Using industry best practices to guide your decision making can not only save you money, but it can also keep you out of the spotlight for bad press. Almost every industry has some sort of metric that determines what the "Best Practices" are. Ignoring the value of these metrics could cost you money, or worse, entangle you in a media nightmare.
A benchmark is simply a comparison of your performance to an industry or peer average. For example, average wait time at a major fast food chain like McDonalds is believed to be one and a half to three minutes depending upon time of day. That includes every step from taking your order to delivering the food. A fast food operator wanting to beat the competition on speed would be required to process an order even faster. Similarly, a fast food operator who wants to avoid gaining a reputation as “slow” would have to process orders approximate to that of McDonalds or a similar industry leader.
The Benefits of Benchmarking
Operating at, or better, than industry standards is a great way to go unnoticed for the right reasons. A quality concern can greatly affect a brand’s perception. Toyota had for years been synonymous to long lasting quality, but the recall events of 2010 changed the public’s perception almost overnight. Emerging from this public relations disaster will require great time and expense. Benchmarking, if used correctly, can help mitigate the risk that you get in the spotlight for the wrong reasons.
There are also almost immediate bottom line benefits to benchmarking. Here are just a few: reduced costs, improved quality controls, and knowledge of what others are budgeting for certain assets and expenses. A great resource from the Australian Taxation Office, for example, shows that 94% of Australian carpet installation companies pay no rent and that for a medium-sized operation, cost of materials should fall between 16-32% of revenue. A mid-sized Australian carpet installer, that is between 150 and 600 thousand AUD revenue, should not be renting space and should be paying more than 32% for COGS. Using this information could help a struggling business understand areas to improve.
Reviewing this resource from the Australian Taxation Office is a great entry point to understanding the types of benchmarks that could apply to your business. This direct link will take you the index where you can find your own industry. You might also search for a similar resource in your home country. Bizstats is also a great free resource for smaller businesses and financial measures.
- Determine which best practices metrics apply to your industry. These metrics could range anywhere from things like turnaround time, to costs, to headcount ratios.
- Match the lowest performing areas of your business to the metrics you identified in step one. This approach would allow you to address the biggest problems first. However, you might wish to start with smaller problems and gain some quick traction on your benchmarking program.
- Set SMART goals that fit the business’ size and scope. A small fast food chain with only five stores might begin with considering benchmarking goals borrowed from a giant like McDonalds, but adjust them closer to a peer’s metrics. A common way to find best practice information is look at industry specific publications. Stores Magazine would be an example for restaurateurs.
- Track progress to determine how well your benchmarking program is working and to identify which areas need more improvement. There are many ways to track and monitor progress including online templates to help kick start your success.
Things to Avoid
Benchmarking will obviously take time to execute implement the findings. Make sure that you 1) have the resources, and 2) the buy in from stakeholders. These stakeholders will also have to be accepting of outsiders’ practices. All stakeholders need to be open minded and committed to improving the organization.
Follow through is the most critical aspect: set SMART goals and track them. Goal Buddy is a great, free tool for tracking. All of the effort is moot unless the actionable items are thoroughly addressed and acted upon. Do not waste a great benchmarking opportunity on fatigue. If you do not initially believe that the time and resources will be there to implement the change, then consider forgoing the benchmarking program until there will be adequate time and resources for completeness.
A Helpful Exercise:
- Travel to Bizstat’s industry financials page and click which applies to you: corporation, s-corp, etc.
- Select your industry and continue drilling down until you have found the best match.
- Pick at least five financial benchmarks from across the income statement, balance sheet or financial ratios.
- Using your most recent financials, see where you measure up to industry standards.
- Brainstorm a list of ideas that you could implement that would improve areas where you are weak.
- If you are convinced there needs to be improvement, then consider implementing a thorough benchmarking program.