Today's economic climate and stringent reporting requirements have sent finance executives' information needs skyrocketing. Investors and regulators are simultaneously demanding greater transparency into the financials and increased shareholder value. Corporate finance should be on the lookout for ways to improve corporate performance, but at the same time must guard the integrity of the organization's financial and management processes. To do both, finance teams need a clear and balanced view into their firm's operational and financial performance -- into all corporate costs; key measures of revenue and earnings, such as sales per employee or gross profit margins; processes such as inventory management, quality control, or customer service; and the company's strategic plan.

They can gain the necessary perspective by comparing expectations with actual results in light of industry norms. Smart finance managers survey the competitive landscape to understand how their key performance indicators (KPIs) and overall business results compare with industry best practices and the performance of their competitors, as well as potential entrants into their market. The practice of competitive and peer benchmarking prepares finance not only to help boost corporate performance, but also to anticipate and address questions and concerns that might be raised by Wall Street analysts, investors, regulators, and auditors.

Benchmarking has been around for many years. The practice used to be as simple as a local retail shop comparing its sales with those of a similar shop in a nearby city. Today, sophisticated comparisons of business functions between organizations can answer questions like: Does my business achieve the same level of profit as other businesses in my industry? Does my business spend too much or too little on rent, advertising, and wages? Is my business performing as well as it should be?

The value of this type of data is clear; however, finding key information about other companies can seem like searching for the proverbial needle in the haystack. Everything needed for a direct comparison doesn't usually reside in one place. Critical information may be scattered among 10-Ks, audited reports, and regulatory reports. In addition, many companies are reluctant to voluntarily publish information that competitors may use against them.

Adding to the benchmarking challenge is the fact that financial data is stored in a variety of formats -- e.g., HTML files, Microsoft Excel documents, text files, PDFs -- that do not allow for easy exchange of information. These files offer no advantage over paper copies for someone trying to analyze and synthesize the data. Plus, because there is no mandated standard for communicating financial information, it is stored without including any context. The line item "revenue" might mean different things in different companies, so trying to establish sales benchmarks between organizations is virtually impossible.

Because they frequently end up referring to SEC filings to substantiate clients' numbers, auditors spend about 70 percent of their time sifting and searching through documents. Only 30 percent of their time actually goes toward auditing work. Likewise, in the traditional benchmarking process, finance employees collect data in miscellaneous formats through one-off downloads. Then they manually aggregate information into a single spreadsheet, from which they can run reports and perform analyses. Not only is this process inefficient and slow, but it frequently results in data that's riddled with human errors.

Is XBRL the Holy Grail?

Within the past decade, a new method of data coding has emerged; it has the promise to change benchmarking forever. Extensible business reporting language (XBRL) is being developed by XBRL International, a consortium of companies and government agencies (www.xbrl.org). It's an open standard, available for use free of charge, for labeling pieces of financial data. A software package that leverages XBRL assigns a standard identifying "tag" to each unit of information. For example, an enterprise resource planning (ERP) package might label a certain sales number with the XBRL "revenue" tag. If another piece of XBRL-enabled software -- say, a business performance management (BPM) application -- subsequently extracts this sales number from the ERP database, it will recognize the information as meeting a strict, standardized definition of revenue. No human has to analyze whether the figure actually qualifies as revenue. Data can be entered once, then understood consistently across a wide variety of computer systems and end users.

As a result, software that can interpret XBRL can treat data labeled with an XBRL tag "intelligently" -- that is to say, it can be set up to automatically perform certain functions on the data depending on the role and importance of that type of information, as imparted by its XBRL label. An application that recognizes revenue data as such might automatically include a new piece of data in calculating the company's month-end performance on key metrics. It might analyze what the new number means relative to the company's recent revenue trends. It might pass the data on to another piece of software or include the figure in a report or a business-unit dashboard.

The benefits of XBRL are not limited to internal activities. Two companies that use different XBRL-compliant general ledgers or performance management applications can share data fairly seamlessly. XBRL tags eliminate the manual activities of data capture, standardization, and rekeying from external benchmarking processes. Financial analysts can perform competitive and peer analyses faster, and their results are more accurate because there's less risk of human error, either typing mistakes or misinterpretations of what a piece of data represents. In addition, auditors and corporate executives can uncover trends, risks, and anomalies among similar companies far more efficiently.

The purpose of XBRL International isn't solely to develop global financial reporting standards or to simplify the preparation, exchange, and analysis of financial statements. Its activities result in both of these outcomes -- but, more important, XBRL opens the door for companies to be viewed and analyzed by third parties in a way that was never before possible. The coding language enables benchmarking processes to be both accurate and efficient. It can give analysts and auditors a greater degree of granularity for benchmarking analysis than they've had before. It creates more confidence in the data by removing the human touch. Finally, it reduces costs by allowing for the automatic compilation of data and publishing of reports to different constituents.

Benchmarking Tools Accelerate XBRL Benefits

Although the coding language is in the early phases of adoption, the competitive advantages that come with establishing XBRL capabilities are clear. Today, banks, investment firms, credit companies, and such regulatory bodies as governments and trade associations have the most to gain from using XBRL extensively. These entities can use the technology to analyze and compare entire portfolios of companies; having a standard in place that simplifies this process gives them a competitive advantage. Many of the world's leading governments, financial institutions, and accounting firms are already leveraging the XBRL standard to simplify data exchange among both internal and external applications.

The U.S. SEC asked companies to code their financial statements using XBRL for 2004 filings, but it made the move voluntary. Some companies are already using XBRL in their filings, including Reuters and Microsoft. Although the SEC's XBRL program is voluntary and there is no looming deadline for XBRL compliance, some see a parallel between early adopters of the reporting standard and companies that jumped on the Sarbanes-Oxley bandwagon early -- companies which are now a step ahead of those that did the bare minimum to meet the law's deadlines.

XBRL-compliant reporting is far from universal, but financial information company EDGAR Online and business intelligence software vendor Theoris Inc. have adopted the standard as the foundation for two new joint product offerings, I-Metrix and I-Metrix Vision. These products include extensive XBRL-tagged data that has been gathered from businesses' 10-Ks and 10-Qs, among other sources -- so they include data on the companies' income, profits, assets, liabilities, and market capitalization. They are for sale to organizations that value this type of standardized data for benchmarking purposes.

Every year brings a broader range of XBRL-enabled offerings. As the movement toward truly standardized financial data slowly gains momentum, benefits will accumulate. Corporate financial data will become much more transparent -- and, ultimately, XBRL-enabled businesses will have enhanced capabilities to improve their overall performance.

7 Steps to Effective Benchmarking by Michael Brooks 1. Define the benchmarking project's scope. Determine whether you will compare functional areas within your organization, or whether the project will be external in nature -- or both. Focus on processes that stand to benefit the most, based on their cost, importance, and potential for improvement. 2. Select metrics for the comparisons. Identify the key measures you will use to compare performance. Metrics may be recommended by consultants, required by regulators, or widely accepted best practices. Consider these questions in defining your metrics: What key metrics do executives use to manage the business (per their reports)? What performance targets must the company achieve to hit its strategic goals? Which drivers most directly affect critical areas of performance, such as profitability, cash flow, and customer satisfaction? How can those drivers be measured quantitatively? What metrics do regulatory agencies require? What metrics relate specifically to the performance objectives of the organization, business unit, and individuals? 3. Select companies to benchmark against. No single resource can help every organization undertaking an external benchmarking initiative decide which businesses to compare itself against. Consider whether your benchmarks will be operational and process-focused or finance-focused. Companies focusing on the operational side may want to benchmark against the top performers in that area of business, companies which may not be in their industry. But if the benchmark is financial in nature, a company should focus on the top competitors in its industry. 4. Collect the data. Gather information about the performance of the organizations you've selected, using sources such as the SEC, the companies themselves, investor releases, and sales-pitch documents. Organizations such as EDGAR Online provide this kind of data in XBRL format. Think about these questions when selecting your data provider: Does the information supplier's database contain enough relevant information? Are the definitions, assumptions, and calculations underlying the data consistent with your own data storage and processing methods? Does the data provider have appropriate controls for data integrity? Does the provider deliver the data in a format that your analysts can massage in ad hoc inquiries as business conditions change? 5. Analyze the data. Measure your organization's performance on each of the metrics you've chosen, and determine the gap between your results and those of the benchmark organizations. Be sure comparisons are apples-to-apples. You may want to use graphical interfaces such as BPM dashboards to highlight areas of concern, assess variances, and gauge progress against goals. 6. Respond to results. Specify which actions the company needs to take to surpass the competition. Develop a plan for enhancing the areas that show potential for improvement. Launch internal programs to ensure that action is taken. Try to be as specific as possible, because the goals determined now will trickle down to all levels of the organization and may greatly impact some employees' responsibilities and behavior. 7. Plan for benchmarking to be ongoing. Implement a continuous benchmarking program by setting specific improvement targets and deadlines and by developing a process for reviewing and updating the analyses over time. This will form the basis for monitoring, revision, and recalibration of metrics in future benchmarking studies.

Michael Brooks is a vice president for Theoris Inc., a business intelligence dashboard software vendor. He has more than 23 years' experience in the IT industry.

Deborah Doane is the vice president for product marketing at EDGAR Online, a provider of information services for the financial community.