Success in business is largely about being better than the competition. To be better than the competition it is necessary to have something to compare. These somethings are usually referred to as key performance indicators or KPIs. The KPIs could measure a host of different things but they all drive towards doing things better, faster and cheaper. These are the means by which a company achieves a competitive advantage.
The comparisons that are sought through benchmarking could be internal, within a company, comparing the performance of different aspects of the business or different business units. It could also be external comparisons. These are most useful as they give an indication of how an organisation is performing against a competitor or an industry standard.
Benchmarking can also be against unrelated businesses when a company is seeking to know what is achievable by world-class organisations. This is particularly the case with companies benchmarking their Net Promoter Scores. The NPS comparisons within their “consideration set” provides benchmarks that are close to home while those with the very best companies in different markets gives a higher aspiration at which to aim.
The Xerox Company is often credited as the originator of benchmarking which it pioneered in 1979. Benchmarking has most of its history in quality management. The wave of interest in improving quality led to the establishment of the Benchmarking Journal (1994) which is focused on total quality management.
Benchmarking is important in business. Benchmarks provide reference points against which you can measure your performance. Benchmarks can be goals, internal metrics or most frequently performance measures of competitors. Competitor benchmarking can cover a myriad of subjects from financial performance through to delivery times or customer satisfaction. External comparisons are useful as they give an indication of how an organisation is performing against a competitor or an industry standard.
The aim of benchmarking is to improve performance. There are four measures of importance:
Measures of time – how long it takes to produce something, how quickly the phone is answered, the speed of response to an enquiry, the time taken to deal with a complaint.
Measures of quality – the number of defects in a product, the length of life of a product, the cost of maintenance of a product, the ability of a product to withstand stress, the reliability of a product.
Measures of cost and effectiveness – the price of a product, the cost per application or use of a product, the cost of maintenance of a product, the savings that a product confers.
Measures of customer satisfaction – overall satisfaction with a product, satisfaction with different aspects of a product, the likelihood to recommend a product, the likelihood to repurchase a product.
These benchmarking measures are in attempts to improve processes in some way, to see if costs can be reduced, profits can be increased, and customer loyalty can be strengthened.
As the diagram indicates, it is important to consider what should be benchmarked and then determine key performance indicators that are readily available for tracking.
The benchmarking wheel (the figure below) takes you through the necessary steps.
The trickiest part of benchmarking is usually steps 3 and 4 – finding an easily available source against which to make the comparisons.
It is reported that in an attempt to improve the turnaround time of its aircraft, Southwest Airlines used the benchmark of the auto racing pits rather than compare itself to other airlines. As a result, the benchmarking exercise helped Southwest make much more significant improvements to gate maintenance, cleaning, and customer loading operations than would have been possible with an inter-industry comparison.
It is likely that every corporate organisation has benchmarked its operation at some time or another. Some companies have become known as the best in practice benchmarks. American Express is renowned for its billing systems, Disney World for customer experience, General Electric or its management processes, Hewlett-Packard for order fulfilment, and Ritz-Carlton for training.
Documented examples of benchmarking are manifold. Xerox faced a logistics and distribution issue in its warehousing and examined LL Bean’s fulfilment methods to successfully improve warehouse productivity by 5%. Motorola identified a problem with the time it was taking between order receipts and product delivery. It studied Domino Pizzas order and delivery procedures to reduce its cycle time. As a great fan of benchmarking, Motorola also sent a benchmarking team to Japan to study how automotive companies managed quality in their manufacturing facilities. This enabled the company to lower the defect rate and to reduce manufacturing costs.
Some things to think about:
The key to benchmarking is to find data against which to benchmark. External data may be the gold standard but if it isn’t available, find an internal data source that is. It is better to have frequent benchmarking tracking data with imperfections than to seek perfect benchmarking data that is not readily available.
The realistic with your KPIs. It can take two or three years to make a significant positive difference. Be patient and don’t lose sight of a long-term goal.