What is benchmarking and 7 steps of effective benchmarking
What is benchmarking?
Benchmarking in layman terms means the process of comparing yourself to others. In business it means to compare your processes and common business practices to your more nearest competition or more preferably, comparing to market leader.
The benefit of benchmarking is that you can set goals to improve your practices to be at par with the market leader, this can help in improving the efficiency and productivity of your business and setting a path to follow to reach the goals of business. This can have a direct result to the success of the business and can help the business to have a disciplined approach and follow the tried and tested path to success.
The importance of right understanding what is benchmarking is imperative, as it is much more than copying the pricing strategy of someone else, it is not a stand along activity, it requires careful scrutiny and analysis to draw parallels and this exercise can even take months to produce results.
The following steps can show you an effective guide to benchmarking.
1. Preparation and Planning
The answer to what is benchmarking lies in planning which includes recognizing the need for benchmarking and following a methodology do doing it.
2. Collection of data
This is the most crucial part of benchmarking as the effectiveness entire exercise depends on the accuracy and correctness of the data. The data will be collected through primary and secondary sources and one will require a strong competition analysis.
3. Analysis of data
It is equally important to do proper analysis of data without which they are just numbers which make no sense.
The analysis of the data must be reported in a crisp and concise manner through proper medium that gives the exact details of the analysis which is easily understood.
5. Process of Learning
Through direct or indirect means, the practices followed by the top performing companies should be found out and compared with self to find the scope of improvements.
6. Implementing measures of improvement
Once the points of improvements are recognized, a plan should be devised to implement the changes that will lead towards improvement in a step-by-step manner.
7. Institutionalizing learning
The improvements made and the insights gained in the process should be embedded in the entire organization so that the organization is on track to achieve sustained improvement over a period of time.
For example, business process benchmarking is comparison against the best-in-class processes. Product benchmarking is when you compare your product with the leading product providers in your market.
Performance benchmark is when you compare your business performance with the performance of the leading organizations. As an example, you can compare your financial performance / financial ratios such as inventory turnover or productivity measures against other companies that are leaders in those areas of performance.
The overall goal of benchmarking is continuous improvement. Companies compare results with the leaders in certain areas and by doing that they identify areas for improvement.
In general organizations can benchmark against industry standards and leaders in various capabilities and performance which means that you can compare your business results against more than one company.
As an example, you can compare your business processes against one company – a leader in those processes, and still compare your other performance with other companies that are leaders in certain core capabilities such as sales performance or quality performance.
In order to develop good benchmark process you need to identify best practices for each of your business categories. Best practices are functional and can be found in various industries not only in your leading industry organizations.
For example, you can benchmark your supply chain performance against leaders in logistics performance such as FedEx or UPS. By using these approaches you have the opportunity to learn and continuously improve your business operations and productivity.
Without comparing your results against external benchmarks it is hard to know whether your business results are poor, average or excellent. For instance, you can achieve growth in revenue by 10% this year but this might be a poor performance if your industry average is 15%. By comparing results with others you always learn and improve.
How to organize your benchmarking?
- First identify the best practices in each of the critical areas in your business such as financial performance, sales performance, operational performance, HR performance, customer satisfaction… These best practices can be found within your industry or outside your industry or market.
- Next, identify and organize a way to collect information on an ongoing basis. Sources of information are sometimes readily available like in the case of financial performance you can get the data for any public company for free online. In some cases you can purchase information from industry associations, publications and organizations as well as business intelligence data providers.
- Define the metrics and KPIs in each of the critical areas for your business so you can quantify the results and make it possible to compare them with others.
- Organize continuous reporting system which will inform decision makers and managers in your organization about the results and they can analyze the latest developments and develop improvement plans.
The key issue when it comes to benchmarking for most organizations is that it takes investment in time and people to develop a benchmarking system.
However this is a one time investment and the benefits will generally be higher that the time and cost invested by the company. For those organizations where benchmarking is a new concept the process of implementation can seem complex however by following these 4 simple steps described above you can manage to develop your process and system.