Many business owners think benchmarking is for big or troubled companies. But no company, regardless of size and performance, can afford to ignore it. In today’s changing business environment and economy, it’s hard to keep up with your competitors, and benchmarking allows companies to compare their productivity and efficiency to other businesses.
Two Types of Benchmarking
The first step in a benchmarking program is to understand what benchmarking is. Most of us know that it is the process of comparing your own company to others to identify areas in which you can improve your performance. However, there are at least two principal types of benchmarking: overall benchmarking and process benchmarking. Overall benchmarking looks at business performance in general, such as total return on capital.
It’s important to do both types of benchmarking. Overall benchmarking may tell you that you need to improve, but without process benchmarking you may not know how or where to improve. Overall improvements cannot be made without improving key processes.
The second step in the benchmarking process is to choose the company or companies you want to benchmark. Many companies assume that they should benchmark within their own industries. Often, this assumption is correct. If you are below average, it’s a good idea to learn how to meet your industry average, and to do that you need to benchmark other companies in your industry. But if you want to excel, to become superior to your peers, you should look outside your industry for ideas. Motorola, for example, benchmarked L.L. Bean when it wanted to improve its order shipping process.
Where can you find benchmarking data? Most experts agree that within the industry, you should contact key executives such as vendors, trade associations, competitors, former employees and customers for suggestions. You should also obtain analyst reports, proxy and financial statements and 10Ks from industry competitors. Outside the industry, it would be best to obtain annual reports from publicly traded companies and investigate private firms in publications such as Ward’s Business Directory or Dun & Bradstreet.
The third step in the process is to identify benchmarks. What do you want to compare? This is the most complex stage of the benchmarking process.
It’s critical that the benchmarks you choose reinforce the company’s strategy. If you want to offer the best price, you must set benchmarks that are different from a company that focuses on total customer satisfaction. For example, Nordstrom benchmarks would be very different from K-Mart’s benchmarks.
To choose proper benchmarks, keep in mind the stakeholder categories of any business: customers, employees, vendors and shareholders. Determine which of these relationships you are trying to improve upon with your primary goal, but keep in mind that they’re all related. For example, if you try to improve customer satisfaction, you should also ensure you maintain sufficient returns for your shareholders. A complex set of relationships needs to be balanced.
After you have determined who and what you want to benchmark, you can begin the benchmarking process. Although the process involves the close scrutiny of another company’s methods, taking a tour of another company’s plant to learn how it works isn’t enough. You’ll also need to scrutinize the other company’s business goals, operations and finances.
Your accounting firm can help in these areas. Some companies prefer that their accounting firm focuses only on financial benchmarking, but this often provides inadequate information. Many companies work with their CPA firms to design a “Balanced Scorecard”. A Balanced Scorecard brings both financial and nonfinancial measures clearly into view. It measures traditional financial data like total return, inventory turnover and margin. It also measures nonfinancial data, like market share, relative quality and employee satisfaction.
The final and critical step is to make changes based on the benchmarking process. All too often, companies go through the benchmarking exercise but don’t take the actions needed to improve or give up when improvement is not seen fast enough. Benchmarking, however, is not the only analysis companies should make; it’s simply one element of a comprehensive improvement program.
If you have questions about how your company could benefit from benchmarking, please contact Austin Buckett.