What it means
Most organisations judge themselves against their own history. That tells them whether they are improving but not whether they are good.
Benchmarking supplies the external reference: how does our cost per unit, our delivery time, our staff turnover, our error rate compare with organisations that do the same thing? The answer is often uncomfortable and always useful, because a gap against a real organisation proves that better is achievable.
A benchmarking exercise runs through several stages. Decide what to benchmark: a process or measure that matters to strategy and that can be compared.
Identify who to benchmark against: competitors, industry surveys, best-in-class operators in other industries, or the organisation's own top performers. Collect data on a comparable basis, adjusting for differences in definition, scale and accounting.
Analyse the gaps and, more importantly, the practices behind them. Set targets and implement changes.
Then repeat, because the benchmark moves. The distinction between metric benchmarking and process benchmarking matters.
Knowing that a competitor's cost per delivery is 20% lower is a metric; knowing that they achieve it through route density, a different vehicle mix and automated scheduling is a process insight that can be acted on. Metric benchmarking tells you where you stand; process benchmarking tells you what to do.
Industry surveys provide the first; visits, partnerships and consultants provide the second. Benchmarking has pitfalls.
Comparing unlike things (a discount retailer's margin with a luxury brand's) produces nonsense. Copying a practice without understanding why it works in its original context often fails.
Treating the industry average as the goal locks in mediocrity, since the average is what half the industry fails to reach. And competitors are understandably reluctant to share detail, so much competitive benchmarking rests on published accounts, customer feedback and inference.
Internal benchmarking avoids most of these problems and is often the most productive place to start.
In practice
Real-world examples.
Example
A hotel group benchmarks revenue per available room, staff cost per room and guest satisfaction across its 60 properties and pairs the bottom ten with the top ten for practice sharing.
Example
A manufacturer benchmarks its order-to-cash process against a fast-moving consumer goods company in a different industry, chosen because its invoicing accuracy is best in class.
Example
A local authority benchmarks the cost of its waste collection service against ten similar authorities and finds it in the most expensive quartile, prompting a route redesign.
Think of it
“Benchmarking is measuring yourself against the best-seeing how you compare to learn how to improve.
Formula
Calculation
Performance Gap = Benchmark Performance minus Own Performance (in units or as a percentage of own performance)
Value of Closing the Gap = Gap per unit x Annual volume
Worked example. A regional bank benchmarks its mortgage processing against an industry study and against its own best branch:
- Own average: application to offer 21 days; cost per application $410; applications withdrawn before offer 18%
- Industry median: 14 days; $340; 12%
- Industry top quartile: 8 days; $260; 7%
- Own best branch: 11 days; $330; 10%
Gaps to the industry median: 7 days (50% slower); $70 per application (21% more expensive); 6 points more withdrawals. On 24,000 applications a year, matching the median cost would save $1,680,000; cutting withdrawals from 18% to 12% would retain 1,440 more mortgages a year, worth about $2,900,000 of lifetime margin at $2,000 each.
The internal benchmark is the most useful finding. The bank's own best branch is already near the industry median without any new investment. A process comparison shows it pre-checks documents at the first appointment, uses a single case owner and calls applicants at day 3 and day 7 rather than waiting for them to call. Rolling that practice out costs almost nothing. The bank sets a target of 12 days and $330 within a year, using the best branch as the model, and a target of top-quartile performance within three years, which will need new systems.Case study
Seen in the real world.
A chain of 40 dental practices had always compared each practice with the group average. Practices at the average were left alone and those below were pressed to improve. A consultant persuaded the group to benchmark instead against its own top five practices and against an external survey.
The exercise showed that the group's best practices generated 35% more revenue per chair than the average, largely through higher hygienist utilisation and a systematic recall programme, and that even those top five were only at the external median. The group's chief operating officer stopped reporting the average, replaced it with the top-five benchmark, documented the recall and scheduling practices of the leaders, and set every practice a target based on its gap to them.
Revenue per chair across the group rose 18% over two years. The external survey was then used to set the next round of targets, since the internal leaders had themselves been benchmarking against nothing but each other.
Watch out
Common mistakes.
- Benchmarking metrics without benchmarking the practices behind them. The number tells you the gap; the practice tells you how to close it.
- Comparing figures with different definitions, accounting policies or business models. Adjust for comparability first.
- Setting the average as the target. Benchmark against the best and treat the average as a floor.
Questions
People also ask.
What is the difference between benchmarking and a benchmark?
A benchmark is the reference figure. Benchmarking is the process of comparing, understanding the gap and acting on it.
Where can I find benchmarking data?
Industry associations, professional bodies, consultancy surveys, published financial statements, regulatory data sets and, for internal benchmarking, your own management information.
How often should we benchmark?
Annually for strategic measures, more often for operational ones. The benchmark moves, so a one-off exercise goes stale quickly.
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