What is Benchmarking & Why is it Important?
In the quest for meeting their ambitious targets, organizations can sometimes put on blinkers and focus on only reaching those goals. While this approach does steer the organization from digressing from the focused path, what it also does is insulate the company from observing & learning from what’s happening in the business environment. One of the ways to prevent this from happening is to constantly keep abreast with what the industry benchmarks are for various areas of interest such as customer service, sales, employee engagement etc.
What are benchmarks?
Simply put, benchmarking is a process to discover what is the best standard of performance seen in a specific company, by a particular competitor or by a completely different industry.
The process of benchmarking involves four distinct steps:
- Identifying the areas where the organization is keen to identify actionable insights. These could range from cost of production to number of critical to quality errors to employee engagement scores.
- Once the areas have been identified, the organization then shortlists the companies/industries to benchmark.
- The third step that follows is to collect data from these identified companies/industries across the areas of interest that were zeroed in earlier.
- Finally, when the data has been collected, the organization studies the gaps between their standard and that of the benchmark.
Sometimes companies might confuse benchmarking with competitor research. However, there are some key differences between the two.
- Focuses on best practices to identify next practices
- Strives for continuous improvement
- Partnering to share information
- Needed to maintain a competitive edge
- Adapting based on customer needs after examination of the best
- Focuses on performance measures
- Bandage or quick fix
- Considered corporate spying by some
- Simply a “nice to have”
- Attempting to mirror another company/process
Why are benchmarks important?
It is observed that companies at times might be reluctant to use benchmarks. One of the most popular reason for this is the belief that they are their own organization, and hence, do not need to emulate any other organization. This is where it is critical to underline the fact that benchmarking does not mean blindly ‘copying’ what competitors do. It simply means to understand what is the acceptable standard in the industry, and where does the organization stand vis-à-vis that standard. Benchmarking helps organizations to stay in sync with the market and customer needs. For instance, at a bank the turnaround time for any customer complaint could be 4 hours, hypothetically. The bank might be tempted to believe that they are doing a great job by offering such a short TAT. However, if other leading banks have a TAT of 2 hours, then the scenario changes. Suddenly, the ‘great job’ is 50% below the benchmark. Customers are likely to prefer a bank that resolves their concerns in the fastest possible timeframe.
Similar examples can be taken for practically every aspect of an organization both internal & external:
- How satisfied are the employees with the compensation & benefits offered to them, compared to employees from other organization?
- Is the company’s quality focus at par with that observed in the industry?
- Is the workforce of an organization sufficiently engaged?
- Does the organization offer an environment which is conducive for performance? And so on.
Now going back to the example of the bank with a 4 hour TAT. What does it do with the information that its performance is 50% below the industry standard? This is where the idea of not copying blindly comes in. A possible course of action for this bank could be to first study its own process to identify the bottleneck which is slowing down the complaint redressal process.
Post the study, say the company hypothetically finds out that its employees do not feel empowered enough to take decisions/commit to clients resulting in the delay. The company can then look at the cause for this and accordingly take corrective actions. One of the first things a company can do here is to align the employees with their customer strategy. Once they know what the company wants to achieve in terms of customers, employees are likely to find it easier to take actions in line with the strategy. To further empower them employees could also be made acquainted with all the possible client scenarios and how to deal with them. They should also have the liberty to cut hierarchies, if it ensures faster complaint resolution.
Thus, benchmarking and then taking corrective actions is not simply emulating competitors. Rather it is the process of understanding what top standard is, and making changes within the organization in order to meet & transcend that standard.
Benchmarking has several other benefits as well:
- Improved Quality: Benchmarking helps organizations to continuously improve the quality of their products & services. Organizations observe the current standard, and then try to surpass that.
- Better performance: Benchmarking helps organizations overcome complacency. They continuously strive to improve their performance standards in order to stay relevant in the market.
- Cost efficiency: Benchmarking provides organization with valuable data on the last technology, and processes followed in the business environment. These are aimed at increasing productivity while reducing cost. For example, a manufacturing company might learn about a certain machine used by its competitor, which can do the work for five workers. This company might also adopt similar technology to lower its labor cost.
- Prioritizing areas of improvement: While organizations understand the importance to develop continuously, they might be unsure at times about where to start the improvement from. Benchmarking helps organizations to identify the areas where the gap between their standard and that of the industry is the largest. This helps organizations to prioritize the areas that they need to work on.
- Leveraging strength areas: Benchmarking can also throw light on the areas where the organization is doing much better than what is observed in the market. Having this information can help organization to
Since the time benchmarking was started by Xerox Corporation in the 1970s, several companies have realized the value that this process brings in. It is the simplest way to understand where an organization stands, and how far it needs to go before it reaches the top. While earlier benchmarking was a ‘good to do’ initiative, today it has become critical for organizations to benchmark in order to stay relevant and gain a competitive edge.
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