Benchmarking

Benchmarking is the process of comparing performance between different entities. You may be benchmarking your sales margins and cost base against your competitors, you may be benchmarking the grades achieved by pupils at different schools you are considering for your children’s future education. But making the performance comparisons is only one approach to benchmarking. The other main approach is called Business Process Benchmarking, where you compare the processes for achieving the results as well as the results themselves.

In the next two sections I will talk about benchmarking in general. In the following section I will discuss Business Process Benchmarking.

Benchmarking can be an expensive exercise, but remember these days there are increasingly people already doing this. Which?, J D Power, Trip Advisor are at the information end, but GoCompare, Money Supermarket and Compare the Market are increasingly being used in the buying process. If you are not using these services to make comparisons, I can ensure you that your customers are.

If you are serious, you may have your own internal benchmarking department. For example, ICI created an internal consulting team to benchmark the performance of their chemical plants against each other. Just making the comparisons, raised questions and kick started the performance improvement process.

In the list below I have given some examples of benchmarking. However, your trade association may have more specific and relevant benchmarks for you to use.

Financial benchmarking – for example:

• PE ratios against industry sector
• Gearing
• Liquidity
• Dividend cover

Financial performance – for example:

• Return on capital employed
• Sales margin
• Marketing spend as a percentage sales
• R&D spend as a percentage sales
• Turnover per employee
• Value Added per employee
• Sales per employee
• Profit per employee

Service benchmarking – for example:

• HR costs as percentage of sales
• Financial and accounting costs as a percentage of sales
• HR function FTEs/Total FTEs employed
• Finance and accounting function FTEs/Total FTEs employed
• HQ function FTEs/Total FTEs employed
• Accounting costs per transaction

Product benchmarking, comparing the different elements of your products performance against the competition in the market place. You can do this yourself, or use industry standards such as those delivered by Which?, The Good Housekeeping Institute or J D Power.

Service benchmarking, again you can do this yourself through mystery shopping, or you can use the results from services such as Trip Advisor.

Customer satisfaction benchmarking – achieved by surveying your customers and your competitors customers.

Brand – companies such as Superbrands UK do this

Employee satisfaction benchmarking, there are consortium that will compare your employee satisfaction survey results with the rest of your industry or employees at large.

Employer brand – how attractive is your company to potential new employees?

Business Process Benchmarking was popularised by Robert Camp in the late 1980s after working for Xerox. He defined it as:

"The continuous process of measuring products, services and practices against the company’s toughest competitors or those companies renowned as industry leaders."

Other companies have taken this approach, but describe Business Process Benchmarking slightly differently. Ford described it as “a structured approach for learning from others and applying that knowledge”. 3M as “a tool to search for enablers that allow a company to perform at best-in-class level in business processes”.

In Business Process Benchmarking, the idea is to compare your process against the process others are using, so you understand both the level of performance that is being achieved and how it is achieved. An approach could take the following 5 steps.

Step 1 Pre-project planning

• Obtaining project sponsorship
• Put it in context, give the project meaning
• Determining what is to be achieved (the outcomes)
• Managing the expectations

Step 2 Planning

• What is to be benchmarked?
• Building the team
• Formalising the goals
• Identifying potential benchmarking partners (those companies you would like to go and see)

Step 3 Analysis

• Establish current levels of performance
• Map the existing process
• Benchmark, by mapping competitor processes and comparing performance
• Identify the potential gap

Step 4 Integration

• Add the context and learning into your thinking
• Project future performance to be achieved
• Communicate your findings
• Establish the commitment to action your findings

Step 5 Action

• Establish the specific changes to be made
• Plan the implementation
• Monitor progress, plans and KPIs
• Recalibrate your benchmark performance

The choice of who to benchmark against is important. You can:

• Internally benchmark, compare the different operations within your business.
• Industry benchmark, go and look at a good operator in your industry, but getting entry may be difficult unless they don’t compete directly for reason of distance etc. This type of benchmarking will give you the quickest results and insights, but may not give you breakthrough ideas.
• Best in breed benchmarking by looking at who would be the best in the world at this aspect of the business as it is absolutely core to their operation. So the example here was Xerox who thought about “picking order” as a process and went and benchmarking a camping gear manufacturer, somebody who does picking very well but not in their industry at all. These visits can give you the best ideas if you are open minded about what you are looking at.

There are three compelling reasons to undertake Business Process Benchmarking:

1. The results will challenge excepted norms
2. It drives improvement by forcing you to look at best in class
3. It shows how performance can be delivered, so helps to overcome resistance to change.

External comparisons are always useful.

People in your business invariably think they perform better than they actually do so that external comparison can dismiss the myths.

If you Business Process Benchmark you can actually see how it is done.

You need to pick tough competitors not people you know aren’t as good as you are.

You need to make comparisons carefully. If you compete on your service levels, don’t be surprised if some people are lower cost. Also make sure that the comparisons are structurally the same, who owns the assets, are they in the balance sheet or are those assets hidden elsewhere?

Start with processes that are easy to benchmark to get some quick wins under your belt, but once you have done this, benchmark your core processes. It is good to know that your accounting costs are competitive, but in reality, there are much more important customer facing processes that should be got right first.

• Robert Camp (2006), Benchmarking: the search for industry best practice that leads to superior performance, ASQC Quality Press, Milwaukee, USA.

• Finance & Management Faculty special report
• Employee Engagement
• Super Brands - An insight into Britain's strongest brands
• NHS Benchmarking network
• Local Government Benchmarking Framework

The ICAEW Library & Information Service provides full text access to leading business, finance and management journals and eBooks. Further reading on benchmarking is available through the resources below.