Service companies match manufacturing leaders in finance costs.

• Author: Roth, Richard T.

Service companies traditionally trail their manufacturing counterparts in overall finance costs as a percent of revenue, based largely on their heavier transaction processing load and the inherent complexity of their customer base. Hamstrung by the additional transaction processing resources required to address areas like accounts receivable, credit, collections and billing, service companies carried a seemingly unfair burden.

Then, too, service companies weren't initially targeted by enterprise resource planning (ERP) vendors, which instead developed products for manufacturers. The result has been that comparability across service and manufacturing depended until recently on understanding the basic differences between the two sectors.

We've seen a sea change, though, and service companies - especially those $5 billion and over in revenue - have merged the cost lines so they're even with their manufacturing brethren.

The latest data from Hackett Benchmarking solutions show overall finance costs as a percent of revenue at 1.1 percent for both service and manufacturing firms with over $5 billion in annual revenue. While that figure represents a slight rise on the manufacturing side since 1996, for service companies it's a significant drop.

So how have service companies pulled even?

Service-side finance professionals have slashed costs in some processes, especially accounting and control/risk management. That's the good news.

Unfortunately, another key is that decision support - including cost analysis, business performance analysis, new business/pricing analysis and strategic planning support - now accounts for only 6 percent of overall finance costs as a percent of revenue. These activities, critical in defining the direction of the business and in strategically outlining ways to expand, have been reduced to virtually nothing. By comparison, the average manufacturing company spends about twice the resources - or 12 percent of total finance costs - in the same area.

For both service and manufacturing companies, these figures are too low and indicate too many highly qualified, highly paid finance professionals are mired in transaction processing instead of looking for ways to drive revenues, gain market share and achieve the coveted "business partner" moniker. But it's especially striking for service companies, which now treat decision support almost as an afterthought.

Bottom line: As finance costs shrink, a "rob Peter to pay Paul" scenario...