immediate imperative according to Hackett. You still have a lot of highly skilled people performing data dog functions like preparing management reports, he bemoans. Why are these people still doing the same things ten years later? You have to outsource those functions, now. They are distracting you from the central mission. 

Hackett's Radical New MissionWatch for the Meteorite

Hackett's stern assessment comes from his increasingly dire and data-driven observation that most companies face a horrifying inability to stay competitive. His warning can be boiled down to one simple observation. By focusing so much attention on internal operations, finance is distracted from where the real dangers lieoutside the company. 

Purging the finance function of internal transaction processing is critical in order to free up finance to watch for the meteor that is about to hit the company. Hacketts meteor is his hyperbolic way of characterizing any of a number of threats from outside the companytechnology shifts, new-style competitors, changing customer preferences or loyalties, regulatory overhauls, an outside interest group battle, currency or interest rate fluctuations, or capital markets mood swings, to name a few.

The fact is, most companies are fighting a tough battle, Hackett observes as an ideal segue to introducing Hacketts Curve, which illustrates companies growth and decline cycles. For example, from 1957 to 1997, only 15 percent of the companies on the S&P 500 roster at the beginning of the period were there at the end. The life expectancy of an S&P 500 firm is only 15 to 20 years, he notes. He also points out that of the Forbes 100 firms he tracked from 1917 to 1987, 61 percent of them ceased to exist at the end of the period, and only 18 stayed in the top 100. History is pretty compelling, says Hackett, Historically you have an 85 percent chance of failure.

The Shocking Identity of Hackett's Two Big Meteors

The new question for companies is What will drive my demise? says Hackett. Nobody builds failure into their plans. Finance, or someone, has to take responsibility for looking at the risk of failure. His overarching concern is to assign an EVP in charge of How We Will Fail. His alarm is driven by his observation that Risk identification is distributed throughout an organization with no central consolidation or consensus. 

Hackett has identified the two main reasons that companies fall into stagnation and decline. And he takes indirect responsibility for creating the second one.

The first of Hacketts meteors is one or more profound external change that a company misses because of its internal focus. Running day-to-day operations is so challenging and the pressure for performance is so great that no time is left to look outside, he claims. Companies miss external danger signs for several reasons. One is that success breeds risk aversion and a desire to protect the status quo. Another is that plans focus on success, rarely contemplate failure, and dont set up early warning systems. And another is that because organizations are drowning in internal data, useful information to identify threats from outside is scarce.

Hackett lists a Dirty Dozen of external changes that all co-conspire to create life-threatening market turmoil. Hackett uses Delta Airlines as a prime example of a victim of the phenomenon. In Deltas case, at least four of the dozenregulatory changes, new competition, stakeholders in the form of its hugely expensive and restrictive labor union contracts, and changes in customer loyaltyaffected the company and drove it quickly from the most admired list to a series of multi-billion-dollar losses and threats of break-up or liquidation.

But what or who is to blame for this myopic inability to see these market changes? Hackett places the blame on what he calls too much good management. And responsibility for this love affair with predictability, Hackett lays squarely in the lap of industrial Americas greatest business heroAlfred P. Sloan, CEO of General Motors from 1923 to 1946 and author of the 1964 book that defined the practice of professional management, My Years At General Motors. Greg Hackett claims that Sloans planning process, which is still taught to all MBA students, is the same hidebound practicedevelop a plan in immense detail and stick to itthat today causes companies to fail. 

Sloans management and planning processes simply dont work in todays fast-changing knowledge-worker world, Hackett claims. Businesses work on the assumption of predictability and continuity. And management is still rewarded for stability in an environment of turmoil. It leads to unwillingness to change directions and discard dying businesses, and a relentless pursuit of nominal incremental change (that is easier to accomplish) rather than driving major changes (very difficult) that would keep a meteor from hitting the business.

Current business trends, Hackett observes, are even making Alfred Sloan-style management errors worse. Todays top managers have far more data than ever before, but less insight, he says. This analysis paralysis leads to less dialogue, less use of intuition, and loads of fatally-flawed, single-point decision making. Managers control the controllable, which is a dangerously inwardly-focused approach, he concludes.

Hacketts 21st-Century Guidance: The 5 Factors 

Vision comes to prepared souls. If there were ever a person well-prepped to be a modern management guru, it would be Greg Hackett. Since his departure from Answerthink, Hackett has studied his subjects intensely96,000 company-years, or 3,000 companies over the 40 years from 1960 to 2000. He notes that 75 percent of the public companies he studied did not hold their positions of dominance, or even make it through all 40 years. From this deep data dive into company death and decline, Hackett has concluded that five changes will turn the tide for 21st century managers. He calls the five The New Dynamic Planning Model.

In planning, virtually everything must change for companies to succeed, Hackett reasons as he introduces the five factors. The first and most important is to spend a lot more time on innovation to meet the challenges created by external market turmoil.

Providing CFOs with enough time to keep abreast of market changes, Hackett reminds us, is what outsourcing delivers. Seven to ten years ago, Hackett recalls, outsourcing finance functions was idiocy because costs went up, especially if you had a mess internally. Now, the outsourcing providers all have best practices, low costs, fix things upstream, and you have to spend no capital to hire them. When you outsource, costs will go down 7 to 15 percent even if you are already doing a good job internally.

Finances Future: Extending the Peak in Hacketts Curve.

For CFOs, Greg Hacketts newest advice is just as simple and clear as his old advice, only it is made for today and tomorrow. He refers to that Hacketts Curve chart shown earlier in this cover story. Finances job is to extend the existing peak, develop a new curve or slow the decline, he says. When I ask him how that responsibility falls in finances lap, he cracks a Mona Lisa smile.

The goal of his research, Hackett says, is to accurately predict your companys death. One of the main tenets of the research, he states, is that companies declines and death spirals begin when innovation stops and organizational rigidity sets in. And he fingers finance as the function most in control of that ultimate turning point. Finance can prevent and help stop a companys stagnation and eventual death by changing how a corporation plans its future and by refocusing as much effort on the external turmoil as it does on tracking and measuring the predictable internals.