The objective of benchmarking is to understand and evaluate the position of a business or organisation relative to best practice either from within their industry or sector, or in a broader context, and to identify areas for performance improvement, and the means of achieving it.
By looking outwards, a business can help understand how their processes and operations compare to others, and identify improvements they can make within their own organisation. The process can also foster a learning culture within a company.
Benchmarking consists of four key elements:
- A detailed understanding of existing business processes;
- Analysing the business processes of others;
- Comparing business performance with those others; and
- Identifying and implementing the necessary steps to close the performance gap.
One error often made when benchmarking is to limit yourself to competitors or firms within your industry or sector as your yardstick. This is a mistake because you are cutting yourself off from valuable learnings which may be available from firms operating in completely different sectors or regions. A logistics company, for example, could learn about customer service from Google or Amazon.
To be effective, benchmarking should not be a one-off exercise but an integral ongoing improvement initiative, enabling a company to keep on top of evolving best practice.
There are 7 main types of benchmarking – strategic, performance or competitive; process; functional; internal; external; and international.
This is used when a business wants to improve its overall performance and entails examining high performers to understand their long-term strategies, and general approaches. High level aspects of performance are considered, such as core skills and strengths, new product and service development, market positioning and how they adapt to changes in the external environment. By its very nature, strategic benchmarking may be difficult and time-consuming to implement.
Performance or Competitive Benchmarking
This type of study is used to measure a company’s position relative to the performance characteristic of key products and services, with benchmarked companies typically those operating in the same sector or industry.
This type of benchmarking focuses on specific critical processes and operations, and targets are companies delivering similar work or services in a way identified as best practice. Process benchmarking can often deliver substantial short-term improvement benefits.
By benchmarking against companies operating in different business sectors or areas of activity, ways can be found of improving similar functions or work processes, often leading to dramatic performance upturns (in part, because looking outside your existing industry can give you a broader perspective on business challenges, and how to solve them).
This is used to compare business units or operations from within the same organisation – for example, country or regional operations. There are a number of advantages with internal benchmarking:
- There are less issues around access to data and information;
- Standardised data is more readily available; and
- Less time and resources are usually needed.
However, there is one major drawback. Operations in different parts of an organisation are likely to be more heterogeneous in terms of functionality and performance than those of an external competitor or industry peer. This means there are likely less learnings to be had than with external benchmarking.
This involves analysing outside companies that are known to be best in class and have leading edge processes and practices. It is used to get an understanding of best practices and ideas which can be implemented within your own company. However, comparable data and information can take time to collect – much of it is confidential and these companies are not going to make this readily accessible to their competitors! – and process into credible findings which can be translated into actionable recommendations.
This is a hybrid of some of the previous benchmark processes, and is used to compare against best practitioners from elsewhere in the world, perhaps because there are insufficient local candidates to produce valid results. Whilst globalisation and technological advances now favour this type of benchmarking, it can take time to collect data, and “national” differences may need to be taken into account.
Albert Einstein famously said “once you stop learning, you start dying”. This is as true for businesses as individuals. Benchmarking is a way to learn from the best, steal or borrow their ideas, and improve the performance of your business. To ignore what others are doing is a sure way to stagnate and, ultimately, to die.