Benchmarking Benchmarking is the process of comparing one's
business processes and performance metrics to industry bests or best practices from other
industries.
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 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.
Benefits and use In 2008, a comprehensive survey on benchmarking
was commissioned by The Global Benchmarking Network, a network of benchmarking centers
representing 22 countries.
Over 450 organizations responded from over 40 countries.
The results showed that: Mission and Vision Statements and Customer
(Client) Surveys are the most used (by 77% of organizations) of 20 improvement tools,
followed by SWOT analysis (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.
Collaborative benchmarking Benchmarking, originally described Rank Xerox,
is usually carried out by individual companies.
Sometimes it may be carried out collaboratively by groups of companies (e.g. subsidiaries
of a multinational in different countries).
One example is that of the Dutch municipally-owned water supply companies, which have carried
out a voluntary collaborative benchmarking process since 1997 through their industry
association.
Another example is the UK construction industry which has carried out benchmarking since the
late 1990s again through its industry association and with financial support from the UK Government.
Procedure 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 partners
Determine the gap Establish process differences
Target future performance Communicate
Adjust goal Implement
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.
Costs The three main types of costs in benchmarking
are: Visit Costs - This includes hotel rooms, travel
costs, meals, a token gift, and lost labor time.
Time Costs - Members of the benchmarking team will be investing time in researching problems,
finding exceptional companies to study, visits, and implementation.
This will take them away from their regular tasks for part of each day so additional staff
might be required.
Benchmarking Database Costs - Organizations that institutionalize benchmarking into their
daily procedures find it is useful to create and maintain a database of best practices
and the companies associated with each best practice now.
The cost of benchmarking can substantially be reduced through utilizing the many internet
resources that have sprung up over the last few years.
These aim to capture benchmarks and best practices from organizations, business sectors and countries
to make the benchmarking process much quicker and cheaper.
Technical/product benchmarking The technique initially used to compare existing
corporate strategies with a view to achieving the best possible performance in new situations
(see above), has recently been extended to the comparison of technical products.
This process is usually referred to as "technical benchmarking" or "product benchmarking".
Its use is well-developed within the automotive industry ("automotive benchmarking"), where
it is vital to design products that match precise user expectations, at minimal cost,
by applying the best technologies available worldwide.
Data is obtained by fully disassembling existing cars and their systems.
Such analyses were initially carried out in-house by car makers and their suppliers.
However, as these analyses are expensive, they are increasingly being outsourced to
companies who specialize in this area.
Outsourcing has enabled a drastic decrease in costs for each company (by cost sharing)
and the development of efficient tools (standards, software).-
Types 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: 1) Process
benchmarking, 2) Performance benchmarking and 3) strategic benchmarking.
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.
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.
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.
Tools Benchmarking software can be used to organize
large and complex amounts of information.
Software packages can extend the concept of benchmarking and competitive analysis by allowing
individuals to handle such large and complex amounts or strategies.
Such tools support different types of benchmarking (see above) and can reduce the above costs
significantly.
Metric benchmarking Another approach to making comparisons involves
using more aggregative cost or production information to identify strong and weak performing
units.
The two most common forms of quantitative analysis used in metric benchmarking are data
envelope analysis (DEA) and regression analysis.
DEA estimates the cost level an efficient firm should be able to achieve in a particular
market.
In infrastructure regulation, DEA can be used to reward companies/operators whose costs
are near the efficient frontier with additional profits.
Regression analysis estimates what the average firm should be able to achieve.
With regression analysis, firms that performed better than average can be rewarded while
firms that performed worse than average can be penalized.
Such benchmarking studies are used to create yardstick comparisons, allowing outsiders
to evaluate the performance of operators in an industry.
Advanced statistical techniques, including stochastic frontier analysis, have been used
to identify high and weak performers in industries, including applications to schools, hospitals,
water utilities, and electric utilities.
One of the biggest challenges for metric benchmarking is the variety of metric definitions used
among companies or divisions.
Definitions may change over time within the same organization due to changes in leadership
and priorities.
The most useful comparisons can be made when metrics definitions are common between compared
units and do not change so improvements can be verified.