Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practice

Best practice

A best practice is a method or technique that has consistently shown results superior to those achieved with other means, and that is used as a benchmark...

s from other industries. Dimensions typically measured are quality, time and cost. In the process of benchmarking, management identifies the best firms in their industry, or in another industry where similar processes exist, and compare the results and processes of those studied (the "targets") to one's own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful.

The term benchmarking was first used by cobblers

Shoemaking

Shoemaking is the process of making footwear. Originally, shoes were made one at a time by hand. Traditional handicraft shoemaking has now been largely superseded in volume of shoes produced by industrial mass production of footwear, but not necessarily in quality, attention to detail, or...

 to measure people's feet for shoes. They would place someone's foot on a "bench" and mark it out to make the pattern for the shoes. Benchmarking is used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.

Also referred to as "best practice benchmarking" or "process benchmarking", this process is used in management and particularly strategic management

Strategic management

Strategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments...

, in which organizations evaluate various aspects of their processes in relation to best practice companies' processes, usually within a peer group defined for the purposes of comparison. This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to improve their practices.

Benefits and use

In 2008, a comprehensive survey on benchmarking was commissioned by The Global Benchmarking Network, a network of benchmarking centers representing 22 countries. Over 450 organizations responded from over 40 countries. The results showed that:

1. Mission and Vision Statements and Customer (Client) Surveys are the most used (by 77% of organizations of 20 improvement tools, followed by SWOT analysis
   SWOT analysis
   SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses/Limitations, Opportunities, and Threats involved in a project or in a business venture...
   
   (72%), and Informal Benchmarking (68%). Performance Benchmarking was used by 49% and Best Practice Benchmarking by 39%.
2. The tools that are likely to increase in popularity the most over the next three years are Performance Benchmarking, Informal Benchmarking, SWOT, and Best Practice Benchmarking. Over 60% of organizations that are not currently using these tools indicated they are likely to use them in the next three years.

Collaborative benchmarking

Benchmarking, originally described as a formal process by Rank Xerox

Rank Xerox

Rank Xerox was formed in 1956 as a joint venture between the Xerox Corporation of U.S. and the Rank Organisation of UK, to manufacture and market Xerox equipment initially in Europe and later in Africa and Asia...

, is usually carried out by individual companies. Sometimes it may be carried out collaboratively by groups of companies (e.g. subsidiaries

Subsidiary

A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...

 of a multinational in different countries). One example is that of the Dutch

Netherlands

The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...

 municipally-owned water supply

Water supply

Water supply is the provision of water by public utilities, commercial organisations, community endeavours or by individuals, usually via a system of pumps and pipes...

 companies, which have carried out a voluntary collaborative benchmarking process since 1997 through their industry association. Another example is the UK construction industry which has carried out benchmarking since the late 1990s again through its industry association and with financial support from the UK Government.

Procedure

There is no single benchmarking process that has been universally adopted. The wide appeal and acceptance of benchmarking has led to the emergence of various benchmarking methodologies. One seminal book on benchmarking is Boxwell's Benchmarking for Competitive Advantage (1994). The first book on benchmarking, written and published by Kaiser Associates

Kaiser Associates

Kaiser Associates is a boutique strategy consulting firm based in Washington, DC and London, England, with offices in Sao Paulo, Brazil, Cape Town, South Africa, Toronto, Canada and Kuala Lumpur, Malaysia. The firm was founded in 1981 as a spin-off from Strategic Planning Associates by Michael...

, is a practical guide and offers a 7-step approach. Robert Camp (who wrote one of the earliest books on benchmarking in 1989) developed a 12-stage approach to benchmarking.

The 12 stage methodology consists of:

1. Select subject
2. Define the process
3. Identify potential partners
4. Identify data sources
5. Collect data and select partners
6. Determine the gap
7. Establish process differences
8. Target future performance
9. Communicate
10. Adjust goal
11. Implement
12. Review and recalibrate

The following is an example of a typical benchmarking methodology:

1. Identify your problem areas - Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research
   Qualitative marketing research
   Qualitative marketing research is a set of research techniques, used in marketing and the social sciences, in which data is obtained from a relatively small group of respondents and not analyzed with inferential statistics...
   
    techniques such as focus group
   Focus group
   A focus group is a form of qualitative research in which a group of people are asked about their perceptions, opinions, beliefs and attitudes towards a product, service, concept, advertisement, idea, or packaging...
   
   s; or in-depth marketing research
   Marketing research
   Marketing research is "the function that links the consumer, customer, and public to the marketer through information — information used to identify and define marketing opportunities and problems; generate, refine, and evaluate marketing actions; monitor marketing performance; and improve...
   
   , quantitative research
   Quantitative marketing research
   Quantitative marketing research is the application of quantitative research techniques to the field of marketing. It has roots in both the positivist view of the world, and the modern marketing viewpoint that marketing is an interactive process in which both the buyer and seller reach a satisfying...
   
   , surveys
   Statistical survey
   Survey methodology is the field that studies surveys, that is, the sample of individuals from a population with a view towards making statistical inferences about the population using the sample. Polls about public opinion, such as political beliefs, are reported in the news media in democracies....
   
   , questionnaires
   Questionnaire construction
   A questionnaire is a series of questions asked to individuals to obtain statistically useful information about a given topic. When properly constructed and responsibly administered, questionnaires become a vital instrument by which statements can be made about specific groups or people or entire...
   
   , re-engineering analysis, process mapping, quality control variance reports, or financial ratio analysis. Before embarking on comparison with other organizations it is essential that you know your own organization's function, processes; base lining performance provides a point against which improvement effort can be measured.
2. Identify other industries that have similar processes - For instance if one were interested in improving hand offs in addiction treatment he/she would try to identify other fields that also have hand off challenges. These could include air traffic control, cell phone switching between towers, transfer of patients from surgery to recovery rooms.
3. Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.
4. Survey companies for measures and practices - Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked to protect confidential data by neutral associations and consultants.
5. Visit the "best practice" companies to identify leading edge practices - Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group.
6. Implement new and improved business practices - Take the leading edge practices and develop implementation plans which include identification of specific opportunities, funding the project and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.

Costs

The three main types of costs in benchmarking are:

• Visit Costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labor time.
• Time Costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.
• Benchmarking Database Costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice now.

The cost of benchmarking can substantially be reduced through utilizing the many internet resources that have sprung up over the last few years. These aim to capture benchmarks and best practices from organizations, business sectors and countries to make the benchmarking process much quicker and cheaper.

Technical/product benchmarking

The technique initially used to compare existing corporate strategies with a view to achieving the best possible performance in new situations (see above), has recently been extended to the comparison of technical products. This process is usually referred to as "technical benchmarking" or "product benchmarking". Its use is well-developed within the automotive industry ("automotive benchmarking"), where it is vital to design products that match precise user expectations, at minimal cost, by applying the best technologies available worldwide. Data is obtained by fully disassembling existing cars and their systems. Such analyses were initially carried out in-house by car makers and their suppliers. However, as these analyses are expensive, they are increasingly being outsourced to companies who specialize in this area. Outsourcing has enabled a drastic decrease in costs for each company (by cost sharing) and the development of efficient tools (standards, software).

Types

• Process benchmarking - the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration.
• Financial benchmarking - performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity.
• Benchmarking from an investor perspective- extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor.
• Performance benchmarking - allows the initiator firm to assess their competitive position by comparing products and services with those of target firms.
• Product benchmarking - the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.
• Strategic benchmarking - involves observing how others compete. This type is usually not industry specific, meaning it is best to look at other industries.
• Functional benchmarking - a company will focus its benchmarking on a single function to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison.
• Best-in-class benchmarking - involves studying the leading competitor or the company that best carries out a specific function.
• Operational benchmarking - embraces everything from staffing and productivity to office flow and analysis of procedures performed.
• Energy benchmarking - process of collecting, analysing and relating energy performance data of comparable activities with the purpose of evaluating and comparing performance between or within entities. Entities can include processes, buildings or companies. Benchmarking may be internal between entities within a single organization, or - subject to confidentiality restrictions - external between competing entities.

Tools

Benchmarking software can be used to organize large and complex amounts of information. Software packages can extend the concept of benchmarking and competitive analysis by allowing individuals to handle such large and complex amounts or strategies. Such tools support different types of benchmarking (see above) and can reduce the above costs significantly.

Metric benchmarking

Another approach to making comparisons involves using more aggregative cost or production information to identify strong and weak performing units. The two most common forms of quantitative analysis used in metric benchmarking are data envelope analysis (DEA) and regression analysis. DEA estimates the cost level an efficient firm should be able to achieve in a particular market. In infrastructure regulation, DEA can be used to reward companies/operators whose costs are near the efficient frontier with additional profits. Regression analysis estimates what the average firm should be able to achieve. With regression analysis firms that performed better than average can be rewarded while firms that performed worse than average can be penalized. Such benchmarking studies are used to create yardstick comparisons, allowing outsiders to evaluate the performance of operators in an industry. A variety of advanced statistical techniques, including stochastic frontier analysis, have been utilized to identify high performers and weak performers in a number of industries, including applications to schools, hospitals, water utilities, and electric utilities.

One of the biggest challenges for metric benchmarking is the variety of metric definitions used among different companies and/or divisions. Definitions may also change over time within the same organization due to changes in leadership and priorities. The most useful comparisons can be made when metrics definitions are common between compared units and do not change over time so improvements can be verified.

See also

• Business Excellence
  Business excellence
  Business excellence is the systematic use of quality management principles and tools in business management, with the goal of improving performance based on the principles of customer focus, stakeholder value, and process management...
  
  
• Best Practices
• Project triangle
  Project triangle
  The Project Triangle in engineering is a triangle model of project. It is a graphic aid where the three attributes show on the corners of the triangle to show opposition. It is useful to help with intentionally choosing project biases, or analyzing the goals of your project...
  
  
• List of benchmarking methods and software tools