Benchmarking as an Organizational Method of Measurement

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Introduction

Benchmarking is a systematic method by which organizations can measure themselves against the best industry practices. It promotes superior performance by providing an organized framework through which organizations learn how the "best in class" do things, understand how these best practices differ from their own, and implement change to close the gap. The essence of benchmarking is the process of borrowing ideas and adapting them to gain competitive advantage. It is a tool for continuous improvement.

Benchmarking is an increasingly popular tool. It is used extensively by both manufacturing and service organizations, including Xerox, AT & T, Motorola, Ford, and Toyota. Benchmarking is a common element of quality standards, such as Chrysler, Ford, and General Motors Quality Systems Requirements. These standards stipulate that quality goals objectives be based on competitive products and Baldrige National Quality Award similarly requires that applicants benchmark external organizations.

Benchmarking Defined

Benchmarking is the systematic search for best practice, innovative ideas, and highly effective operating procedures. Benchmarking considers the experience of others and uses it. Indeed, it is the common-sense proposition to learn form others what they do right and then imitate it to avoid reinventing the wheel. Benchmarking is not new and indeed has been around or a long time. In fact, in the 1800s, Francis Lowell, a New England colonist, studied British textile mills and imported many ideas along with improvements he made for the burgeoning American textile mills.

Fig 1: Benchmarking Concept

As shown in Figure 8-1, benchmarking measures performance against that of best-in-class organizations, determines how the best in class achieve those performance levels, and uses the information as the basis for adaptive creativity and breakthrough performance.

Implicit in the definition of benchmarking are two key elements. First, measuring performance requires some sort of units of measure. These are called metrics and are usually expressed numerically. The numbers achieved by the best-in-class benchmark are the target. An organization seeking improvement then plots its own performance against the target. Second, benchmarking requires that managers understanding why their performance differs. Benchmarkers must develop a through and in-depth knowledge o both their processes and the processes of the best-in-depth knowledge of standing of the differences allows managers to organize their improvement efforts to meet the goal. Benchmarking is about meeting them by improving processes.

Reasons to Benchmark

Benchmarking is a tool to achieve business and competitive objectives. It is powerful and extremely effective when used for the right reasons and aligned with organization strategy. It is not a panacea that can replace all other quality efforts or management processes. Organizations must still decide which markets to serve and determine the strengths that will enable them to gain competitive advantage. Benchmarking is one tool to help organizations develop those strengths and reduce weaknesses.

By definition, benchmarking requires an external orientation, which is critical in a world where the competitor can easily be on the other side of the globe. An external out- look greatly reduces the chance of being caught unaware by competition. Benchmarking can notify the organization if it has fallen behind the competition or failed to take advantage of important operating improvements developed elsewhere. In short, benchmarking can inspire managers (and organizations) to compete.

In contrast to the traditional method of extrapolating next year's goal from last year's performance, benchmarking allows goals to be set objectively, based on external information. When personnel are aware of the external information, they are usually much more motivated to attain the goals and objectives. Also, it is hard to argue that an objective is impossible when it can be shown that another organization has already achieved it.

Benchmarking is time and cost efficient because the process involves imitation and adaptation rather than pure invention. Benchmarking partners provide a working model of an improved process, which reduces some of the planning, testing, and prototyping effort. As the old saying goes, Why reinvent the wheel?

The primary weakness of benchmarking, however, is the fact that best-in-class performance is a moving target. For example, new technology can create quantum leap performance improvements, such as the use of electronic data interchange (EDI).

Auto- mobile makers no longer use paper to purchase parts from suppliers. A computer tracks inventory and transmits orders directly to a supplier's computers. The supplier delivers the goods, and payment is electronically transmitted to the supplier's bank. Wal-Mart uses bar-code scanners and satellite data transmission to restock its stores, often in a matter of hours. These applications of ED! save tens of thousands of worker hours and whole forests of trees, as well as helping to meet customer requirements.

For functions that are critical to the business mission, organizations must continue to innovate as well as imitate. Benchmarking enhances innovation by requiring organizations to constantly scan the external environment and to use the information obtained to improve the process. Potentially useful technological breakthroughs can be located and adopted early.

Process

Organizations that benchmark, adapt the process to best fit their own needs and culture. Although the number of steps in the process may vary from organization to organization, the following six steps contain the core techniques.

Decide what to benchmark.

Understand current performance.

Plan.

Study others

Learn from the data.

Use the findings

Table 1 illustrates how AT & T and Xerox have adapted benchmarking to their won needs. AT&T, in its first six steps explicitly incorporates training and makes sure that personnel using benchmarking results to improve their processes buy into the program. The assumption is that if the process owners are not committed; they will ignore the results and the effort will have been wasted. Steps 7 represent the core benchmarking process.

Xerox, in steps 5 through 8 devotes extra effort to integrating benchmarking results into its formal planning process. This involves justification to senior management and gaining agreement from senior management. Again, steps are added to fit the process to the organizational need, but the core activities are consistent.

AT & T's 12- step Process Xerox's 10- Step Process

1.

Determine who the clients

1.

Identify what is to be

are -who will use the

benchmarked.

information to improve their

processes.

2.

Advance the clients form the

2.

Identify comparative

literacy

organizations.

3.

Test the environment. Make

3.

Determine current

sure the clients can and will

performance gap.

follow through with

benchmarking findings.

4.

Determine urgency. Panic or

4.

Determine current

disinterest indicate little chance

performance gap.

for success.

5.

Determine scope and type of

5.

Project future performance

benchmarking needed

6.

levels.

6.

Select and prepare the team.

Communicate benchmark

7.

findings and gain acceptance.

7.

Overlay the benchmarking

Establish functional goals.

process onto the business

planning process.

8.

Develop the benchmarking plan.

8.

Develop action plans.

9.

Analyze the data.

9.

Implement specific actions and monitor progress

10.

Integrate the recommended actions.

10

Recalibrate benchmarks.

11.

Take action

12.

Continue improvement.

Table 1

Deciding What to Benchmark

Benchmarking can be applied to virtually any business or production process. Improvement to best-in-class levels in some areas will contribute greatly to market and financial success, whereas improvement in other areas will have no significant impact. Most organizations have a strategy that defines how the firm wants to position itself and compete in the marketplace. This strategy is usually expressed in terms of mission and vision statements. Sup- porting these statements is a set of critical activities, which the organization must do successfully to realize its vision. They are often referred to as critical success factors. Critical processes are usually made of a number of sub-processes. In general, when deciding what to benchmark, it is best to begin by thinking about the mission and critical success factors.

For example, take the case of two insurance organizations. The chairperson of the first expresses the organization's vision as becoming the "easiest in the industry to do business with." He wants to sell customers all their insurance needs by emphasizing speed of writing policies and an outstanding level of customer service. Critical success factors in this case could include a 24hour, 800-number service, fast payment of claims, database systems that can relate information on all policies held by each customer, and reduced cycle time.

Benchmarking customer service processes would have a substantial impact on the vision. The chairperson of the second organization admits that his organization is only an average performer in terms of customer service but intends to reduce the cost of insurance through excellent investment performance. Because today's premiums are invested to pay tomorrow's claims, higher earnings from investments would allow the organization to charge less. The critical success factors for this firm could include hiring and training good financial managers, using telecommunications to track and act on developments in global money markets, development of online, real-time information systems, and expert forecasting. Benchmarking investment processes would be appropriate in this case.

Fig 2: Choosing the Scope of the Benchmarking Study

In deciding what to benchmark, it is best not to choose too large a scope. A benchmarking study should be done quickly, to it may not get done at all. Teams can get very bogged down in the technicalities of benchmarking and take a year or longer to complete a study. Many circumstances can change in an organization over a year. Team members or management may change in a year's time, and that may compromise the study or even force a study to be abandoned. In order to limit the scope of a study and thereby limit the time it takes to conduct the study, it is best to choose a broad and shallow scope or a narrow and deep scope as shown in Figure 8-2. Broad and shallow studies ask, What is done?" and span many functions and people and do not go into detail in any one area. Broad and shallow studies are useful in developing strategies, setting goals, and reorganizing functions to be more effective. Narrow and deep studies ask, "How is it done and delve into a few aspects of a process or function. Narrow and deep studies are useful in changing how people perform their jobs. Some benchmarking teams start with a broad-and-shallow scope and identify a few area of particular interest to do a narrow and deep study. Other benchmarking teams identify the narrow and deep target immediately, based on existing data or experience.

Benchmarking Steps

Step 1: Plan

The first step in the benchmarking process is to plan. The Needs Assessment Team provides insight into key customer needs and the processes in the organization that address those needs. When a customer need is identified, the processes that directly fulfill that need become critical processes. We only benchmark critical processes. Typically, we try to identify weak critical processes that can give us the most leverage if they are fixed.

The Benchmarking Team needs to:

Understand the critical processes and how they are measured.

Decide what kind of data is needed and how data will be collected.

Identify all team members and find a sponsor.

A key step in the planning process is using flow charts so that the Team first understands their own critical processes. The Team needs to understand the process and how it is measured, both in their own terms and in the customer's terms. The kinds of measurements (or metrics) chosen have to be useful to compare performance with a benchmark partner.

The output of the planning process should be:

An identified customer class.

Identified customers' needs.

A targeted critical process related to fulfilling customers' needs.

A linkage between the purpose of the benchmarking study and organizational objectives.

A sponsor and a benchmarking team.

A data collection plan.

Step 2: Research

The purpose of research is to:

· Establish the metrics to be used.

· Identify the benchmark candidate.

· Collect public data.

Before collecting a lot of data about others, a benchmarking team needs to collect baseline data about its own processes. Collecting this data will refine the measurement process and help develop the final set of metrics to be used in the benchmarking effort. Use TQM tools or other analytical tools to observe and analyze your own process. The Benchmarking Team can use this internal review as benchmarking practice prior to the site visit with the benchmarking partner.

Identifying potential benchmarking partners is another step in the research phase. It is always best to develop a list of three to five potential benchmarking partners for cooperative benchmarking.

Some of the sources to identify benchmarking partners are:

Quality award winners (Malcolm Baldrige Award, for example)

Business newspaper and magazine articles

Trade journal articles

Conference speakers

Industry and professional associations

Books on well-run companies

Consultants and Big 6 accounting firms who work in your industry

Step 3: Observe

Eventually the Benchmarking Team must go to the source of the data and visit the benchmarking partner. The Team will have already prepared itself by:

Establishing a benchmarking agreement with a partner

organization.

Establishing a data collection plan and method.

Becoming experts in the measurement of their own system

Preparing themselves by absorbing and cataloging all relevant public information.

Step 4: Analyze

Analysis of the collected data usually takes several steps:

Summarize and interpret the data.

Analyze the gap between your process and your partner's process.

Project where future gaps will be.

Analyze things that were not on the agenda.

Develop key findings into new operational goals.

Analyzing the benchmark performance "Gap" can be done as a snapshot or as a trend over a period of time. Either method (or both) may be appropriate for the process being studied. When cost, productivity or quality is the metric under study, sometimes it is useful to look at the historical trend as well as the current gap. Projecting future performance levels of your productivity and the benchmark partner's, given the current rate of improvement for each, creates what we call the "Z Chart" of productivity improvement required to attain parity with your benchmark partner.

Step 5: Adapt

As a process improvement technique, benchmarking requires the same change management framework that all improvements need. The key change management techniques used are:

· Communicate the benchmark findings widely.

· Involve a broad cross-functional team of employees.

· Translate the findings to a few core principles.

· Work down from principles to strategies to action plans.

Benchmarking is about improving processes. Each process has a process "owner," and process owners and other stakeholders need to have a voice in the changes recommended. Before developing strategies, it is important to communicate with all who might be involved in the change.

Various methods are used to generate the strategies required:

The "End-State Vision" method: The desired state or condition when the process is working as intended is defined and compared with the current condition. A strategy is developed to migrate from the current state to that desired end state.

A "Force Field" diagram is used to explain where we are and how we got there by identifying helping factors and hindering factors. Our strategy becomes to boost the helping factors and reduce or eliminate the hindering factors.

A matrix can be used to target the highest priority changes by looking at importance of the process to the organization and the leverages from various options.

Step 6: Improve

The key implementation strategy is to choose solutions to benchmark findings that also contain an element of continuous improvement. Another implementation strategy is to move the benchmarking out from specialized work groups to include all employees and all processes that may need it. Finally, there should be an improvement to the benchmarking process itself - to establish "best practices" in benchmarking.

Continuous improvement is brought to bear in a process by ensuring that the process is subjected to an ongoing benchmarking activity. Benchmarking links each process in the organization with an improvement strategy and organizational goals that are in turn linked to customer needs. This linkage strengthens the bond between the customer and the organization.

Part of the organization's environment includes technology and competition. It is not enough to continuously improve if competitors are improving at a faster rate. Benchmarking imbues the organization with a sense of continuous improvement, and it also acts a practical monitor on the environment to ensure long term organizational survival.

To accomplish the goal of bringing benchmarking activities to all critical processes of the organization means that all employees may eventually need benchmark training. Process owners are key people to train in benchmarking principles so that they can also own the benchmarking process. Once they feel ownership and control, benchmarking becomes another quality management tool.

The final step in any benchmarking activity is to complete the Deming Cycle of continuous improvement; that is, to plan for the next benchmarking project. Lessons learned in the benchmarking activity become the source for continuous improvement of the benchmarking process. These lessons should be documented and used as the basis for the new planning cycle.

Pitfalls and Criticisms of Benchmarking

The basic idea of benchmarking can be summed up quite simply. Find someone who executes a process better than you do and imitate what he or she does. The most persistent criticism of benchmarking comes from the idea of copying others. How can an organization be truly superior if it does not innovate to get ahead of competitors? It is a good question, but one can also ask the reverse: How can an organization even survive if it loses track of its external environment?

Benchmarking is not a panacea. It is not a strategy, nor is it intended to be a business philosophy. It is an improvement tool. To be effective, it must be used properly. Benchmarking isn't very helpful if it is used for processes that don't offer much opportunity for improvement. It breaks down if process owns and managers feel threatened or do not accept and act on the findings. Over time, things change, and what was state-of-the area yesterday may not be today. Some processes may have to be benchmarked repeatedly.

Benchmarking is also not a substitute for innovation; however, it is a source of ideas from outside the organization. Business success depends on setting and achieving goals and objectives. Benchmarking forces an organization to set goals and objectives based on external reality. Consumers don't care if a process achieved a 20% year-to-year productivity gain. They care about quality, cost, and delivery, and they vote with their checkbooks or the superior organization.

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