What is Benchmarking?
Benchmarking is a process of measuring the performance of a company’s products, services, or processes against those of another business considered to be the best in the industry, aka “best in class.” The point of benchmarking is to identify internal opportunities for improvement. By studying companies with superior performance, breaking down what makes such superior performance possible, and then comparing those processes to how your business operates, you can implement changes that will yield significant improvements.
Benchmarking is the practice of comparing business processes and performance metrics to industry bests and best practices from other companies. Dimensions typically measured are quality, time and cost.
In general, benchmarking is used to compare a company’s performance to competitors who have had the best results in the field. The basic data used for benchmarking include quality, time and cost. To begin the benchmarking process, a company has to identify its best rivals or corporations that use similar methods to produce goods and/or services, using whatever kinds of intelligence are required, consider the results achieved by competition as targets, and apply their winning ways to their own methods of doing business. In fact, it is the business processes as such that are the most important criterion for benchmarking.
Some companies use benchmarking as a tool to be used occasionally only, but those companies that are their respective fields’ leaders use this method continually.
Benchmarking is used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.
Also referred to as “best practice benchmarking” or “process benchmarking”, this process is used in management in which organizations evaluate various aspects of their processes in relation to best-practice companies’ processes, usually within a peer group defined for the purposes of comparison. This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to improve their practices.
In project management benchmarking can also support the selection, planning and delivery of projects.
In the process of best practice benchmarking, management identifies the best firms in their industry, or in another industry where similar processes exist, and compares the results and processes of those studied (the “targets”) to one’s own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful. According to National Council on Measurement in Education, benchmark assessments are short assessments used by teachers at various times throughout the school year to monitor student progress in some area of the school curriculum. These also are known as interim government.
The Difference Between Benchmarking and a Competitive Analysis
The process is about finding examples or “best practices”, which are then used as a benchmark to improve performance.
It’s not about copying the competition, but about identifying the potential for improvement.
Therefore, benchmarking does not create specific solutions, but rather analyses the current situation in order to draw conclusions about best practices.
The term benchmark, originates from the history of guns and ammunition, in regards to the same aim as for the business term; comparison and improved performance. The introduction of gunpowder arms replaced the bow and arrow from the archer, the soldier who used the bow. The archer now had to adapt to the new situation, and learn to handle the gun. The new weapon left only a mark on the target, where the arrow used to be visible, and with the bow gone, the soldiers title changed to marksman, the man who put the mark. The gun was improved already in the early beginning, with rifling of the barrel, and the rifle was born. With the industrialization of the weapon-industry in the mid-1800s, The mass production of ammunition as a cartridge replaced the manual of loading of black-powder and bullet into the gun. Now, with standardized production of both the high-precision rifle, as well as the cartridge, the marksman was now the uncertain variable, and with different qualities and specifications on both rifle as well as ammunition, there was a need for a method of finding the best combination. The rifled weapon was fixed in a bench, making it possible to fire several identical shots at a target to measure the spread.
In 2008, a comprehensive survey on benchmarking was commissioned by The Global Benchmarking Network, a network of benchmarking centres representing 22 countries.
- Mission and Vision Statements and Customer (Client) Surveys are the most used (by 77% of organizations) of 20 improvement tools, followed by SWOT analysis (strengths, weaknesses, opportunities, and threats) (72%), and Informal Benchmarking (68%). Performance Benchmarking was used by 49% and Best Practice Benchmarking by 39%.
- The tools that are likely to increase in popularity the most over the next three years are Performance Benchmarking, Informal Benchmarking, SWOT, and Best Practice Benchmarking. Over 60% of organizations that are not currently using these tools indicated they are likely to use them in the next three years. Benchmarking mainly depends on SWOT analysis and will also be using in future for almost 4-5 years.
Types of Benchmarking
Benchmarking can be internal (comparing performance between different groups or teams within an organization) or external (comparing performance with companies in a specific industry or across industries). Within these broader categories, there are three specific types of benchmarking:
- Process benchmarking. This type of benchmarking helps you to better understand how your processes compare to others in your industry. By looking at other companies in the industry you can improve your processes to make them more efficient and cost-effective.
- Strategic benchmarking. Strategic benchmarking, similar to process benchmarking, is all about improving parts of your company through looking at others in the industry. Strategic benchmarking relates to strategy and how to create a strategy that will allow you to be more competitive in your area.
- Performance benchmarking. Performance benchmarking is the hardest process to improve as it involves learning about competitor performance metrics and procedures, and also making changes to processes within your business on the lower levels. Introducing new processes is a challenging action in any business as it requires buy-in from many different levels in the company. Performance benchmarking can uncover findings that might not be possible to implement in the business without creating a long-term change plan. These can be also the most effective and successful changes for a company.
These can be further detailed as follows:
- Process benchmarking – the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration. Benchmarking is appropriate in nearly every case where process redesign or improvement is to be undertaking so long as the cost of the study does not exceed the expected benefit.
- Financial benchmarking – performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity.
- Benchmarking from an investor perspective – extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor.
- Benchmarking in the public sector – functions as a tool for improvement and innovation in public administration, where state organizations invest efforts and resources to achieve quality, efficiency and effectiveness of the services they provide.
- Performance benchmarking – allows the initiator firm to assess their competitive position by comparing products and services with those of target firms.
- Product benchmarking – the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.
- Strategic benchmarking – involves observing how others compete. This type is usually not industry specific, meaning it is best to look at other industries, i.e. Strategic Benchmarking with the help of PIMS (Profit impact of marketing strategy).
- Functional benchmarking – a company will focus its benchmarking on a single function to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison.
- Best-in-class benchmarking – involves studying the leading competitor or the company that best carries out a specific function.
- Operational benchmarking embraces everything from staffing and productivity to office flow and analysis of procedures performed.
- Energy benchmarking – process of collecting, analysing and relating energy performance data of comparable activities with the purpose of evaluating and comparing performance between or within entities. Entities can include processes, buildings or companies. Benchmarking may be internal between entities within a single organization, or – subject to confidentiality restrictions – external between competing entities.
The first stage of benchmarking is the most important in the process. Planning includes highlighting what you want to improve, who you will benchmark yourself against, and how you envisage success. Only once this step has been completed will you be able to move onto the next step as the results of planning will focus on the information you need to collect and what success will look like.
Collection of Information
After planning, benchmarking is about collecting information on your processes and how competitors do them. If you are looking to improve your customer service satisfaction rating you should understand the processes involved in the department, how calls and communication are dealt with, and also how it differs from your competition. Maybe you can talk to someone in another call center, or call the center directly to gain first-hand knowledge of their processes. At this point, it is important to gather as much information as possible.
Analysis of Data
Once you feel you have all the information you can gather, you can start to plot it and begin to understand the shortcomings you may have. It is important to remember at this point in the process that no business is perfect and you must have an open mind to be able to analyze information objectively. Once findings start to be uncovered you can draft a report and start discussing the next steps to achieve better performance in this area.
Presenting findings to a department is never an easy thing, especially when you are proposing changes. Gathering and analyzing information is only worthwhile when you can implement changes and better the company in the process. Gaining buy-in from a department can involve concessions so make sure the MVP you present is accepted and will likely equate to the success highlighted in the planning stage.
No plan is ever complete without monitoring results to determine how successful the plan has been. The implementation phase will have highlighted metrics and goals for success within a time frame so monitoring these is the only way of knowing the efficacy of the changes. Monitoring can be over a short or long period of time depending on the desired outcomes.
There is no single benchmarking process that has been universally adopted. The wide appeal and acceptance of benchmarking has led to the emergence of benchmarking methodologies. One seminal book is Boxwell’s Benchmarking for Competitive Advantage (1994). The first book on benchmarking, written and published by Kaiser Associates, is a practical guide and offers a seven-step approach. Robert Camp (who wrote one of the earliest books on benchmarking in 1989) developed a 12-stage approach to benchmarking.
The 12 stage methodology consists of:
- Select subject
- Define the process
- Identify potential partners
- Identify data sources
- Collect data and select all partners
- Determine the gap
- Establish process differences
- Target future performance
- Adjust goal
- Review and recalibrate
The following is an example of a typical benchmarking methodology:
- Identify problem areas: Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, re-engineering analysis, process mapping, quality control variance reports, financial ratio analysis, or simply reviewing cycle times or other performance indicators. Before embarking on comparison with other organizations it is essential to know the organization’s function and processes; base lining performance provides a point against which improvement effort can be measured.
- Identify other industries that have similar processes: For instance, if one were interested in improving hand-offs in addiction treatment one would identify other fields that also have hand-off challenges. These could include air traffic control, cell phone switching between towers, transfer of patients from surgery to recovery rooms.
- Identify organizations that are leaders in these areas: Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.
- Survey companies for measures and practices: Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked to protect confidential data by neutral associations and consultants.
- Visit the “best practice” companies to identify leading edge practices: Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group.
- Implement new and improved business practices: Take the leading edge practices and develop implementation plans which include identification of specific opportunities, funding the project and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.
Why Should Your Firm Benchmark?
The case for benchmarking suggests that a particular process in your firm can be strengthened. Some organizations benchmark as a means to improve discrete areas of their business and monitor competitors’ shifting strategies and approaches. Regardless of the motivation, cultivating an external view of your industry and competitors is a valuable part of effective management practices in a world that is constantly changing.
There are a number of core drivers of benchmarking initiatives in a firm:
- The most common driver for benchmarking comes from the internal perspective that a process or approach can be improved. Organizations will collect data on their own performance at different points in time and under different circumstances, and identify gaps or areas for strengthening.
- Many organizations compare themselves to competitors in an attempt to identify and eliminate gaps in service or product delivery or to gain a competitive edge. The data gathered in a competitive benchmarking initiative offers specific insights into a competitor’s processes and thinking.
- The term “strategic benchmarking” is used to describe when a firm is interested in comparing its performance to the best-in-class or what is deemed as world-class performance. This process often involves looking beyond the firm’s core industry to firms that are known for their success with a particular function or process.
The Benefits of Benchmarking
By identifying areas you wish to improve on in your business and benchmarking your existing performance against competitors, your business can strive to enhance your execution tenfold. Using benchmarking this way has allowed businesses to gain strategic advantages over competitors and grow industry averages.
Benchmarking involves looking at current trends in data and projecting future trends depending on what you aim to achieve. In order to know you have been successful, benchmarking needs to be a continuous process. Monitoring performance is an inherent characteristic of it.
As well as monitor performance, continuous improvement is an essential attribute of benchmarking. This is because the aim of benchmarking is to improve a certain element of a business. This improvement should not merely be something that improves once and is forgotten, but something that improves over time and is continuous.
Planning and Goal Setting
Once benchmarking has been carried out, goals and performance metrics are set in order to improve performance. These goals are new, more competitive targets for a company but they must be achievable. If goals are unrealistic to achieve teams become demotivated and goals are destined to remain unfulfilled.
When companies look at their processes and metrics they need to ask hard questions to get all the answers they need. This includes talking to everyone in the business and understanding their roles. By asking these questions and gaining a better understanding of everyone’s role, ownership for processes and performance is encouraged. This means that employees will take pride in their job and the work they do. This pride leads to better performance and higher-quality end results.
Understand Your Companies Advantages
Benchmarking identifies where your company is right now compared to where you want it to go. If you are looking at improving any process in your business, benchmarking is a way of looking at how you can excel and become more successful through outlining the steps needed to achieve your goal.