Seven reasons to use benchmarking and possible traps

“Benchmarking provides an inventory of creative changes that other companies have enacted”
– John Langley

We are living in a volatile world constantly changing and evolving. Intense competition requires the businesses to remain fit and ready for daily challenges. As Bill Gates noted in his book “Business at the speed of thought”, nowadays the businesses have to adjust to the business turmoil quickly to survive. If the companies are not consistently enhancing their performance to remain above the competition, then somebody will manage their destiny.

The question is – can you navigate your business in this tough competitive environment, if you don’t effectively measure your performance, and therefore know your place in the competition and chart your way to the top? One of key measurement tool of performance is BENCHMARKING. When executed correctly, it can drive the change convincing leaders of the need to undertake improvement efforts. Benchmarking is a tool that enables the analysis, decision making and ultimately the achievement of excellence, based on the realities of the business environment and competition rather than on internal standards and historical trends. It is your compass and navigator in business competition.

The process of benchmarking involves comparing company’s performance on a set of measurable indicators (also known as key performance indicators or “KPI”) against peer companies, including companies known to have achieved best performance on those criteria. This tool is also helpful in identifying new ideas and new ways of improving processes and being able to maximize shareholders’ values and meet the expectations of customers.

Benchmarking can be beneficial to companies and organizations due to following:

  • Helps to measure company’s current performance and compare it to performance of other industry players
  • Helps to identify the gaps between company and competitors and calls for action in order to survive in the long run
  • Highlights the areas of practice and performance that require attention and improvement
  • Enables to identify other companies with superior performance and processes, with a view to their adoption
  • Results in lower cost and time spent on reinventing new processes by relying on the best practices used by companies with superior performance
  • Accelerates change and restructuring by using tested and proven practices and creating a sense of urgency when gaps are revealed
  • Fosters a “learning culture” within organization towards continuous improvement, total quality, and competitiveness over the long term

Things to be cautious about when doing benchmarking (Traps)

It should be noted that certain degree of caution should be exercised in the process, as there are factors, which can significantly decrease the effectiveness of the benchmarking process or could lead to the incorrect decisions. Below are some of the key considerations to take into account:

  • Comparing one business to a peer group is helpful if the peer group is a comprehensive representation of the industry. However, if a company begins to compare itself to another, single company, there may be considerable differences that prevent a true comparison. The sample size should be broader than a single company (apples vs. apples comparison).
  • Many benchmarking metrics such as net profit margin, operating netbacks (oil and gas industry), liquidity and turnover ratios are common, and their calculations are not generally changed. However, there are a number of non-financial indicators used, such as capacity utilization parameters or some industry-specific KPIs, such as sales per seat. In this case, it is important to use the same calculation, period after period. There should only be one consistent interpretation of the calculation.
  • Comparing a business to its peers only once per year may not be optimal, given that the industry is always changing even if your business isn’t. The more frequent the benchmark analysis is performed, the sooner trends can be identified and analyzed. The participant then will have valuable information and insight for decision making and ultimately enhancing its position in the market competition.
  • The gap between company initiating benchmarking and the company with best practices can be too big, in which case it is better to strive for incremental changes rather than big leaps in performance.
  • The initiator of the benchmarking can be overwhelmed by a large amount of data involving a great number of variables when benchmarking with the best companies.

Five key success factors to successful benchmarking

The keys to success for using benchmarking are:

  • A clear understanding of what needs to be improved, and why; benchmarking should fit the organization’s objectives in order to be successful
  • Careful selection of the target companies (i.e. who to benchmark against) and analysis of which processes to be benchmarked
  • Clear understanding of the reasons for any gaps in performance between your company and the best performing company
  • Setting goals and targets that are both challenging and achievable
  • Willingness to change and adapt based on the benchmarking findings; being patient in implementing changes as the results will not necessarily come quickly and easily. This is probably the most important factor for successful benchmarking.

The most commonly used KPIs in benchmarking:

Financial Operational Customer People
Liquidity ratios (current, quick ratios)

Profitability ratios (Net profit margin, gross profit margin)

Efficiency ratios (return on equity, return on assets)

Solvency ratios (debt-to-equity, debt-to-assets, debt-to-EBITDA)

Activity ratios (inventory turnover, A/P and A/R turnover)

Percentage of product defects

Capacity utilization rate

Manufacturing cost as a percentage of revenue

Labor productivity (efficiency)

Average unit contribution margin

Customer acquisition cost

On-time delivery to commit

Customer turnover rate

Customer complaints

Customer satisfaction index

Employee turnover rate

Employee satisfaction

Revenue per employee

Human capital value added (HCVA)

Employee net promoter score (employee loyalty)

Costs of benchmarking

The three main types of costs in benchmarking are:

  • Visit Costs. This includes accommodation, flight costs, meals, and lost labor time.
  • Time Costs. Benchmarking team members will need to dedicate sufficient time research problems, find best-performing companies, making visits, and implementing changes after the gaps are identified.
  • Benchmarking Database Costs. Companies may find it useful to create and maintain a database with best-performing companies and best practices than can be associated with those companies in order to keep track of gaps identified and results to strive for.

The cost of benchmarking can substantially be reduced through utilizing different resources, one of which is benchmarking software. With the help of different platforms, companies can identify benchmarks as well as handle large and complex amounts of information much faster and efficiently.

INTELFOLIO (www.intelfolio.com) could be an appropriate data analysis vehicle and a benchmarking solution to address the issues discussed in this article for the success of your business while keeping your information anonymous. It provides access to live financial metrics and anonymously benchmarks among the peers in a specific industry, segment, among private or public companies.