Definition of Benchmarking in Business
Benchmarking compares your organization’s operations against others in the industry or the general marketplace. Organizations use benchmarking to generate ideas about how to continuously improve their products, services, procedures, functions, strategies, and other areas of operation.
What is benchmarking?
Benchmarking generally focuses on broad strategic measures of business operations such as:
- Customer satisfaction
Organizations use these broad measures for a comparative analysis of business practices and procedures, including compensation, IT, research & development, employee benefits, communication, and marketing.
Why is benchmarking important to your business?
Based on information from the Center for Association Leadership (ASAE), benchmarking can provide insightful data on where your organization excels and falls short. It compares your business to other organizations, for example, overall performance or compensation.
Benchmarking data can help your business:
- Reduce operating costs
- Increase profits
- Build and strengthen customer loyalty
Benchmarking has advantages that also allow your business to:
- Acquire an impartial perspective on how well your organization performs compared to other companies.
- Create a company culture and mindset focused on continuous improvement.
- Develop a set of standardized metrics and processes for improving operations.
- Monitor your organization’s performance and direct change.
- Zero in on performance shortfalls to identify areas that need improving.
These advantages may encourage businesses to consider benchmarking or apply benchmarking to areas of their operations.
The American Society for Quality (ASQ), a quality training and certification membership organization, offers this five-point benchmarking process for businesses:
- Avoid a benchmarking study that’s too broad because it’s likely to fail. For example, a study subject that’s not essential to your organization’s success won’t generate enough benefits to justify the study.
- Clearly understand and control your own organizational processes to benefit fully from benchmarking studies.
- Insufficient resources can derail a benchmarking study by undervaluing the planning and effort involved. Be well prepared for a more efficient study.
- Support related studies and be ready to make changes based on the data’s outcome since the studies require a significant investment in time and effort.
- Choose a tightly focused benchmarking study of subjects critical to your organization’s success.
- Assemble a cross-functional team in which the members’ goals and support for the study are solid.
- Study your organization’s processes, such as how work is performed and how the output should be measured.
- Identify organizations to partner with that follow best practices.
- Gather information directly from partner organizations. The information should include numeric data and descriptions of processes that you can collect through telephone interviews, questionnaires, and onsite visits.
- Compare the data collected, including both numeric and descriptive information.
- Identify gaps between your measurements of performance and those of your partner organizations.
- Identify the causes of these gaps.
- Establish goals for your organization’s benchmarking process.
- Develop action plans for achieving those goals.
- Activate and monitor your plans.
Once organizations understand the benchmarking process and how to prepare for it, they can determine the kind of benchmarking they need for the subjects they want to measure.
The history of benchmarking
The term “benchmark” is a military concept dating back hundreds of years, according to data and research platform, Benchmarking.com.
The term’s widespread use reportedly coincided with the launching of gunpowder in firearms during the mid-1800s. Marksmen would shoot firearms from the same mark on a bench and compare the results. The ‘mark’ eventually earned the name “benchmark.”
In the UK’s Victorian era, to show above-sea-level altitudes, stonemasons would carve marks in:
- Other vertical structures
Another use of the term benchmarking in earlier days is attributed to cobblers who used a bench to measure shoe sizes.
Types of benchmarking
Benchmarking isn’t a one-size-fits-all process. There are different categories involved based on the activities you want to measure.
The American Productivity & Quality Center (APQC) divides benchmarking into four categories:
- Performance. This category of benchmarking measures key performance indicators (KPI) or how well employees and/or operational activities are doing. Organizations need standard criteria and a way to gather, collect, and evaluate the data. According to APQC, measuring KPI is often the first benchmarking businesses do.
- Practice. This form of benchmarking measures how business activities are carried out through people, technology, and processes. This type of study involves collecting and comparing qualitative data, such as process mapping.
- Internal. This benchmarking category measures KPIs and/or practices from various departments, units, product lines, programs, and geographies within an organization. A requirement for the study is that at least two areas in the organization have shared an activity for cross-referencing.
- External. This type of benchmarking compares one organization to another or to several others. It requires organizations to agree to participate in the study and possibly a third party to oversee the data collection. According to the APQC, this benchmarking category requires substantial time and effort but can be very valuable.
Businesses can better determine what aspects of their operations they want to measure by knowing the available types of benchmarking.
Below are examples of how various industries conduct benchmarking studies and what each one’s goal may be:
Health care. Hospitals and other healthcare organizations collect benchmarking information on the quality of patient care, the length of waiting times, recovery outcomes, and patient satisfaction. These facilities collect this data to see how or whether they’ve progressed and compare the results against similar organizations to determine their industry standing.
Technology. Tech companies may monitor their competitors’ products and compare the specifications against other products they manufacture. They also may measure their products’ life cycles against the industry standard to remain competitive.
Online. E-commerce businesses use benchmarking to measure and predict sales trends. They target markets, determine the average cost of converting a product from the promotional stage to the sales stage, and identify key customers.
Hospitality. Hotels, bars, restaurants, and diners use benchmarking to stay competitive. They record various activities, including food costs, bar expenditures, employee benefits, and retention rates. These establishments may use customer satisfaction surveys as a benchmarking technique to ensure staff is appropriately trained and their operations are vital.
Benchmarking allows you to compare your operations’ performance and effectiveness against other organizations. You can also compare your internal functions against each other. This gives you baseline data for identifying shortfalls and setting goals for improving how you conduct business.
In describing benchmarking, the APQC states that the process is about organizations admitting that other businesses may outperform them. However, they’re wise enough to find out how to match or outdo their competitors.
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