The word benchmarking means many things to many people. “Benchmarking” evaluates performance by measuring what companies are doing or / and the results they are getting against some predetermined standards. Companies that benchmark can identify best practices and apply them to their own business. The greatest benefit of benchmarking is its ability to introduce a different perspective to the organization.
There are three main types of benchmarking that companies should regularly engage in to identify areas for improvement and develop action plans: internal benchmarking, competitive benchmarking, and process benchmarking.
Internal benchmarking measures company performance against itself, either comparing to past performance or to a goal. Every company does some form of internal benchmarking, particularly when it comes to financial results. They will look at year over year growth, costs, backlog of work, or burn-rate, for example. More sophisticated companies set goals and benchmark progress toward those goals as well. Typically, these internal benchmarks are referred to as Key Performance Indicators (KPIs), though often the metrics companies are using turn out not to be “key”. They are often reported on a Dashboard Report which is akin to the dashboard of a car – it can tell you whether the company is operating within established norms. If the numbers on the dashboard fall outside of expectation, it’s time to investigate.
There are a number of common mistakes companies make when setting internal benchmarks. One is selecting growth goals using a last year + X% approach. For example, a revenue goal of last year +5% with no further clarification assumes people will just work 5% harder. While this might work for year 1 or year 2, by year 10 people would need to work 65% harder – an untenable goal. There needs to be some thinking around the “how” part of goal setting to ensure that the goal is achievable.
Another common mistake with internal benchmarks is to select all lagging and no leading indicators. Leading indicators are typically process-based. While they are easy to influence, they can be hard to measure. Lagging indicators measure outcomes – easier to measure, but harder to improve. Picking all lagging indicators is a mistake because by the time a lagging indicator is measured, the horse has left the barn and there is little that can be done. For example, a lagging indicator might be cash in the bank, while the leading indicator is AR Aging.
Competitive benchmarking measures company performance against other companies – either best in class or mid-level performance companies. There are many sources of data for competitive benchmarking, but because almost all are based on lagging indicators it is difficult to use them to determine how to improve company performance. It is also challenging to find “apples to apples” comparisons (particularly in small business), and therefore competitive benchmarks should be reviewed with a grain of salt.
That said, competitive benchmarking has the ability to broaden a company’s perspective of what is possible. It can be highly useful when researching an industry for marketing or business development purposes. While Bellrock does not compile competitive benchmarking statistics, the nature of our business has given us insight into some good sources of information, which we’re happy to share with you.
Process benchmarking audits company processes and systems against best practices, the theory being that if enough of the right things are being done in a best practice way, the results will follow. Processes are a leading indicator to the lagging indicator of results. A multi-perspective approach is required as information is gathered from the perspectives of other companies, theoretical research, internal company sources, and customers. All of this information is blended to identify both the best practices appropriate for a given company and how they are performing against those best practices. An example of a process benchmarking analysis on accountability systems might address some of these questions:
- The organization chart is sufficiently scalable for mid-term requirements of the company.
- A prioritized index of all procedures is updated and used for process improvement.
- There are up-to-date job descriptions in place that identify duties, authorities, responsibilities, and performance criteria for each position.
- The performance evaluation system is based on customized performance criteria for each position and occurs regularly.
- Career planning is a meaningful part of the employee evaluation process.
Once a company knows the best practices applicable to them, it can prioritize the degree to which these processes are in place, and the value of implementing them company-wide.
One of the inherent challenges with process benchmarking is the breadth of information available. There is so much literature on “Best Practices” and so many process areas to research. Prioritizing where to start and which sources to use can be overwhelming.
The degree to which best practices are implemented will also have an impact on results. Take, for example, the best practice of job descriptions. Some companies might have them, but they are so vague as not to be helpful in setting expectations with employees. Another might have job descriptions for some positions and not all. Still another company might have excellent job descriptions that none of the staff use as a reference. Yet all of these companies would say “yes” when asked if they have job descriptions and therefore may inaccurately prioritize their value.
We haven’t found a company yet that isn’t benchmarking in one way or another. Remember the adage “what gets measured, gets managed” and make sure you’re measuring the right things, the right way, and at the right time to obtain actionable and implementable feedback. If you have 15 minutes to spare, try this questionnaire to process benchmark your own environment and learn some of the best practices from multiple areas of your business.