Beware of Benchmarking!

Mark Komen, President

Kodyne, Inc.

Plymouth, MN

If there was ever a business quicksand pit, it would be the practice of benchmarking.  Benchmarking, as a business practice, came into prominence in the 1980s as organizations strived to find ways to improve themselves.  A worthy exercise at its basic level, benchmarking is the process of comparing how your company or organization does things with how others do things.  In particular, those companies or organizations perceived as industry leaders.  Now this in and of itself isn’t so bad.  There can be value in studying how others do things.  My issue is that there is a tendency to compare your RESULTS with theirs and attempt to replicate them and here’s where benchmarking can be a misleading endeavor.  Often, industry trade associations publish data contributed by their members.  This allows members to see the data spreads (averages, standard deviations, percentile rankings, etc) for things like financial measures (sales, revenue, net), operations (defects, rework, inventory turns), employee measures (headcount, turn-over, workforce demographics…), etc.  This is all useful information.  However, the danger lies in blanket comparisons with organizations you know little about.

Let’s consider just 11 organizational categories and some possible comparison items:

  1. Management Styles – Visionary leaders, innovators, dictators, chaos causers or status quo preservers?
  2. Organizational Culture Aspects – Quality first?  Achievement-driven?   Agile?  Sweatshop?  Conflict-ridden?  Team-based?
  3. Staff – Skill levels, experience, credentials.
  4. Market Philosophy – Low cost? Best value? First-to-market?
  5. Customer Base – Transactional? Relationship-oriented?
  6. Geographic Coverage – Local?  Regional?  National?  International?
  7. Production Capabilities – Outsourcing approaches, lean manufacturing, high volume.
  8. Equipment – Age of equipment, levels of automation, downtime.
  9. Capitalization – What kind of access is there to funds to spend on facilities, improvements, or employee benefits?  What is the organization’s ability to manage cash flow and debt service?
  10. Expense Commitments – Pay structure, benefits, rent, insurance costs.
  11. Cost of Goods – Supply chain, economies of scale, negotiation leverage, direct labor costs.

This list could go on and on.  My point here is that there are many, many factors that contribute to a organization’s performance and success.  Comparing yours to others without taking these considerations into account is a dangerous supposition.  Further, getting access to some of this information can be difficult at best.   And you have to know if you are comparing yourself with organizations obtaining AVERAGE performance vs. those obtaining INDUSTRY-LEADING performance. It’s also important to know HOW they’re measuring the data they report.

So what’s a better use of benchmarking?  Look internally.  I suggest the following:

  1. Identify key performance indicators within your organization that are important to your success.
  2. Take a snapshot of them in time to establish a starting point..
  3. Measure them regularly.
  4. Analyze the data at say the 6-month and 1 year points and see where you’ve changed and if the trends and results are favorable or not.  Better yet, compute moving averages over time for a bigger picture view.
  5. Figure out what you’re doing well and what changes you need to make.

So is there ANY value at all in a benchmarking exercise? Sure – for starters, seeing what industry leaders or award-winning organizations measure may give you ideas about what you could be measuring. Another is recognizing whether an organization’s stated performance is average, above-average or in the top 10% and figuring out how to reach to the higher levels. After all, the goal is improvement.

Benchmarking against other organizations, even peer organizations in size or revenue, can be a futile exercise without truly understanding what they are reporting. It’s nice to know what they‘re doing but I think it’s much better to focus on what you’re doing.