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.
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Editor’s Note: This article has been updated as of September 17, 2024
Discover insights from Rami Al Tawil, General Manager of Organizational Excellence at Al Saedan Real Estate Company, as he shares expertise honed over nearly two decades. With a master’s degree in industrial engineering from Jordan University of Science and Technology, Rami specializes in aligning strategic visions with employee performance. In this interview, he shares his perspectives on cultivating best practices for achieving organizational excellence and the trends shaping performance management.
Trends
In your opinion, what are the key trends in organizational performance management in 2024?
Organizational performance management trends emphasize data-driven decision-making, continuous feedback loops, and employee-centric approaches. Remote work requires the adoption of virtual performance management tools, while agile methodologies and technology drive adaptability. This year, focus areas include employee well-being, skill development, and DEI considerations within performance frameworks.
Which of the existing trends, topics, or aspects within performance management have lost their relevance and/or importance in your opinion?
From my point of view, traditional annual performance reviews conducted without ongoing feedback and coaching are losing relevance. Organizations now prioritize continuous and dynamic performance management approaches. Employees and managers alike increasingly seek real-time feedback and coaching to drive growth and development.
What does the corporate performance management system of the future look like?
The corporate performance management system of the future integrates AI for data-driven insights and predictive analytics. It fosters continuous feedback and coaching, leveraging virtual platforms for remote collaboration. AI-driven tools facilitate personalized recommendations, enhancing efficiency and aligning individual goals with organizational objectives for agile adaptation and innovation.
What will be the major challenges in managing performance in the future and how should organizations prepare for them?
Major challenges in managing performance in the future include adapting to remote work dynamics, ensuring fairness and inclusivity in performance evaluations, and leveraging AI ethically. To address these challenges effectively, organizations must invest in virtual performance management tools, foster a culture of transparency and equity, and establish clear guidelines for AI use, respectively. Additionally, prioritizing employee well-being and skill development will be crucial for navigating evolving work environments and maintaining performance excellence.
How is technology impacting the way organizations conduct strategic planning and manage performance? Any specific tools you would like to mention?
Technology transforms strategic planning and performance management with tools like business intelligence software for data-driven insights, performance management software for goal-tracking, and AI for forecasting and trend analysis. Examples include Tableau, SAP BusinessObjects, Power BI, and Oracle Hyperion, which are empowering agile decision-making and operational efficiency in organizations.
How is sustainability impacting the way organizations conduct strategic planning and manage performance? Any specific aspects you would like to mention?
Sustainability drives organizations to integrate ESG factors into strategic planning and performance management. Key aspects include carbon footprint reduction, energy efficiency, waste management, ethical sourcing, diversity, and community engagement. Incorporating sustainability metrics allows for progress tracking, target setting, and brand reputation enhancement while meeting regulatory requirements and attracting investors.
What should be improved in the use of strategy and performance management tools to make an organization even more resilient to future crises?
Enhancing organizational resilience demands comprehensive improvements in strategy and performance management tools. This entails incorporating real-time data analysis, scenario planning, and integrated risk management. Cross-functional collaboration, flexible goal setting, and continuous improvement are essential, alongside employee empowerment and technology investment. Leadership commitment and learning from crises drive agile adaptation and proactive response, ensuring the organization remains robust amidst future challenges.
While navigating through these challenging times, what would you consider as a best practice in performance management?
During challenging times, a best practice in performance management involves frequent communication and feedback sessions between managers and employees to clarify expectations, assess progress, and provide support. Emphasizing flexibility in goal setting and adjusting performance metrics to reflect changing priorities is crucial. Additionally, fostering a supportive and transparent work environment where employees feel valued and empowered to contribute their best efforts improves overall resilience and adaptability.
How does benchmarking support the improvement of performance management and target setting systems?
Benchmarking enhances performance management and target setting by comparing an organization’s metrics with industry standards. It identifies areas for improvement, aligns goals with best practices, and fosters a culture of continuous learning. This process informs strategic decisions, setting realistic targets and driving overall performance improvement in line with industry benchmarks.
Which organizations would you recommend being observed due to their approach to managing performance and its subsequent results? Why?
Organizations renowned for their effective performance management approaches like Saudi Aramco, Saudi Basic Industries Corporation (SABIC), and Saudi Telecom Company (STC) are notable for their performance management practices. Saudi Aramco, as a global energy leader, emphasizes operational excellence and continuous improvement. SABIC, a diversified chemical company, focuses on innovation and sustainability. STC, a leading telecommunications provider, prioritizes customer-centric strategies and digital transformation. Studying their approaches offers insights into effective performance management.
Given their importance in practice, what aspects of performance management should be further explored through research?
Analyzing the impact of performance management practices on employee engagement and satisfaction offers insights for optimizing systems, enhancing motivation, and improving retention strategies. Understanding these dynamics is vital to create a conducive work environment that fosters long-term commitment and productivity among employees.
What are the key competencies of a successful business leader (C-level executive)?
The key competencies of successful C-level executives include strategic vision, leadership, decision-making, communication, adaptability, problem-solving, innovation, resilience, strategic networking, and trustworthiness. These competencies enable effective leadership, drive organizational success, and foster a culture of trust, innovation, and growth.
What are the key competencies of a strategy and performance manager to succeed nowadays?
The key competencies for strategy and performance managers include strategic thinking, data-driven decision-making, agility in adapting to change, effective communication, and leadership. They must excel in analytics, continuous improvement, fostering collaboration, and leveraging technology. Adaptability, resilience, and a focus on innovation are also crucial for success in today’s dynamic business environment.
What are the processes and tools you look at when differentiating a successful performance management system from a superficial one?
From a consultant’s perspective, it is crucial to analyze processes like goal setting, feedback mechanisms, and performance appraisal methods. Examining the integration of data analytics, employee development initiatives, and alignment with organizational strategy distinguishes a successful performance management system from a superficial one, with the former ensuring effectiveness and tangible results.
Discover more perspectives from practitioners in the realm of strategy and performance management here.
As businesses increasingly acknowledge their societal responsibilities and the profound impact they have on the world, Environmental, Social, and Governance (ESG) practices have become all the more essential. These are implemented not only to ensure that operations are ethical but also to meet stakeholder expectations and achieve sustainable growth—a commitment that is further underscored by businesses contributing towards the achievement of the United Nations’ (UN) Sustainable Development Goals (SDGs).
By adopting a comprehensive ESG strategy, companies can effectively evaluate and enhance their performance across governance procedures, social responsibility, and environmental impact.
What Is ESG?
ESG is a comprehensive framework that helps stakeholders evaluate how an organization manages the risks and opportunities related to the following three criteria:
Environmental
This criterion assesses an organization’s environmental effect and its risk management practices. This includes efforts to reduce natural resource consumption, control greenhouse gas emissions, and minimize waste. Key performance indicators (KPIs) in this category focus on environmental protection measures.
In this aspect, a company is evaluated based on how it provides people—including employees, customers, suppliers, and communities—with an environment where their well-being, culture, and social dynamics are respected and nurtured. This component of ESG extends beyond the company to include supply chain partners, particularly in regions with less stringent environmental and labor standards.
This aspect covers several factors, spanning leadership, ethical principles, and the internal controls of an organization. Risk management, anti-corruption laws, executive compensation, and board structure are all addressed under this ever-evolving discipline. Effective governance is the foundation of corporate honesty and equity, as it fosters accountability and transparency through contracts, innovative organizational structures, and rigorous regulation.
ESG not only highlights environmental issues—instead, it is a comprehensive framework consisting of standards for external stakeholders to monitor and compare their business performance effectively. These standards also allow them to guide internal goal-setting and prioritize actions to strive for these objectives.
By outlining key outcomes and expectations, ESG indicators provide businesses with the tools to concentrate on specific areas and objectives that guide their priorities and actions. Therefore, these indicators inform businesses of key outcomes and stakeholder expectations, offering clear guidance on specific areas for improvement and sustainability. Ultimately, the objective of ESG for businesses is to provide crucial assistance on how to align business operations with broader societal and environmental objectives.
A study that analyzed companies in Shanghai and Shenzhen revealed a positive relationship between ESG performance and corporate performance. It highlighted how strong ESG practices helped improve corporate performance. For context, China is currently encouraging sustainable development and actively implementing the double carbon target, which has led to the manufacturing industry being more sensitive to the environment.
Moreover, stakeholders and the public are more concerned about factors such as corporate social responsibility, environmental protection, and internal governance. Therefore, companies with better ESG performance are more likely to be favored by investors, increasing corporate value and leading to better corporate performance overall.
When a company pays more attention to its environmental impact, actively takes social responsibility, and improves corporate governance, it tends to translate into economic benefits and significantly improved corporate performance.
Similarly, another study found a significant positive relationship between ESG and financial performance in the chemical industry. The findings imply that corporations that prioritize sustainability and invest in eco-friendly activities improve their environmental credentials and long-term financial performance. This is the result of a dedication to renewable energy investments, emission and waste reduction, and green production.
Therefore, investors are increasingly likely to favor sustainable enterprises that invest in green activities— a trend that is expected to increase green finance demand and change investment patterns towards sustainability.
Investors and customers who highly value ethical principles are more likely to buy products and services from companies that demonstrate a commitment to ESG standards. In addition, disclosing ESG information helps companies become more transparent,which could reduce information gaps and attract long-term investors. This strategic transparency can enhance a company’s reputation and increase its market share, especially in industries where ethical considerations are crucial in the decision-making process. It also demonstrates a company’s commitment to sustainable development.
Good ESG practices could enhance overall organizational management, especially with employees, as they are emerging as strategic components that can bring about elevated levels of commitment and contribution. Employee engagement is bolstered through ESG because it connects individuals to their organization’s larger purpose and collective goals.
An outstanding organizational culture is cultivated when employees see their employers’ dedication to social and environmental issues—appealing to staff through identity and community. By fostering a culture that values social and environmental responsibility, modern companies strategically position themselves to achieve sustained success through stronger internal cohesion and improved employee satisfaction.
Read more articles about organizational performance here.
Outstanding performance that can sustain positive results in the future is one of the key elements of organizational excellence.
Considering organizational excellence as what can drive organizations to a brighter future in terms of more profits, cost reduction, more customer satisfaction, referrals, better net promoter score; it is important to highlight the three pillars of the excellence model from the EFQM model 2020; direction, execution and results.
Having this in mind, the model stresses the need for methodological approach where we develop practices and processes, integrate them into the organization towards agile, effective, and efficient execution, in order to achieve better performance results internally (strategic and operational) and externally as perceptions from stakeholders (customers, citizens, and beneficiaries), which can sustain positively in the future.
The third criterion of the model, namely “Engaging Stakeholders,” focuses on ensuring continuous and positive engagement with all key stakeholders of the organization including employees/public servants. Employees are therefore seen as a key stakeholder, and having them as an integral part of any organizational excellence model emphasizes the need to shift the public sector’s focus from the traditional way of operations, in which public servants are only there to process the requests of citizens, try on their own to be energetic and efficient, awaiting their retirement, to a more competitive way, in which they compete with the private sector’s staff in terms of service excellence.
For this shift to happen, the key players are the employees, who will need to feel the need, accept and change towards a different mindset where they consider themselves not just as public servants but as drivers towards the public sector’s and country’s prosperity.
Leaders need to approve such a shift, align it with organizational purpose, direct it internally and externally, support it with the right values, allow change management to tackle all what needs to change step by step, and catalyze it with motivational culture.
A motivational culture can help public servants create ideas to improve, and innovate in the direction of efficiency and agility, so that they can get recognized internally and externally. Motivate them to be proud ambassadors for the country’s welfare. Motivate them so that they can understand and fully believe that they are the primary drivers of success.
Although motivation is one word, thousands of research papers have talked about it! So, let’s get back to the foundation of human beings without further complications: aren’t we survivors? Haven’t we gone through so many crises and changes in this world and made it safely in 2022? Accordingly, the desire to see what tomorrow holds for us and to consider what we may do now to get a greater return tomorrow is what drives us to get out of bed each morning in search of a better tomorrow.
Finally, I would like to refer to the very significant connection between motivation and sustainability. Motivation is one of the components of sustainability, which ensures that resources are preserved for current generations as well as all future ones.
Will sustainability direction, focus and efforts succeed? It will all depend on whether we, people, feel ourselves part of it and we are motivated enough to invest in it. How to feel this way and how to be motivated? Simply by ensuring our sense of belonging and our ability to effect the necessary change, both for our benefit and the benefit of all future generations.
All performance frameworks—whether it is the Balanced Scorecard (BSC), Objectives and Key Results (OKRs), Management by Objectives (MBO) or the Performance Prism—have a shared DNA and purpose: to create synergy in the organization to optimize key results. However, two important questions need to be asked: which performance framework should a company implement and what should one consider when selecting a performance framework?
A well-defined performance framework enables the organization to achieve its desired goals, and having various performance frameworks in hand can make it a bit tricky to choose the right one. Thus, one might be tempted to try implementing what big companies such as Google have implemented and attempt to do the same within their own organization without contextualizing the company culture, size, and business nature.
This article will illustrate the four things to consider when selecting a performance framework for the organization.
It would be silly to start furnishing an empty room without first understanding its intended purpose. Is it going to be for dining or a personal workspace? The same thing can be said when selecting a performance framework. Understanding the company’s goals and objectives is crucial as it will give you a sense of direction. For example, if the company’s goal is to have a disruptive, innovative product or achieve fast growth, then you might consider the OKRs framework as it will enable you to set challenging objectives and provide flexibility to support innovation. On the other hand, if the company’s objectives gravitate toward stability and sustaining the current market share with modest growth, then the BSC is more suitable for this type of environment as it will assist in cascading the objectives from the top down and preserve company status quo while supporting growth at the same time.
Consider the company size and structure.
When we talk about company size, we are not only talking about its capital and asset value, but we are also talking about its workforce size and how they are structured into various functions. If the company has a huge hierarchical structure where each employee is expected to perform a very specific and specialized task that is repetitive and operational, then selecting a framework that exhibits this nature of work will enable the company to create clarity and focus for the employees. A framework to consider for this purpose is MBO, which is defined by The KPI Institute as “clearly setting and defining objectives agreed by both management and their employees.”
Involve internal stakeholders in the selection process.
Highly engaged employees produce substantially better outcomes, are more likely to stay at their organization, and experience less burnout, according to analytics and advisory firm Gallup, Unfortunately, employees can’t reach that level unless they feel that their day-to-day tasks are linked to the company’s purpose and that they have an impact on the results. A good performance framework should be able to convey this to the employees. Asking employees what they value the most and involving them in the decision-making process will result in a highly engaged organization and limit the silo work environment. A performance framework should not be imposed but rather tailored to serve the company’s goals and its human capabilities.
Review and assess the performance framework.
Just like a strategy review, a performance framework needs to be reviewed regularly and not ossified and treated as set in stone within the organization. As the company’s strategy, size, and market grow and change, the performance framework needs to be updated and changed as well.
In conclusion, selecting a performance framework is only the first step. It is a tool for enablement, not a purpose. All performance frameworks can be customized to fit the company’s needs—these are not off-the-shelf products that must be implemented as-is. Nevertheless, other factors play a huge role in executing performance frameworks, such as employee engagement, company structure, and business processes. All these factors influence and impact which framework to select.
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This article was written and submitted by Ms. Wedad Alsubaie, who works at the Strategy Management Office of the National Unified Procurement Company in Saudi Arabia.
