Essential guide to benchmarking

Benchmarking compares the performance of your business to that of similar firms. At its simplest, it helps you to compare figures and control costs. More sophisticated benchmarking looks at process design and business strategy.

Every business can use benchmarking. It questions what you are doing, identifies opportunities for improvement and often provides the momentum necessary for implementing change.

Benchmarking opportunities

Planning for benchmarking

Benchmarking partners

Collecting information

Managing improvement

Getting help with benchmarking

1. Benchmarking opportunities

The simplest form of benchmarking is to compare costs

• For example, utility bills or salaries.
• Costs which appear higher than industry norms may provide opportunities for savings.

Most benchmarking compares key performance indicators (KPIs)

• This tends to focus on productivity and efficiency.
• Some indicators can be expressed as simple statistics. For example, sales per employee, gross profit margins or wastage levels.
• Others may require qualitative, as well as quantitative, analysis. For example, to assess the effectiveness of training activities or levels of customer satisfaction.
• Indicators showing that the business is underperforming compared to similar businesses suggest opportunities for improvement.

Benchmarking often proves particularly successful when comparing processes

• This involves looking in detail at how other organisations carry out the same or similar processes. For example, which technologies and production techniques they use.
• You may be able to apply some of these ideas to your business.

Benchmarking can also be used to compare businesses at a strategic level

• For example, what strategic aims organisations have, where resources are focused and what standards they work to.
• Again, you may be able to incorporate the lessons learnt into your own strategy.

However you use benchmarking, it is only a tool which highlights opportunities

• Benchmarking doesn’t tell you how to take advantage of opportunities (see Managing improvement).

2. Planning your benchmarking

Set up a project team from different parts of the business

• Choose influential people who will have the power to drive the necessary changes through. Unless your business is prepared to change, benchmarking will be pointless.
• Establish a small team (six at most). It will make it easier to reach agreement.
• Provide any training necessary for the team to understand the benchmarking process (and project management skills).

Link the benchmarking activity to your business objectives

• Identify which activity you want to benchmark and what the KPIs are. Benchmarking models or consultants (see Getting help with benchmarking) can help you.
• There is little point in benchmarking minor activities. Focus on key areas.

Benchmarking will not work unless you know your business

Be clear about the ‘cultural’ factors which influence company performance. These will include:

• The business environment you operate in. For example, your market and your customers’ requirements.
• Your management structure and style. For example, if your firm has highly centralised management control, it will be difficult to introduce processes which work in more decentralised organisations.
• The location of workers. With workforces becoming increasingly mobilised and traditional office-based roles giving way to remote staff and freelancers, it’s vital you take into account the makeup of the organisation.

A typical benchmarking project takes three or four months to set up

• Unless you buy in external services, the only significant cost is employee time.

3. Benchmarking partners

Use the aims of your project to decide on the kind of benchmarking partners you need.

You can use internal partners (eg different departments or sites)

• This kind of benchmarking helps you standardise and improve your operations at the level of your best performers.
• However, if you only benchmark internally, you run the risk of complacency.
• Internal benchmarking is unlikely to lead to any dramatic insights.

Most benchmarking involves external comparisons

• Aim to compare yourself against businesses of a similar size and structure, with similar objectives.
• Understanding how their objectives, limitations and cultures differ from yours is important if you are going to make meaningful comparisons.
• You can also compare separate processes which are going to be similar across different businesses. For example, the base-level operation of the accounts team is likely to be similar for most businesses.
• Competitors usually offer the best direct comparison. However, it may be difficult to collect detailed information from them.
• There may be legal or ethical restrictions which prevent the free exchange of information.

You may want to benchmark against outstanding businesses

• This is one of the best ways to bring about a substantial improvement in performance.
• It can be more difficult to make comparisons if the other businesses operate in a very different environment.

Identify and select three to six individual partners

• Talk to colleagues, customers and suppliers, and research your industry to establish who leads the field in the area you are benchmarking.
• Business publications, blogs, podcasts and online video content can also provide ideas.
• Your local business support organisation and trade association can suggest possible partners. If you're searching in a broad or unknown area, you may want to get help from a consultant.

4. Collecting information

Approach the organisations you want to make comparisons with

• Use any existing contacts to make the first approach, or contact your opposite number.
• Explain the objectives of the study and emphasise its mutual benefits.

Draw up a benchmarking agreement

The more focused your research is, the more useful it's likely to be. Your agreement should include:

• What information you want to exchange - never ask for information that you are not prepared to share in return.
• How you will use the information.
• Who will have access to the information.
• How and when you will collect the information and in what form.

Decide how you want to collect data

• Simple operational data can be exchanged by using a questionnaire - either online, by post or by phone.
• A site visit will give you a much better feel for how your partner operates. Use a checklist and visit in pairs. Two people may find it easier to get complete, objective information and impressions.

Send copies of your visit reports to the partner organisations

• They can check and verify the information.

Invite your partners to carry out a return visit

• They can collect information on your business and operations.
• You can hear their views on how you operate.

5. Managing improvement

Summarise where you differ from your benchmarking partners

Depending on your objectives, you may identify:

• Differences in performance indicators. For example, higher staff turnover or lower gross margins.
• Differences in individual processes. For example, how you recruit or how your production processes work.
• Differences in strategy. For example, what your human resource policies are, or what quality standards you have for your products.

Investigate why you differ

Typical reasons include:

• Your cost control is poor.
• Your processes are outdated or inefficient.
• You have made a different trade-off. For example, if you choose to invest more in employee development and recognition to keep your turnover levels low.
• You have a different focus to your benchmarking partners. For example, if you have a different target market.
• You have different organisational constraints. For example, if you do not have the financial resources to invest in new technology.

Decide what actions you need to take to make the improvements you have identified

There will normally be several options open to you:

• You may decide to do nothing. You may accept that there is a good reason for the difference, or that it would be impossible to make changes.
• You may feel that you should adapt your processes. If your benchmarking partners are similar to you but achieve better results with a different process, you may want to adopt elements of that process within your business.
• You may target specific areas for improvement and further investigation. For example, if it's clear that your marketing is underperforming, but you aren't sure what you can do about it.
• You may realise that you need to redefine elements of your strategy, eg change your objectives or standards.

The success of benchmarking depends on management commitment

• The more complex and far-reaching the change, the more time and effort you will need to spend developing and setting up action plans.

Review how well the benchmarking study went and what impact the changes had

• Did the study achieve its objectives?
• What went well, and what would you do differently next time?
• How well is your business performing now? Did the actions you took lead to incremental improvements or to a step change in performance?

Benchmarking is not a one-off activity

• Even if you have achieved best practice today, regular benchmarking is essential to keep you up to date and ahead of the competition.

6. Getting help with benchmarking

You may want to involve a consultant

Although many benchmarking studies are conducted without external help, you may want a consultant to help with some aspects such as:

• Collecting internal data and documenting existing processes. An external consultant may find it easier to be objective about your business.
• Identifying and contacting benchmarking partners.
• Project management.
• Overcoming resistance to change.

Check with business support organisations

• Your trade association may offer benchmarking information or activities for your sector, or be able to put you in touch with sector-specific benchmarking consultants.
• Local business support organisations may offer benchmarking support.

Expert quotes

"It is always easier to benchmark functions that have quantifiable outcomes." - DLA Piper - MCG Consulting

"Benchmarking studies always throw up more questions than answers. A consultant with a relevant database is best positioned to address the issues raised." - DLA Piper - MCG Consulting

"Benchmarking is an ideal tool for measuring performance, using objective criteria. It is particularly valuable for identifying problem areas, letting you address issues ranging from poor productivity to low staff morale, absenteeism and cash flow shortfalls." - Winning Moves Ltd.