Benchmarking – the process of comparing business performance against the performance of others – is a popular performance management tool. But while benchmarking can deliver potentially powerful insights that can lead to performance improvements, that’s only the case if you can avoid the key mistakes and pitfalls of benchmarking. In my experience, many companies fall foul of these pitfalls and fail to get the most out of benchmarks.
In this article, we’ll look at the advantages of benchmarking, the potential pitfalls, and how to overcome these pitfalls to use benchmarking effectively in your organisation.
Different types of benchmarking
I’ve written before about the different types of benchmarking, so I won’t go into too much detail here. But, in a nutshell, benchmarking can be internal (comparing one part of the business against another) or external (comparing the organisation to another company, which could be a competitor or a business in a completely different industry). Those categories further break down into process benchmarking, strategic benchmarking and performance benchmarking.
Benchmarking can be used to look at specific business functions (for example, benchmarking HR effectiveness against others in the same industry), the entire organisation or even individual performance.
What are the advantages of benchmarking?
Done well, benchmarking can help you unearth opportunities for improving your processes, practises and performance. Ultimately, identifying areas for improvement is the single biggest advantage of benchmarking.
Depending on your business’s needs, this improvement may mean increasing customer satisfaction, boosting staff engagement, reducing costs, increasing revenue and profit, streamlining processes, or any other area that could do better.
As a side benefit, external benchmarking also helps you to learn more about your competitors and industry.
Overcoming the downsides of benchmarking
It’s clear that benchmarking can be a really useful tool in your performance management arsenal. However, to get the most out of benchmarking, you need to overcome some the main pitfalls or disadvantages of benchmarking.
For me, the biggest downsides of using benchmarks can be broken down as:
- Lack of context. In most cases, the benchmark data being compared is stripped of its short-term and long-term context, meaning it tells you what a competitor or internal team has achieved, with no information on how they achieved it. This makes it difficult to pinpoint meaningful areas for improvement.
- Measurement issues. Not everyone measures things in the same way, which can make like-for-like comparisons difficult. For example, one company might measure on-time delivery based on when the shipment leaves their factory while others might measure when the complete order actually reaches the customer. Then there’s the fact that comparing certain metrics, like profits, can be skewed by one-offs and accounting exceptions.
- Finding comparisons is difficult. Although it is getting easier to find data for a lot of industries, that’s not always the case. Your competitors might not want to share data, which leaves you comparing against companies from outside of your industry or focusing on the data that’s easy to find. This might not tell you a lot.
- Finding reliable data can also be difficult. Today, aggregator sites provide an easy way to access competitive benchmark data. For example, hotels and guest houses can use Booking. Com to see how customers rate their competitors, restaurants can use TripAdvisor, and tradespeople can use Checkatrade. But the reliability of this data is sometimes questionable, and, besides, aggregator sites aren’t available across every industry.
- Benchmarks look backwards, not forwards. Benchmarking only tells you what’s already happened. It doesn’t show you what’s occurring right now in real time, or provide indicators of future performance (unless you can say for certain that the same conditions and performance will continue into the future). As any bank will tell you, past performance is no guarantee of future results!
How to get it right
So how can you overcome these pitfalls and use benchmarks successfully in your organisation?
The first critical step is to see benchmarking as only a part of the performance measurement picture, not the complete picture. To really understand and improve performance you need a combination of benchmarks, forward-looking KPIs, targets, a strategy map, and projects/initiatives that deliver change.
For me, performance measurement and management all starts with strategy. This means you need to clearly map out your strategic goals and identify your critical business questions (the things you need to understand if you’re going to achieve those goals). Then you can design meaningful KPIs that help you to answer those questions and track performance against your strategic goals. And you can compare performance using internal and external benchmarks.
This link between organisational strategy and performance measurement is critical. Rather than tracking KPIs that are easy to measure or benchmarking against data that’s easily available, focus on the KPIs and benchmarks that link to your strategic goals. These are the measures that will have the most impact on business performance.
You can then use what the data tells you to better understand and predict performance, and use that information to plan projects, initiatives and changes that will improve future performance.
Where to go from here
If you would like to know more about KPIs and performance management, cheque out my articles on:
- Understanding the Different Types of Benchmarking
- Key Tools and Techniques for Performance Management
- How to Develop Effective KPIs
Or browse the KPI Library to find the metrics that matter most to you.
