BENCHMARKING

BENCHMARKING

Benchmarking is the practice of comparing business processes and performance metrics to industry bests and best practices from other companies. Dimensions typically measured are quality, time and cost.

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 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.

In project management benchmarking can also support the selection, planning and delivery of projects.

In the process of best practice benchmarking, management identifies the best firms in their industry, or in another industry where similar processes exist, and compares 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.

History

The term benchmark, originates from the history of guns and ammunition, in regards to the same aim as for the business term; comparison and improved performance.

The introduction of gunpowder arms replaced the bow and arrow from the archer, the soldier who used the bow. The archer now had to adapt to the new situation, and learn to handle the gun. The new weapon left only a mark on the target, where the arrow used to be visible, and with the bow gone, the soldiers title changed to marksman, the man who put the mark.

The gun was improved already in the early beginning, with rifling of the barrel, and the rifle was born. With the industrialization of the weapon-industry in the mid-1800's, The mass production of ammunition as a cartridge replaced the manual loading of black-powder and bullet into the gun. Now, with standardized production of both the high-precision rifle, as well as the cartridge, the marksman was now the uncertain variable, and with different qualities and specifications on both rifle as well as ammunition, there was a need for a method of finding the best combination. The rifled weapon was fixed in a bench, making it possible to fire several identical shots at a target to measure the spread.

In 2008, a comprehensive survey on benchmarking was commissioned by The Global Benchmarking Network, a network of benchmarking centres representing 22 countries.

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 (strengths, weaknesses, opportunities, and threats) (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. benchmarking mainly depends on SWOT analysis and will also be using in future for almost 4-5 years.

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 benchmarking methodologies. One seminal book is Boxwell's Benchmarking for Competitive Advantage (1994). The first book on benchmarking, written and published by Kaiser Associates, is a practical guide and offers a seven- step approach. Robert Camp (who wrote one of the earliest books on benchmarking in 1989)[8] 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 all 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:

Identify 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 techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, re-engineering analysis, process mapping, quality control variance reports, financial ratio analysis, or simply reviewing cycle times or other performance indicators. Before embarking on comparison with other organizations it is essential to know the organization's function and processes; base lining performance provides a point against which improvement effort can be measured.

Identify other industries that have similar processes: For instance, if one were interested in improving hand-offs in addiction treatment one would 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.

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.

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.

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.

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.[9]

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

Benchmarking can be internal (comparing performance between different groups or teams within an organization) or external (comparing performance with companies in a specific industry or across industries). Within these broader categories, there are three specific types of benchmarking: 1) Process benchmarking, 2) Performance benchmarking and 3) Strategic benchmarking. These can be further detailed as follows:

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. Benchmarking is appropriate in nearly every case where process redesign or improvement is to be undertaking so long as the cost of the study does not exceed the expected benefit.

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.

Benchmarking in the public sector - functions as a tool for improvement and innovation in public administration, where state organizations invest efforts and resources to achieve quality, efficiency and effectiveness of the services they provide.

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.

The emerging technology of benchmarking engines automates the stage of going from data to noteworthy comparative insights, sometimes even expressing the insights in English sentences.

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 сan 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. Advanced statistical techniques, including stochastic frontier analysis, have been used to identify high and weak performers in 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 companies or divisions. Definitions may 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 so improvements can be changed.

Benchmarking is the process through which a company measures its products, services, and practices against its toughest competitors, or those companies recognized as leaders in its industry. Benchmarking is one of a manager’s best tools 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 idea behind benchmarking is to measure internal processes against an external standard. It is a way of learning which companies are best at performing certain activities and functions and then imitating—or better still, improving on—their techniques.

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 companycan get new products to market; at how the qualitycontrol function is performed; at how customerorders are filled and shipped; and at how maintenanceis 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 actually

achieved, and to take action to improve a company’s

cost competitiveness. As a result, benchmarking has

been used in many companies as a tool for obtaining a

competitive advantage.

Companies usually undertake benchmarking with

a view towards the many improvements that it may

offer. These benefits include reducing labor cost,

streamlining the work flow through reengineered business

processes and common administrative systems,

improving data center operations through consolidation

and downsizing, cooperative business and information

technology planning, implementing new technology,

outsourcing some assignments and functions, redesigning

the development and support processes, and restructuring

and reorganizing the information technology

functions.

BENCHMARKING BASICS

The goal of benchmarking is to identify the weaknesses

within an organization and improve upon them,

with the idea of becoming the “best of the best.” 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 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.

A company that decides to undertake a benchmarking

initiative should consider the following questions:

When? Why? Who? What? and How?

WHEN. 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. Leibfried 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

WHY. This is the most important question in management’s

decision to begin the benchmarking process.

McNair and Leibfried suggest several reasons why

companies may embark upon benchmarking:

• to signal management’s willingness to pursue

a philosophy that embraces change in a proactive

rather than reactive manner;

• to establish meaningful goals and performance

measures that reflect an external/customer

focus, foster “quantum leap” thinking, and

focus on high-payoff opportunities;

• to create early awareness of competitive disadvantage;

and• to promote teamwork that is based on competitive

need and is driven by concrete data

analysis, not intuition or gut feeling.

WHO. Companies may decide to benchmark internally,

against competitors, against industry performance,

or against the “best of the best.” Internal

benchmarking is the analysis of existing practice

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 more trend-based

and has a much broader scope. It can help establish

performance baselines. The best-in-class form of

benchmarking examines multiple industries in search

of new, innovative practices. It not only provides a

broad scope, but also it provides the best opportunities

over that range.

WHAT. Benchmarking can focus on roles, processes,

or strategic issues. It can be used to establish the function

or mission of an organization. It can also be used

to examine existing practices while looking at the

organization as a whole to identify practices that support

major processes or critical objectives. When

focusing on specific processes or activities, the depth

of the analysis is a key issue. 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. Concerning strategic issues, the

objective is to identify factors that are of greatest

importance to competitive advantage, to define measures

of excellence that capture these issues, and to isolate

companies that appear to be top performers in

these areas.

HOW. Benchmarking uses different sources of information,

including published material, trade meetings,

and conversations with industry experts, consultants,

customers, and marketing representatives. The emergence

of Internet technology has facilitated the benchmarking

process. The Internet offers access to a

number of databases-like Power-MARQ from the

nonprofit American Productivity and Quality Centercontaining

performance indicators for thousands of

different companies. The Internet also enables companies

to conduct electronic surveys to collect benchmarking

data. How a company benchmarks may

depend on available resources, deadlines, and the

number of alternative sources of information.

TYPES OF BENCHMARKING

There are a number of different types of benchmarking,

which are driven by different motivating factors

and thus involve different comparisons. Some of

the major types of benchmarking are as follows:

Metric benchmarking is the use of quantitative measures

as reference points for comparisons. Best-practice

benchmarking focuses on identifying outstanding

techniques. Information technology benchmarking

includes data processing, systems analysis, programming,

end-user support, and networks. Infrastructure

benchmarking includes data centers, networks, data/

information, end-user support, and distribution remote

centers. Application benchmarking includes system

analysis, development and maintenance programming,

and functionality. Strategy benchmarking includes skills

assessment, information technology strategy, businesstechnology

alignment, and delineation of roles and

responsibilities.

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 translates into value added to the company

as well as its employees.

SUCCESSFUL BENCHMARKING

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 as well as having an open mind to

ideas is 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, keepthem 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 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 followthrough

process and assistance from consultants with

experience in designing and establishing such programs.

THE FUTURE OF BENCHMARKING

Although early work in benchmarking focused

on the manufacturing sector, it is now considered a

management tool that can be applied to virtually any

business. It has become commonplace for companies

to use in order to compete in and lead their respective

industries. It has helped many reduce costs, increase

productivity, improve quality, and strengthen customer

service.

In his book Benchmarking the Information

Technology Function, Charles B. Greene noted that

companies are increasingly interested in benchmarking

for a number of activities, including:

• cost of supporting business driver (transaction

costs, or cost per order)

• systems development activities, including

maintenance, backlogs, development productivity

and project management

• end-user support

• data centers/communication networks

• skills management

• business strategy alignment

• technology management

• customer/user satisfaction

According to a 2003 Bain and Company survey

quoted in Financial Executive, benchmarking received

the second-highest usage score (84 percent) 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

3.96 on a 5-point scale) with the results benchmarking

provides to their companies.