Benchmarking

Benchmarking is the process of comparing one’s business processes and performance metrics to industry bests or best practices from other companies. Dimensions typically measured are quality, time and cost. 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.

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 and particularly strategic 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.

The Xerox approach to benchmarking is as

Planning

• Identify what is to be benchmarked.
• Identify comparative companies.
• Determine the data collection method and collect data.

Analysis

• Determine current performance ‘gap’.
• Project future performance levels.

Integration

• Communicate benchmark findings and gain acceptance.
• Establish functional goals.

Action

• Develop action plans.
• Implement specific actions and monitor progress.
• Recalculate benchmarks.

Maturity

• Leadership position attained.
• Practices fully integrated into processes.

The Alcoa approach to benchmarking is as follows:

• Decide what to benchmark – what is important to the customer, mission statement, business needs, etc.
• Plan the benchmarking project (choose a team leader and team members, submit the project proposal).
• Understand own performance (self-study in order to examine factors that influence performance positively or negatively).
• Study others (identify candidates for benchmarking, short-list, prepare questions of interest, conduct the study).
• Learn from the data (identify performance gaps and which practices should be adopted).
• Use the findings (for the benefit of the organization and its employees).

Choosing benchmarking partners

There are several options.

Internal colleagues – This is the easiest form of benchmarking to conduct, as the information should be readily available and accurate. Different divisions in the same organization may be compared easily. The problem with this approach is that if performance is generally poor in the company then any benchmarking project will not improve competitive performance.

Industry benchmarking – Benchmarking against competitors can be fraught with problems. Firstly, it seems unlikely that a competitor would wish to engage in an exercise that might lead to a loss of competitive advantage, but some organizations are very open with their information so it is not impossible. Secondly, information provided by a direct competitor without corroborative evidence should be treated with skepticism.

Finally, trade associations do produce industry statistics, but these are likely to be non-specific and based on averages. This information will be of little use if the benchmarking organization is already exceeding these standards. The statistics may provide some comfort through the knowledge that the company is not below average, but it will not be helpful if off shore competitors are exceeding these standards significantly. The desire of many companies is to be the best in class or world-class for their industry.

Non-competitive benchmarking – This type of benchmarking involves benchmarking against other companies in different industries. This has the advantage of excluding market competition from the process of comparison. By the same token, it does make it more difficult to identify specific areas of comparison between non-competitive benchmarking partners. For example, a retailer is unlikely to have areas of operations that are similar to a manufacturing company. However, what they will have in common is processes such as purchasing or supplier appraisal. It is through examining in detail the processes used by the different partners that areas of improvement will be identified.

Many companies see the advantages of continuing benchmarking activities on a regular basis and so they have set up benchmarking clubs as a forum to continue the activity.

Other benchmarking activities – Obtaining competitors’ products or services and dismantling them (reverse engineering) is one way of comparing the organization with its direct competitors. Published accounts, trade conferences, articles in the trade press and employees recruited from competitors are all sources of useful information about competitors. It must not be forgotten that the organization’s customers are a good source of competitive information. Through asking the customer questions about the organization’s performance it is possible to glean information about competitors’ performance in key areas also. This should help to forge stronger links with major customers.