January 29th, 2012 Benchmarking Methods
Benchmarking is a systematic comparison of organizational processes and performance to create new standards or to improve processes.
Benchmarking models are used to determining how well a business unit, division, organization or corporation is performing compared with other similar organizations. A Benchmark is often used for improving communication, professionalizing the organization / processes or for budgetary reasons. Traditionally, performance measures have been compared with previous measures from the same organization at different times. Although this can be a good indication of the rate of improvement within the organization, it could be that although the organization is improving, the competition is improving faster.
Benchmarking (also "best practice benchmarking" or "process benchmarking") is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice, usually within their own sector. This then allows organizations to develop plans on how to adopt such best practice, 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 challenge their practices.
There are four types of benchmarking methods:
1. Internal (benchmark within a corporation, for example between business units)
2. Competitive (benchmark performance or processes with competitors)
3. Functional (benchmark similar processes within an industry)
4. Generic (comparing operations between unrelated industries)
Typically, benchmarking models involves the following benchmarking steps:
- scope definition
- choose benchmark partner(s)
- determine measurement methods, units, indicators and data collection method
- data collection
- analysis of the discrepancies
- present the results and discuss implications / improvement areas and goals
- make improvement plans or new procedures
- monitor progress and plan ongoing benchmark.
Benchmarking is a tough process that needs a lot of commitment to succeed. More than once benchmarking projects end with the 'they are different from us' syndrome or competitive sensitivity prevents the free flow of information that is necessary. However comparing performances and processes with 'best in class' is important and should ideally be done on a continuous basis (the competition is improving its processes also…).
Historically, benchmarking is based on Kaizen and competitive advantage thinking.
Advantages of Benchmarking
Benchmarking is a powerful management tool because it overcomes "paradigm blindness." Paradigm Blindness can be summed up as the mode of thinking, "The way we do it is the best because this is the way we've always done it." Benchmarking opens organizations to new methods, ideas and tools to improve their effectiveness. It helps crack through resistance to change by demonstrating other methods of solving problems than the one currently employed, and demonstrating that they work, because they are being used by others.
Benchmarking, originally invented as a formal process by Rank Xerox, is usually carried out by individual companies. Sometimes it may be carried out collaboratively by groups of companies (eg subsidiaries of a multinational in different countries). One example is that of the Dutch municipally-owned water supply companies, which have carried out a voluntary collaborative benchmarking process since 1997 through their industry association.
There is no single benchmarking process that has been universally adopted. The wide appeal and acceptance of benchmarking has led to various benchmarking methodologies emerging. The most prominent methodology is the 12 stage methodology by Robert Camp (who wrote the first book on benchmarking in 1989).
The 12 stage methodology consisted of 1. Select subject ahead 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/recalibrate.
The following is an example of a typical shorter version of the methodology:
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 techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, re engineering analysis, process mapping, quality control variance reports, or financial ratio analysis. Before embarking on comparison with other organizations it essential that you know your own organization's function, process; 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 s/he 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.
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.
Cost of Benchmarking
Benchmarking is a moderately expensive process, but most organizations find that it more than pays for itself. The three main types of costs 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 benchmarking or 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 particularly well developed within the automotive industry ("Automotive Benchmarking"), where it is vital to design products that match precise user expectations, at minimum possible cost, by applying the best technologies available worldwide. Many data are obtained by fully disassembling existing cars and their systems. Such analyzes were initially carried out in-house by car makers and their suppliers. However, as they are expensive, they are increasingly outsourced to companies specialized in this area. Indeed, outsourcing has enabled a drastic decrease in costs for each company (by cost sharing) and the development of very efficient tools (standards, software).
Types of Benchmarking
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.
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 in order 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.