If someone is doing something more successfully than you are, it makes sense to look over their shoulder and see what you can learn from them. US manufacturers started doing this when they realized that Japanese competitors were taking away their markets. It’s called benchmarking and it’s become so widespread among big companies that some business thinkers now caution against it.

Benchmarking establishes standards against which performance can be measured. It is used to assess performance and to set targets across a range of business activities. The purpose of benchmarking is to improve efficiency and quality, to determine and promote best practice, to maintain competitiveness and to focus people on the need for change and improvement.

Background

The history books point to Xerox as being the first large US corporation to benchmark. That was in the late 1970s when, like many of its compatriots, it was feeling the competitive heat. It took all the key parts of the business, from production to sales and maintenance, and measured them against their counterparts in other companies, abroad as well as at home. If the performance of the other’s process was better in some way—quicker, cheaper, more efficient—Xerox determined at least to match it. In so doing, it transformed its own overall performance and word spread. So did the practice of benchmarking.

Types of Benchmarking

A benchmark is a standard of performance; it can apply to anything from production rates and defect levels to how you answer the phone. In benchmarking, you first assess your own performance, compare it with others and, if they are superior, you do what it takes to match or—better—exceed it.

Benchmarking comes in different forms: 

1. Internal benchmarking: Using internal measures to match or surpass current performance, ensure consistent standards throughout the company, eliminate waste and improve operations. 
2. External Benchmarking: External Benchmarking is simply comparing one organization to another. It is a method of acquiring and analysing details of how your business compares to others. External benchmarking is harder and should be more productive. It can be done in a number of ways:
   1. Competitive Benchmarking: Using (direct)competitors’ standards to set targets that match or improve upon their performance. However, doing benchmarking “with direct competitors can be delicate, since they will be reluctant to share certain information, though in certain areas—like health and safety—competitors may be more cooperative for the sake of the industry as a whole.
   2. Industry: Setting benchmarks that are industry standards.
   3. Beyond/Cross-industry: Benchmarking against practices in unrelated industries is easier and usually more useful, since it is more likely to tell you things you didn’t know. Looking beyond one’s own industry helps to remove blinkers and—when it comes to implementation—is less likely to fall foul of the “not invented here” syndrome.

How to do it (Benchmarking)

Successful benchmarking needs everyone to be ‘on the same page’ and to understand the process. People need to be clear about what is being measured and why, and it is important to give people the time and resources they need.

Benchmarking methodologies vary in detail but follow much the same route. 

Pick a benchmark. It shouldn’t be too broad in scope, and should be capable of precise definition. One school of thought says that everything can and should be benchmarked but this becoming a minority view, given the cost in time and people. For that same reason, commitment from the top is important. 

Then pick a team. Some companies favor small teams of two or three, others more, but at least some should be senior enough to get their recommendations approved. Outside consultants can be used, particularly if confidentiality is an issue or the company is inexperienced. 

Either way, the first step is to analyse your own process from beginning to end, so that you know what is being benchmarked. For those who think they know their own processes, this can yield surprising results and may prove a benefit in itself.

Select partners — this is not always straightforward, as the most obvious or attractive may well be suffering from benchmark fatigue. 

Decide on measurement methods and—important—units, and then collect the data. The data report should include any differences in the partner’s practices and structure “as well as its processes. Analyze the results and, in the jargon, determine the “gap.”

Then plan for change, identifying any ideas you can adopt or adapt to improve your own process and determining how to implement them. The plans should aim to take you well beyond the present gap. The next time you compare notes—which you should—the partner will presumably have continued to improve as well.

Why you should not do it (Benchmarking)

Daniel Levinthal of the Wharton business school’s management department acknowledges that benchmarking can have value and power, but warns that there may be dangers in imitating some policies and practices of other firms. He points out that the different functional components of a firm “are both complementary and reinforcing—“interdependent.” Firms that have sustained their competitive advantage over time are the ones that are good at managing those interdependencies.

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“Copying best practices may make you more efficient, but it will also make you look more like your competitors.”

— Nicolaj Siggelkow, 2006

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The implicit assumption of benchmark thinking is that the policy adopted from outside can be independent of everything else the firm is doing. However, for one these components—human resources, say—to adopt the best management practice of another company may not only not be best for the firm, but may actually be dysfunctional. It could disturb the internal consistency of the company’s interlocking set of strategy choices.

Finally, there is mounting criticism of the way in which benchmarking is making all companies look the same, producing strategic convergence. And lack of differentiation, as Michael Porter would say, is no source of competitive advantage.

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