Benchmarking is a highly structured process which aims to improve the performance of an organization by comparing it with other competitors or with the market’s best practices. Secondary benchmarking refers to a benchmarking study that is based on data which is accessible to the public and the comparison is usually done within a specific industry. The gathered data comes mostly from annual, sustainability or financial reports of the companies chosen as benchmarking partners.
Although less complex and much more limited, secondary benchmarking has specific advantages, as it is easy to deploy and it has the capacity to highlight key relevant aspects about the industry – trends or top performers. Moreover, secondary benchmarking helps identify the industry’s common and primary benchmarks, and it can form the basis of a very well structured primary benchmarking project.
For a better understanding of the importance of the key performance indicators (KPIs) used, it is mandatory to comprehend the difference between KPIs and benchmarks. Benchmarks play a key role in any benchmarking project and they can be seen either as the company’s goals, or as a baseline.
In the first case, companies usually choose benchmarks based either on the industry’s standards, or on top performance in the industry. These two set the performance level for all the other actors within the industry. In the latter case, benchmarks are used to highlight the current level of performance and to enable goal setting to increase performance.
In both cases, it is mandatory to have a performance management system in place and to measure performance through KPIs on a regular basis, at the departmental or organizational level. A performance management system pinpoints the current level of performance and enables organizations to see the differences between their performance and the industry’s average level of performance or that of the best performers within the industry.
However, in practice the situation is quite different and given the fact that organizations measure different indicators based on the key elements of their strategic objectives and their development strategy, a lot of differences between indicators or measurements can be spotted.
For example, some companies may focus on constantly innovating and improving their products, while other organizations within the same industry may perceive a high customer service performance as a key driver for their development. In this case, it is only natural that the production KPIs for the first type of organization would include:
One the other hand, organizations like the one in the second scenario will focus on KPIs such as:
% Drop call rate;
% Customer calls answered in the first minute;
% Agent utilization;
# Call handling time;
# After call work time; or
% Calls answered within SLA.
While this can block the actual comparison stage of a benchmarking process, it can also be seen as an opportunity, because it can drive organizations to change their focus, or at least consider giving more attention to another part of their business based on the common KPIs used within the industry.
One other important aspect to consider when choosing KPIs for a benchmarking project is the availability of data. For a complete and relevant output, you need to make sure that the chosen KPIs are reported by most of the benchmarking partners, or that the data has been available for more than just one year.
This will on one hand help you during the comparison process, and on the other hand, it will make it possible for you to spot the pattern of development of a single company. It will be hard to draw any insight, if just one organization reports that KPI and if data is available for a single year.
Based on the experience gained from deploying benchmarking projects and working with KPIs, the specialists at The KPI Institute have encountered one recurring issue which may impact the deployment of a benchmarking project. This issue concerns the terminology used when referring to KPIs and performance management in general.
Each company uses its own terminology and refers to specific processes in a language fostered by its organizational culture. Although two companies might measure the same indicator, they might be using different words and formats to express it.
For example, in the latest benchmarking project deployed by The KPI Institute – the Secondary Benchmarking Report Series within the Utilities sector – we have noticed that when referring to interruptions, some organizations named this term “supply interruptions” and others “interruption time.”
Image Source: Freepik
Hence, to make sure that the results of a secondary benchmarking project are as accurate and as complete as possible and that similar KPIs are easily identified, I would recommend to start the data analysis phase with standardizing the names of all indicators from the data base according to TKI’s standards:
Use a short and concise name;
Add a symbol in front based on what the KPI measures;
Use the same name for indicators measuring the same process.
Moreover, the unit of measurement might differ from one company to another – some might measure the interruption time of supply for 100 customers, while others for 1000.
Another KPI example from the Secondary Benchmarking Report Series within the Electricity sector is the rate of electricity consumption, which can be measured in GWh or in MWh. Having different units of measurement affects the final output as the data cannot be compared.
For the first example, the data can easily be manipulated in such a way that it can be compared. If we are interested to report the numbers for 100 customers we can multiply the results for 1000 customers by 10. In the second case, we want to standardize units of measurement such as GWh and MWh, by simply converting one of them into the desired one, as per international standards.
In conclusion, make sure that you use these three simple recommendations in order to choose and standardize the indicators for your benchmarking report, as this is a very important step in the beginning of any benchmarking project:
Consider the availability of data during the KPI selection process;
If you wish to know more about benchmarking and all the challenges associated with it, The KPI Institute’s training program, Certified Benchmarking Professional, is designed to fill the gaps you might have or to provide complete new knowledge about aspects on how to conduct a benchmarking study.
For further knowledge, feel free to download any of our webinars that are focused around the idea of Benchmarking or take a look at our Benchmarking Solutions, which span from audit services to Benchmarking framework optimization.
Interested in more benchmarking best practices? Click here.
**********
Editor’s Note: This article has been updated as of September 17, 2024.
Benchmarking—i.e. learning from best practices—can boost a company’s performance by enabling a learning experience that relies on underlining the best in-class practices and their integration into your own organizational processes. Moreover, it allows companies to focus on strengths and weaknesses in comparison to those of their main competitors and, as such, it supports them in strengthening their position on the market. Nowadays, benchmarking is one of the most frequently used strategies for improving business performance.
Best practice benchmarking allows companies to conduct a comparison of performance data obtained by means of studying similar processes or activities performed by other organizations, and identifying, adapting, and implementing the practices that produced the best performance results. This represents the most powerful type of benchmarking, as it focuses on “action” and it is used for learning from the experience of others.
Through benchmarking, companies can easily determine which of their procedures would benefit more from improvement strategies and what they should do to become more productive and profitable. Comparisons are actually made in business on a daily basis, as companies need to know where they stand, in regards to their competitors, and frequently ask themselves questions such as: “Why are others better?”; “What can we learn from them?”; or “How can we catch up and become the best in our sector?”
Even if many companies have already adopted practices for measuring their performance by monitoring key performance indicators (KPIs), this aspect should be just the first one in calibrating an organization’s business performance. Hence, benchmarking sets some standards against which these key performance indicators can be measured and compared to.
Benchmarking can be used in any business to compare KPIs, and processes performance, to certain industry standards. As a general methodology, there are three questions to answer prior to starting a benchmarking study in your organization:
What will be benchmarked? ( e.g. processes, results)
Against what will your organization be benchmarked? (e.g. standards, other organizations)
How will be benchmarking used? (e.g. for continuous improvement, for evaluation)
The concept of benchmarking also relies on the idea that performance numbers can mean less when analyzed without having a point of reference (a benchmark) as a comparison starting point. For example, in airline industry, an airline company has a turnaround time of 55 minutes. Is it good, or bad? It is hard to find the answer, unless you compare this 55 minutes turnaround time to an objective standard, such as the industry average turnaround time for other airline companies.
Therefore, benchmarking enables a company to discover its performance gaps in comparison to another company and incorporate processes belonging to leading firms into its own process flow in order to increase performance and close gaps.
In conclusion, as measuring performance through KPIs has become a standard practice for most of companies that want to improve their performance, the next step necessary for improvement that should be considered is to implement a benchmarking study, aimed at comparing their performance against that of best practitioners. Without benchmarking, performance improvement could be limited, as it will only measure performance in isolation, with no reference to any industry standards or competitors’ results.
Benchmarking, commonly known as learning from best practices, is an effective organizational performance tool that can boost a company’s performance, by enabling a learning experience that relies upon understanding best-in-class practices and implementing them within one’s own organizational structure.
This assessment process is conducted for the sake of improving your firm’s performance with the goal of filling the performance gaps between you and your best-in-class competitors or even exceeding their performance level in the long run.
However, as effective as it may seem, it is a time-consuming and resource-intensive activity that requires a well-defined methodology, action planning to identify best-in-class competitors, and an implementation strategy. Without these components, the positive effects of a benchmarking study on performance might be reduced.
The What, Why, and Who of Benchmarking
Benchmarking allows companies to focus on their strengths and weaknesses, by comparing them to those of their main competitors within their respective industry, or from another industry, which will allow them to strengthen their position on the market.
When searching for competitors, we focus on better understanding their best practices. Best practices refer to conducting a comparison of performance data, data that is obtained by analyzing our competitors’ similar processes and internal activities and by identifying those practices that led to superior performance. Once identified, those practices must be adapted and implemented within the boundaries of your own organization.
Hence, when conducted correctly, the benefits associated with benchmarking can include:
Measuring and comparing your organizational processes against those of another competitor or industry;
Discovering performance gaps;
Incorporating leading firms’ processes into your own process flow to increase performance and reduce gaps;
Future-oriented goal setting and improved resource prioritization;
Accelerating continuous process improvements – CPI;
Identifying better opportunities for growth;
Learning from industry standards.
To show that benchmarking is more than just comparing numbers, let’s consider the following example: in the electric utility sector, an electricity distributor has an average interruption time for residential customers of 105 minutes. Is this value good, acceptable, or bad? It is not easy to find an appropriate answer, unless the 105 minutes are compared to an objective standard, such as the industry standard of interruption time for the competitors in the sector.
However, it also depends on the company’s strategy. 105 minutes may be considered a satisfactory value for them, while someone else can view it as an alarming call for improvement.
The example above relies on the idea that performance represented through the usage of mere numbers can’t provide any meaning when analyzed without having a reference, or a benchmark value for the sector, as a comparison point.
When conducting a benchmarking analysis, no matter the industry of interest, there are usually three questions that must be answered before initiating the study:
What is to be benchmarked? (e.g. processes, strategies)
Against what or who will your organization be benchmarked? (e.g. KPI, competitors)
What will benchmarking do to my organization? (e.g. improve performance, analyze performance)
In general, nowadays, performance measurement has become a standard practice for any organization that uses KPIs.
However, the next step that needs to be taken to improve performance is the implementation of a benchmarking study, where your company can compare its own performance with the sector’s point of reference (a benchmark), or simply assess the compliance with respect to industry standards, understanding how you can learn from their best practices and apply them within your own organization.
Types of Benchmarking
A first step in conducting a benchmarking study involves the type of benchmarking that is to be constructed. This first step is necessary because any process, product, and function in a business are eligible for benchmarking.
The decision depends on the nature of the company, the sectors of interest, and above all else, it depends on what are the main goals the company has planned after its implementation of the best practices learned through this study.
There are three main typologies:
Performance Benchmarking: focuses primarily on the characteristics of products and services. For instance, analyzing # Average waiting call time in the customer care department
Process Benchmarking: compares similar activities to identify the most effective operating practices, for instance, % Delivered products on time
Strategic Benchmarking:focuses on identifying best practices in strategic processes to improve competitiveness within and beyond one’s own industry and assess what could be a long-term competitive advantage.
By contextualizing, benchmarking can provide the above-mentioned benefits to the company conducting the study, if it supports a strategic plan and if the plan is conducted on existing processes that are defined and in use.
The Bottom Line
Is benchmarking worth a company’s investment and time? Yes, it is a potentially powerful tool to promote continuous improvement in performance and performance comparison among industry players.
Nevertheless, you have to remember that quite a lot of attention and time must be dedicated to defining the initiatives that must be taken and to the methodology that is used, otherwise, the results may be ambiguous.
Given the complexity of designing a Benchmarking study and all the related challenges associated with it, The KPI Institute’s training program, Certified Benchmarking Professional, is designed to fill the gaps you might have or to provide complete new knowledge about aspects on how to conduct a benchmarking study.
For further knowledge, feel free to download any of our webinars that are focused on the idea of Benchmarking or take a look at our solutions, which span from audit services to framework optimization.
**********
Editor’s Note: This article has been updated as of September 17, 2024
