Benchmarking is the process through which a company measures its products, services, and practices against its competitors, or those companies recognized as leaders in its industry. Benchmarking is a management tool for determining whether the company is performing particular functions and activities efficiently, whether its costs are in line with those of competitors, and whether its internal activities and business processes need improvement. The objective of benchmarking is for management to identify the practices that are most successful in the marketplace and to incorporate those techniques into the operation of their business.
Benchmarking focuses on company-to-company comparisons of how well basic functions and processes are performed. Among many possibilities, it may look at how materials are purchased, suppliers are paid, inventories are managed, employees are trained, or payrolls are processed; at how fast the company can get new products to market; at how the quality control function is performed; at how customer orders are filled and shipped; and at how maintenance is performed.
Benchmarking enables managers to determine what the best practice is, to prioritize opportunities for improvement, to enhance performance relative to customer expectations, and to leapfrog the traditional cycle of change. It also helps managers to understand the most accurate and efficient means of performing an activity, to learn how lower costs are achieved, and to take action to improve a company's cost competitiveness.
Companies usually undertake benchmarking to obtain a competitive advantage by reducing labor cost, streamlining the work flow through reengineered business processes and common administrative systems, improving data center operations through consolidation and downsizing, implementing new technology, outsourcing some assignments and functions and redesigning the development and support processes.
The goal of benchmarking is to identify the weaknesses within an organization and improve upon them, with the idea of becoming the “best-in-class.” The benchmarking process helps managers to find gaps in performance and turn them into opportunities for improvement. Benchmarking enables companies to identify the most successful strategies used by other companies of comparable size, type, or regional location, and then adopt relevant measures to make their own programs more efficient. Most companies apply benchmarking as part of a broad strategic process. For example, companies use benchmarking in order to find breakthrough ideas for improving processes, to support quality improvement programs, to motivate staffs to improve performance, and to satisfy management's need for competitive assessments.
Benchmarking targets roles, processes, and critical success factors. Roles are what define the job or function that a person fulfills. Processes are what consume a company's resources. Critical success factors are issues that a company must address for success over the long-term in order to gain a competitive advantage. Benchmarking focuses on these things in order to point out inefficiencies and potential areas for improvement.
There are many motivators that drive the different types of benchmarking. Application benchmarking and infrastructure benchmarking, for example, use such motivators as cost, quality, competition, and goal setting. An advantage of benchmarking is that it facilitates the process of change, clearly laying out the types of solutions external organizations have used and providing a global perspective on how part of the company affects the whole. It further helps focus improvement in the areas where actual gains can be made, which translate into value added to the company as well as its employees.
Benchmarking can be used at any time, but is usually performed in response to needs that arise within a company. According to C.J. McNair and Kathleen H.J. Leib-fried in their book Benchmarking: A Tool for Continuous Improvement, some potential “triggers” for the benchmarking process include:
- Quality programs
- Cost reduction/budget process
- Operations improvement efforts
- Management change
- New operations/new ventures
- Rethinking existing strategies
- Competitive assaults/crises
Methodology. Benchmarking involves selecting a product, process, or service to benchmark, and then identifying the key performance metrics for that particular function. A metric is a quantitative measure that is used as a reference point for comparisons. The analysis can take the form of vertical or horizontal benchmarking. Vertical benchmarking is where the focus is placed on specific departments or functions, while horizontal benchmarking is where the focus is placed on a specific process or activity.
There are four main approaches to benchmarking, including strategic benchmarking, functional benchmarking, best practices benchmarking, and product benchmarking. Strategic benchmarking compares different companies' strategies with particular reference to process capability, technology portfolio, and product line. Functional benchmarking analyzes the performance of core business functions, whereas best practices benchmarking breaks the function down into discrete targets for comparison with the industry leaders. It is a more focused study than functional benchmarking in that it assesses business processes and the management techniques behind them. Finally, product benchmarking, also known as reverse engineering or competitive product analysis, assesses competitor costs, product concepts, and alternative designs by dissecting competitors' products.
After isolating the aspect of the company to be benchmarked, the managers choose what they will measure the function against. Internal benchmarking is the analysis of existing practices within various departments or divisions of the organization, looking for best performance as well as identifying baseline activities and drivers. Competitive benchmarking looks at a company's direct competitors and evaluates how the company is doing in comparison. Knowing the strengths and weaknesses of the competition is not only important in plotting a successful strategy, but it can also help prioritize areas of improvement as specific customer expectations are identified. Industry benchmarking is a more trend-based approach. Because of its broad scope, it is primarily used by companies to establish performance baselines.
Once an internal department or another company has been selected to benchmark against, management collects data about its practices and performance. Benchmarking uses different sources of information, including published material, trade meetings, and conversations with industry experts, consultants, customers, and marketing
representatives. Databases such as APQC.org from the nonprofit American Productivity and Quality Center contain performance indicators for thousands of different companies. Management analyzes the data and identifies the best practices. Once the opportunity for improvement has been observed, the managers must implement the necessary changes and monitor subsequent performance.
According to a 2007 Bain and Company survey, benchmarking received the fourth-highest usage score (81%) among more than two dozen management tools used by senior executives around the world. The survey also reported that users tend to be highly satisfied (rated 3.8 on a 5-point scale) with the results benchmarking provides to their companies.
There are several keys to successful benchmarking. Management commitment is one that companies frequently name. Since management from top to bottom is responsible for the continued operation and evaluation of the company, it is imperative that management be committed as a team to using and implementing benchmarking strategies. A strong network of personal contacts and an open mind to new ideas are other keys. In order to implement benchmarking at all stages, there must be a well-trained team of people in order for the process to work accurately and efficiently. Based on the information gathered by a well-trained team, there must also be an effort toward continuous improvement. Other keys include a benchmarking process that has historical success, sufficient time and staff, and complete understanding of the processes to be benchmarked.
In almost any type of program that a company researches or intends to implement, there must be goals and objectives set for that specific program. Benchmarking is no different. Successful companies determine goals and objectives, focus on them, keep them simple, and follow through on them. As in any program, it is always imperative to gather accurate and consistent information. The data should be understood and should be able to be defined as well as measured. The data must be able to be interpreted in order to make comparisons with other organizations. Lastly, keys to successful benchmarking include a thorough follow-through process and assistance from consultants with experience in designing and establishing such programs.
SEE ALSO Competitive Advantage; Continuous Improvement; World-Class Manufacturer
APQC Process Classification Framework Houston: American Productivity and Quality Center, 2007. Available from: http://www.apqc.org/portal/apqc/ksn/PCF_5x.pdf?paf_gear_id=contentgearhome&paf_dm=full&pageselect=contentitem&docid=152203.
Engle, Paul. “World-Class Benchmarking.” Industrial Engineer August 2004.
Greene, Charles B. Benchmarking the Information Technology Function. New York: The Conference Board, 1993.
Mard, Michael J., et al. Driving Your Company's Value: Strategic Benchmarking for Value. New Jersey: John Wiley, 2004.
McNair, C.J., and Kathleen H.J. Leibfried. Benchmarking: A Tool for Continuous Improvement. Harper Business, 1992.
Powers, Vicki. “Boosting Business Performance through Benchmarking.” Financial Executive November 2004.
Rigby, Darrell. Management Tools and Trends Boston: Bain & Company, 2007. Available from: http://www.bain.com/management_tools/Management_Tools_and_Trends_2007.pdf.
Tirbutt, Edmund. “Brimming with Confidence: Benchmarking Your Perks against Your Rivals' Can Provide HR with Added Reassurance.” Employee Benefits November 2004.
"Benchmarking." Encyclopedia of Management. . Encyclopedia.com. (December 14, 2017). http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/benchmarking
"Benchmarking." Encyclopedia of Management. . Retrieved December 14, 2017 from Encyclopedia.com: http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/benchmarking
Benchmarking is a management technique aimed at detecting "best practice" in other organizations and then adopting it in one's own.
According to Keith Session and his associates, writing in an occasional paper titled "All Benchmarkers Now?," the practice has its roots in Japanese reverse engineering efforts in the 1950s and in kaizen, meaning continuous improvement, a practice introduced by Toyota. Benchmarking, in other words, is a competitive response: "Others are doing a better job. How do they do it? Let's do the same thing." According to Session et. al., the practice is "very much associated with Xerox in the USA, leading to the first book on the subject by the company's head of benchmarking in the 1980s…. Initially, in the late 1970s and early l980s, Xerox focused on the activities of its Japanese competitors. This 'competitive benchmarking' was quickly joined by 'generic benchmarking', in which Xerox looked beyond immediate competitors, to include companies with strong practices wherever they were to be found—railways, insurance and electricity generation, for example."
Since that time benchmarking has been applied in a formal fashion (following strict rules) to all manner of technical and administrative procedures. The phrase has also come to be used somewhat loosely to indicate any kind of comparisons between companies, departments, and discrete processes. It may be applied very narrowly to such matters as Internet download time performance and as broadly as comparing marketing campaigns.
Benchmarking has become a well-accepted management tool among larger corporations, both as a means of remaining competitive and in justifying their own performance. Richard T. Roth, writing in Financial Executive, leads off his article on benchmarking by saying: "The benchmarking concept, a familiar one to most executives, keeps gaining converts. Bain & Co.'s most recent Management Tools study, which charts the tools that companies use to set strategic direction, finds that for the past four years, benchmarking has held steady in second place, with 84 percent of all surveyed companies using it. Only formal strategic planning surpassed benchmarking in the ranking." Benchmarking picked up with the onset of the recession in the late 1990s: it helps document a business unit's contribution to corporate performance no matter which way the economy moves. Benchmarking also helps to make the case for necessary but painful change.
HOW IT WORKS
Benchmarking is a study of best practices elsewhere and the implementation of findings "back home." Studies may be very broad (generic benchmarking), industry-wide (industry benchmarking), specific to a business function like purchasing (functional benchmarking), or aimed at a particular process (performance benchmarking).
The general procedure involves selection of a target, identifying best practitioners, surveying best practices by interview and other means, analyzing the results, and making whatever changes are needed internally to apply the discoveries made.
Unless the practice is well-integrated and institutionalized, barriers to effective benchmarking abound, especially in smaller organizations. Formal programs usually require a substantial commitment of staff time and direct expenditures. For maximum effect, therefore, top management involvement is vital but not always forthcoming: benchmarking initiatives may arise at lower levels in order to "nudge" upper management. Identifying best practice may prove difficult and may involve extra costs. It is obviously most difficult to benchmark direct competitors: they tend to shy from sharing the secret of their success. Once best practices have been identified, their analysis can present serious difficulties. Frequently "best practice" is due to unique circumstances, sometimes intangible qualities like a leading personality, and are therefore very difficult to adopt. Finally, implementation of best practice may be fiercely resisted within the company slated for improvement.
For these reasons, benchmarking programs are most successful when their aims are fairly narrow and quantifiable, awareness of the problem within the company is widespread and shared, best practice is reasonably accessible, and implementation is well rewarded.
BENCHMARKING AND SMALL BUSINESS
Benchmarking tends to be a method most suited to large, centralized, and bureaucratically organized institutions. Smaller companies sometimes attempt it, but success appears to require effective top management participation. James Dodd and Mark Turner, writing in National Public Accountant, accurately assess small business attitudes toward this management technique: "Most regard their businesses as too unique to warrant detailed comparison across industries," they write. "They see no valid comparisons and, therefore, do not recognize any meaningful benefit from examining practices outside their own industries." There is also the further consideration that small businesses have better uses for their money than visiting scores of distant companies to learn how they collect debt or display merchandise. The functional equivalent to benchmarking, however, does take place when small business owners interact with competitors and peers in the marketplace—and keep eyes and ears open.
see also Best Practices
Ackoff, Russell L. "The Trouble with Benchmarking." Across the Board. January 2000.
"All Benchmarkers Now? Benchmarking and the 'Europeanisation' of Industrial Relations." Sussex European Institute, 2002.
Bogan, Christopher E., and Michael J. English. Benchmarking for Best Practices: Winning through Innovative Adaptation. McGraw-Hill, 1994.
Dodd, James L., and Mark A. Turner. "Is Benchmarking Appropriate for Small Businesses?" National Public Accountant. August 2000.
"Main Obstacles to Benchmarking." Modern Materials Handling. 29 February 2000.
Roth, Richard T. "Best Practice Benchmarking." Financial Executive. July-August 2005.
Wieder, Tamara. "E-Commerce Benchmarking." Computerworld. 7 August 2000.
Hillstrom, Northern Lights
updated by Magee, ECDI
"Benchmarking." Encyclopedia of Small Business. . Encyclopedia.com. (December 14, 2017). http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/benchmarking
"Benchmarking." Encyclopedia of Small Business. . Retrieved December 14, 2017 from Encyclopedia.com: http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/benchmarking
www.dh.gov.uk/en/Publicationsandstatistics/Publications/PublicationsPolicyAndGuidance/DH_4005475 Explanation of the benchmarking of health care from the Department of Health
"benchmarking." A Dictionary of Nursing. . Encyclopedia.com. (December 14, 2017). http://www.encyclopedia.com/caregiving/dictionaries-thesauruses-pictures-and-press-releases/benchmarking
"benchmarking." A Dictionary of Nursing. . Retrieved December 14, 2017 from Encyclopedia.com: http://www.encyclopedia.com/caregiving/dictionaries-thesauruses-pictures-and-press-releases/benchmarking