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Benchmarking involves finding, adapting and implementing best practices. Bruder and Grey define it as "a rigorous yet practical process for measuring your organization's performance and processes against those of best-in-class organizations, both public and private, and then using this analysis to improve services, operations and cost position dramatically." R.J. Fischer defines
Benchmarking in performance measurement terms: "Through a series of performance measures standards known as "benchmarks"--a person can identify the best in a class among those doing a particular task. Then, the best practices are analyzed and adapted for use by others wanting to improve their own way of doing things."
Benchmarking as a stand alone management strategy is a relatively new and evolving set of techniques. Its roots go back to performance measurement, including the ICMA ground-breaking efforts to measure municipal activities in 1938, through Deming and his followers, the Hoover Commissions, and PPBS. In its current form, Bruder and Grey have set out the most detailed agenda, the following seven step protocol:
1. Determine which function will benefit most from benchmarking;
2. Identify key cost, quality and efficiency measures for those functions;
3. Conduct an expert opinion survey and literature review to find the best in class organization for each measure;
4. Measure the best in class performance in the key areas identified;
5. Compare your organization's performance against the best in class and quantify the gap;
6. Specify actions to close the performance gap to best in class and, if possible, the steps necessary to "leap-frog" the current industry leader; and,
7. Implement those actions and monitor your performance.
Benchmarking is the process of comparing one's business processes and performance metrics to industry bests or best practices 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.
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, 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.
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 company can get new products to market; at how the quality control function is performed; at how customer orders are filled and shipped; and at how maintenance is 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.
Goal of benchmarking
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 bench-marking initiative should consider the following questions: When? Why? Who? What? and How?
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:
cost reduction/budget process
operations improvement efforts
new operations/new ventures
rethinking existing strategies
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.
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.
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 bench-marking 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.
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 bench-marking process. The Internet offers access to a number of databases-like Power-MARQ from the nonprofit American Productivity and Quality Center-containing performance indicators for thousands of different companies. The Internet also enables companies to conduct electronic surveys to collect bench-marking data. How a company benchmarks may depend on available resources, deadlines, and the number of alternative sources of information.
ADVANTAGES and DISADVANTAGES OF BENCHMARKING
There are several key advantages to using benchmarking in an organization.
Lowering Labor Costs
One advantage of benchmarking may be lower labor costs. For example, a small manufacturing company may study how a top competitor uses robots for several basic plant functions. These robots may help the competitor save a significant amount of money on labor costs. Company managers may obtain information on these robotics systems through the competitor's website or online articles. They may also identify the company that sold the competitor the robots. Subsequently, the company using benchmarking may call the robot manufacturer to help set up its own system.
Improving Product Quality
Companies may also use benchmarking to improve product quality. Engineers sometimes purchase leading competitors' products. They may then take them apart, study them and determine how the competitors' products outlast or outperform others in the industry. Chemical engineers may study food or cleaning products in a similar manner. They can then compare various elements contained in competitive products to their own product line. Subsequently, improvements can be made to product quality.
Increasing Sales and Profits
A company that uses benchmarking to improve its functions, operations, products and services may enjoy increases in sales and profits. Customers are likely to notice these improvements. The benchmarking company may also promote is improvements through company brochures, its sales reps, magazine and television ads. These efforts are likely to increase sales, especially among core customers. Companies that operate more efficiently due to benchmarking can drastically lower their expenses. These savings can be lead to greater profits.
Some organizations use internal benchmarking to improve performance in different departments. Department managers may study and emulate the best practices of one particular department. These changes may spark improvements among all departments. Internal benchmarking has its limitations, however. The company's top department may not be functioning as efficiently as others in the industry. This means the other departments were not truly benchmarking against the best departments out there.
Benchmarking can require a large investment in time, labor, and capital. Costs for a large project can easily reach into the hundreds of thousands of dollars. These can be minimized through careful, thoughtful, and deliberate planning. Typically, there are expenses related to travel as well as indirect costs associated with employee time devoted to trips and team meetings. With careful planning benchmarking costs can be kept to a minimum. The following are its disadvantages:
Size: The size and scope of a benchmarking project is related directly to the cost. An easy way to minimize costs is to take on a stepwise approach. This minimizes the amount of investment and risk taken concurrently.
Dividing Costs: Organizations can pool resources by taking joint benchmarking projects and dividing costs accordingly. This is more easily done in organizations that are not directly competing, such as government agencies. Various organizations have pooled their resources and knowledge into benchmarking groups.
Consultants: Many consultant firms will also aid an organization in a benchmarking project. These organizations have the technical knowledge and experience to more efficiently gather and interpret data. Careful background research of a consultant must be made to make this process more effective and it comes at a price. However, this does not require hiring additional staff or expanding roles of current staff.
Education and Travel: Benchmarking does require education and travel costs. Once a team is chosen, they often need to be educated on the methods of benchmarking. This is accomplished through workshops, seminars, meetings, and courses. Then, this information must be disseminated to others. When researching organizations, sometimes it is best to see the organization in action and meet with the team that performed and implemented the changes to gain first-hand knowledge of the processes involved.
Communication: One of the most important methods of keeping benchmarking costs low is effective communication. This involves knowing what you need and where your own deficiencies are and sharing information about yourself. Also, informing others inside of your organization of what has been learned through reports, analyses, etc. and its method of implementation involving flowcharts, matrices, schematics, etc. is critical. Clear communication also lets management know how the project is going and its status. This reduces confusion and conflicts among management and the team and among team members themselves.
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 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, analyzing 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.
Benchmarking, originally described Rank Xerox, is usually carried out by individual companies. Sometimes it may be carried out collaboratively by groups of companies (e.g. 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. 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
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, developed a 12-stage approach to benchmarking.
KAISER's SEVEN-STEP APPROACH TO BENCHMARKING
Kaiser's 7-step benchmarking process, which has been applied in more than 4,000 engagements, provides structure and analytical rigor to both internal and external Benchmarking:
This step involves defining as accurately as possible the process to be benchmarked. It is the cornerstone of the entire benchmarking process. An incorrect identification at this stage could result in a waste of precious resources at later stages. Consider the following questions: Have departmental priorities been established? Determine whether the department has strongly defined its overall purpose. This includes setting long-term goals and short-term objectives.
What is the level of change? Does an entire system require rethinking? Perhaps a particular process within that system needs to be improved. Can improvement be achieved by upgrading some particular task within the process?
Has the work process to be selected been flowcharted? A good first step in gaining an overview of the entire process is to flowchart it. This will help identify problem areas and locate potential trouble areas. Then establish the critical measurements by which to compare future progress.
How much change is possible? Given your organization's resources and circumstances, find out whether reforming the process is affordable at the determined level of change.
Have critical performance measures been determined? Investigate whether measures have been determined in accordance with customer requirements. Have the measures been expressed in terms of a ratio or percentage? Are there other measures and, if so, which measure has priority?
Has a project description been written? Make sure the description includes the following:
1. A reason for the project
2. Goals and objectives
3. The cost and duration of the project
4. Critical measures
5. Potential gains
6. The project's impact on the entire organization
Gather proof that the project is necessary in terms of potential costs against potential benefits.
After accomplishment of step 1, you will have a sharply focused, clearly defined procedure that tells management what needs to be changed, how much change can be achieved within given limitations and how to measure accurately your processes against those of others and against your own future projections.
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.
The technique initially used to compare existing corporate strategies with a view to achieving the best possible performance in new situations, 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).
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 and can reduce the above costs significantly
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. 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 verified.
By continuously seeking to identify the best-in-class and duplicate or surpass their performance, an organization can embed in its culture and behavior a strong spirit of competitiveness, pride, confidence, energy and striving for improvement. Benchmarking is also a relatively low tech, low cost and quick response technique that almost any organization can adopt. Benchmarking also seems to be common sense and is easily understood by managers, workers, suppliers, customers, the general public and the media.
Benchmarking can easily become bogged down in performance measurement and lose sight of the real objective of performance improvement. This is particularly significant as measuring the performance of organizations, particularly public organizations with multiple goals, is often a very difficult task. As Fischer suggests--no data are ever perfect; small differences should not be considered overly meaningful; and comparisons with competitors should be used to find red flags. Sometimes, significant factors may be too difficult or even impossible to quantify (eg., spirit, energy or attitude).
Benchmarking can lead to limits on creativity by focusing on copying what already has been achieved, instead of encouraging "out of the box" thinking and looking for quantum breakthroughs. And it can become a ceiling on achievement in a given field. It can also lead to blind attempts to imitate when more careful analysis would relieve cultural, temporal, geographic or other characteristics that limit the reliability of the selected benchmark.
Finally, the cost of benchmarking is seldom noted in the literature or considered in the field. Research takes time, energy and resources. The more extensive the benchmarking effort, the more likely it is to consume the organization's innovative capacity. Taken to an extreme and combined with a complex performance measurement system to establish baselines, benchmarking can begin to negatively affect the quality and quantity of services delivered.