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Benchmarking and its Myths By Robert J. Kennedy, Educational Testing Service What Is Benchmarking? The term benchmarking was hardly known to the business world a decade ago, but today it's a popular buzzword. The text book definition defines benchmarking as "the comparison of similar processes across different organizations, companies, and industries to identify best practices." Some business managers, however, like to think of benchmarking as simply assessing “the good, the bad, and the ugly” in an organization.1 Perhaps the best way to look at benchmarking is to think of it as a financial snapshot of an organization, and then comparing that snapshot with those of other companies. The competitive intelligence field increasingly uses benchmarking as an informational gathering tool, since it's not only important to learn about direct competitors, but the industry as a whole. Why Benchmark? Despite the various definitions of benchmarking, the goal is always the same: to identify best practices. The advantages are clear. First, benchmarking allows a company to climb the learning curve quickly by benefiting from the experience of other companies. According to Greg Hackett, founder and president of The Hackett Group, “…you get to steal the learning curve of others….”2 Ultimately, benchmarking results in more efficient processes which, in turn, can generate substantial cost savings. According to Mark Krueger, managing director of AnswerThink Consulting, cost reductions can range from 15% to 45%.3 Myths of Benchmarking Despite the obvious benefits of benchmarking, many companies are reluctant to undergo such an effort because they believe the many myths that surround this practice. Some of the more common follow. 1 MYTH # 1: BENCHMARKING IS TOO EXPENSIVE Typical costs of benchmarking include travel expenses as well as indirect costs such as employee time. However, Robert Graham, vice president of Medrad, points out that, “with careful planning benchmarking costs can be kept to a minimum.”4 Working efficiently and effectively can reduce travel and meeting time. For example, before visiting other companies you should find out what your own company’s problems are and define what you intend to accomplish. Then you need to make this information known to the companies you will be visiting. This planning will reduce travel and meeting time and it will lower costs. Another way to control costs is benchmarking by degrees and defining narrow areas to explore. In other words, you don’t have to benchmark all processes at once. MYTH # 2: MANAGEMENT DOESN'T SUPPORT BENCHMARKING While some managers remain pessimistic about benchmarking, most executives have a more positive view. Good managers are competitive in nature, and any manager who is competitive is already looking at what other companies are doing. Naturally the next questions for these managers are, “How do other companies achieve their results?” and “What can we learn from them?”5 Consequently, many managers are benchmarking informally without even knowing it. MYTH # 3: BENCHMARK ONLY THE BEST COMPANIES There are some good reasons not to benchmark the most elite companies. First, best practice companies are often overwhelmed with requests for visits and therefore must turn down many companies. Second, the performance gap between your company and best practice companies is often so large that it would be discouraging to attempt changes. Instead, incremental changes may be more appropriate to gain momentum and 2 support. Al Pozos, manager of Pacific-Bell's corporate quality center, explains that, “You can learn from an Olympic athlete. But you can learn from the local tennis pro.”6 MYTH # 4: BENCHMARK ONLY SIMILAR COMPANIES Companies or industries that are different can have similar processes or characteristics. For example, a medical center may wish to benchmark their admissions process with a hotel’s. Such companies are using benchmarking to break out of their industry paradigms and reach new, world-class levels of performance. Once managers realize that you don’t need to benchmark companies only similar to their own, the possible benchmark partners are almost limitless. For example, Dr. Thomas Gorrie, the worldwide franchise chairman of Johnson and Johnson, points out that they “seek out companies…outside of our main competitors. We have individuals looking throughout the world for information.”7 MYTH # 5: BENCHMARKING IS ONLY FOR BIG COMPANIES It’s no surprise that many managers think benchmarking is only for big companies since they have abundant human and financial resources. However, small companies can benefit too, as Ken Dooley, quality manager of Syntron Inc., points out, “It’s easier to learn to do benchmarking when you’re dealing with a company the same size as yours.” 8 Companies of different sizes will likely approach processes in different ways. However, this is not to say that companies should only benchmark with companies of similar size. For example, a big company can learn a lot from a small company when it is planning to consolidate operations. Benchmarking focuses on processes and as long as you learn about those processes your efforts will produce results, regardless of size. How to Benchmark The first benchmarking decision is what to benchmark. Benchmarking is often applied to such business practices as payroll, payables, customer billing, receivables, information technology, purchasing, and inventory management. 3 The next decision is who will undertake the benchmarking effort. Many companies have mounted their own efforts by creating cross-functional benchmark teams and joining with several other companies to share and compare common practices. The team must first learn how the process under study works at their own company. The team then learns how the process can be improved by visiting other companies, reading literature and talking to employees. Employees who have been performing the process for many years are often the best sources for ideas on how to improve the process. Some companies take a slightly different benchmarking approach and hire independent experts who specialize in comparing costs and productivity of practices among many world-class organizations. In this case, the benchmarking experts still must learn the process under study, but there is a greater emphasis on data collection. Data is collected about costs, labor and efficiency and various financial ratios are calculated and compared to hundreds or thousands of both similar and different companies. Next Step: Develop Recommendations As previously mentioned, benchmarking should ultimately result in more efficient processes. After processes and/or data are compared to other companies’, the benchmarking team or expert should develop recommendations based on other companies’ best practices. These recommendations should be presented to management and relevant staff. It is imperative to obtain management “buy-in” of the recommendations so that implementation can begin. Staff should also know the recommendations so that they can effectively participate in the implementation. In fact, if the benchmark effort simply results in a report that will not be put to use, it created the one thing it was to remedy, inefficiency. Bell Atlantic realizes that the project isn’t complete unless the recommendations are implemented. Implementation is the ultimate way of measuring the success of the benchmark effort. Becoming 'Invaluable' As more and more companies undertake benchmarking efforts, the prevalence of these myths seem to increase. For anyone starting such an endeavor it is important to separate the myths from reality. 4 Finally, it's worth noting one overwhelming truth about benchmarking. From a professional point of view, benchmarking is a skill that is highly valued in today’s marketplace. If you become a true benchmarking expert, you will be invaluable. Endnotes 1. Hackett, 1995. 2. ibid. 3. Caudron, 1998. 4. Feltus, 1994. 5. ibid. 6..ibid. 7. Gorrie, 1996. 8. Feltus, 1994. References and Related Readings Business Week Enterprise (1998), “Better Your Business: Benchmark it,” April 27, pp. 4-6. Caudron, S. (1998), “300-Watt Ideas for Generating Value,” Controller Magazine, August, pp. 36-42. Feltus, A. (1994), “Exploding the Myths of Benchmarking,” Continuous Journey, April. Fleisher, C., Stephan, A., Miner, A. (1997), "Anatomy of a First-Time Internal-Process Benchmarking Project: Operation, Contrasts & Lessons," Competitive Intelligence Review, vol. 8, no. 2 (Summer), pp. 44-57. Gorrie, T., et al (1966), “Symposium: Understanding the Competition -- The CEO’s Perspective,” Competitive Intelligence Review, vol. 7, no. 3 (Fall), pp. 4-14. Hackett, G. (1995), “Benchmarking: An essential tool for establishing best practice,” Financial Focus, August. O’Dell, C. (1994), “Out of the Box Benchmarking,” Continuous Journey, April. Prescott, J., Herring, J., Panefely, P. (1998), “Leveraging Information for Action: A Look into the Competitive and Business Intelligence Consortium Benchmark Study,” Competitive Intelligence Review, vol. 9, no. 1 (Spring), p.9. The Hackett Group (1997), “Developing World-Class Organizations through Benchmarking,” pp. 29, 43-45. Vanderwicken’s Financial Digest, (1998), “How Benchmarking Is Getting Smarter,” July, p.6. 5 ------------------------------------------------------------------------------------------------------- Robert J. Kennedy is a internal business consultant at the Educational Testing Service in Princeton, NJ. He received his bachelor’s degree, cum laude, in accounting as well as degrees in MIS and economics from the University of Delaware. Currently, he is a participant in the MBA program at Widener University. He has extensive consulting experience in both the retail and service industries. He is also a CPA with a small business consulting practice. He may be contacted at +1 609-734-1620 or email@example.com. 6 Sidebar 1 Notable Quotes on Benchmarking "Under the leadership of our director of corporate competitive analysis, benchmarking…has been fundamental to our ability to know where we were too heavy in our administrative work. This has included benchmarking in terms of speed to market and benchmarking the structure of our organization." -- John E. Pepper, Chairman, The Procter & Gamble Company ("Competitive Intelligence at Procter & Gamble," Competitive Intelligence Review, vol.10, no.4, Winter 1999). "From 1976 to 1982, our market share was cut in half…. In an effort to get back on track our former CEO, David Kearns, went to our Japanese affiliate, Fuji Xerox. Learning from their success, he benchmarked the Japanese quality processes and became a quality convert. On returning to the U.S. he launched our own quality strategy, which helped us regain market share and lead the industry. Competitive benchmarking is still helping us today." -- Judith M. Vezmar, Vice President, U.S. Customer Operations, Xerox Corporation ("Competitive Intelligence at Xerox," Competitive Intelligence Review, vol.7, no.3, Fall 1996) "Our intelligence department engages in some formal benchmarking for the company. They are not the benchmarkers for the company, but they do very special benchmarking when we have identified a certain target 'affector'." -- Robert W. Galvin, Chairman of the Executive Committee, Motorola, Inc. ("Competitive Intelligence at Motorola," Competitive Intelligence Review, Vol.8, no.1, Spring 1997). "While our individual companies focus on specific competitors, as a corporation we use benchmarking to assess our internal performance. We track 25 to 30 major companies representative of the types of businesses we're in. We compare our performance and their performance against factors such as sales growth, gross profit, SG&A -- selling general and administrative expenses -- and return on investment, as well as tax rates and so on, so we can see how we are moving. We then target areas to improve and invest the savings from those improvements into R&D." -- Thomas M. Gorrie, Worldwide Franchise Chairman, Johnson & Johnson Medical Inc. ("Understanding the Competition: The CEO's Perspective," Competitive Intelligence Review, vol.7, no.3, Fall 1996). Note: positions/affiliations as of the dates when the above-referenced articles were published. 7 Sidebar 2 The American Productivity and Quality Center's Benchmarking Code of Conduct Preamble Benchmarking -- the process of identifying and learning from best practices anywhere in the world -- is a powerful tool in the quest for continuous improvement and breakthroughs. To guide benchmarking encounters, to advance the professionalism and effectiveness of benchmarking, and to help protect its members from harm, the International Benchmarking Clearinghouse, a service of the American Productivity & Quality Center, has adopted this Code of Conduct. Adherence to this Code will contribute to efficient, effective and ethical benchmarking. Code of Conduct 1.0 Principle of Legality 1.1 If there is any potential question on the legality of an activity, consult with your corporate counsel. 1.2 Avoid discussions or actions that could lead to or imply an interest in restraint of trade, market and/or customer allocation schemes, price fixing, dealing arrangements, bid rigging, or bribery. Don't discuss costs with competitors if costs are an element of pricing. 1.3 Refrain from the acquisition of trade secrets from another by any means that could be interpreted as improper including the breach or inducement of a breach of any duty to maintain secrecy. Do not disclose or use any trade secret that may have been obtained through improper means or that was disclosed by another in violation of duty to maintain its secrecy or limit its use. 1.4 Do not, as a consultant or client, extend benchmarking study findings to another company without first ensuring that the data is appropriately blinded and anonymous so that the participants' identities are protected. 2.0 Principle of Exchange 2.1 Be willing to provide the same type and level of information that you request from your benchmarking partner to your benchmarking partner. 2.2 Communicate fully and early in the relationship to clarify expectations, avoid misunderstanding, and establish mutual interest in the benchmarking exchange. 2.3 Be honest and complete. 3.0 Principle of Confidentiality 3.1 Treat benchmarking interchange as confidential to the individuals and companies involved. Information must not be communicated outside the partnering organizations without the prior consent of the benchmarking partner who shared the information. 3.2 A company's participation in a study is confidential and should not be communicated externally without their prior permission. 4.0 Principle of Use 4.1 Use information obtained through benchmarking only for purposes stated to the benchmarking partner. 4.2 The use or communication of a benchmarking partner's name with the data obtained or practices observed requires the prior permission of that partner. 4.3 Contact lists or other contact information provided by the International Benchmarking Clearinghouse in any form may not be used for purposes other than benchmarking and networking. 8 5.0 Principle of Contact 5.1 Respect the corporate culture of partner companies and work within mutually agreed procedures. 5.2 Use benchmarking contacts, designated by the partner company if that is their preferred procedure. 5.3 Obtain mutual agreement with the designated benchmarking contact on any hand-off of communication or responsibility to other parties. 5.4 Obtain an individual's permission before providing his or her name in response to a contact request. 5.5 Avoid communicating a contact's name in an open forum without the contact's prior permission. 6.0 Principle of Preparation 6.1 Demonstrate commitment to the efficiency and effectiveness of benchmarking by being prepared prior to making an initial benchmarking contact. 6.2 Make the most of your benchmarking partner's time by being fully prepared for each exchange. 6.3 Help your benchmarking partners prepare by providing them with a questionnaire and agenda prior to benchmarking visits. 7.0 Principle of Completion 7.1 Follow through with each commitment made to your benchmarking partner in a timely manner. 7.2 Complete each benchmarking study to the satisfaction of all benchmarking partners as mutually agreed. 8.0 Principle of Understanding and Action 8.1 Understand how your benchmarking partner would like to be treated. 8.2 Treat your benchmarking partner in the way that your benchmarking partner would want to be treated. 8.3 Understand how your benchmarking partner would like to have the information he or she provides handled and used, and handle and use it in that manner. Benchmarkers Know and abide by the Benchmarking Code of Conduct. Have basic knowledge of benchmarking and follow a benchmarking process. Prior to initiating contact with potential Benchmarking partners, have determined what to benchmark, identified key performance variables to study, recognized superior performing companies, and completed a rigorous self-assessment. Have a questionnaire and interview guide developed, and share these in advance if requested. Possess the authority to share and are willing to share information with benchmarking partners. Work through a specified host and mutually agreed upon scheduling and meeting arrangements. When the benchmarking process proceeds to a face-to-face site visit, the following behaviors are encouraged: Provide meeting agenda in advance. Be professional, honest, courteous, and prompt. Introduce all attendees and explain why they are present. Adhere to the agenda. Use language that is universal, not one's own jargon. Be sure that neither party is sharing proprietary information unless prior approval has been obtained by both parties, from the proper authority. Share information about your own process, and, if asked, consider sharing study results. Offer to facilitate a future reciprocal visit. 9 Conclude meetings and visits on schedule. Thank your benchmarking partner for sharing their process. The following guidelines apply to both partners in a benchmarking encounter with competitors or potential competitors: In benchmarking with competitors, establish specific ground rules up-front, e.g., "We don't want to talk about things that will give either of us a competitive advantage, but rather we want to see where we both can mutually improve or gain benefit." Benchmarkers should check with legal counsel if any information gathering procedure is in doubt, e.g., before contacting a direct competitor. If uncomfortable, do not proceed, or sign a security/non-disclosure agreement. Negotiated a specific non-disclosure agreement that will satisfy the attorneys from both companies. Do not ask competitors for sensitive data or cause the benchmarking partner to feel they must provide data to keep the process going. Use an ethical third party to assemble and "blind" competitive data, with inputs from legal counsel in direct competitor sharing. (Note: When cost is closely linked to price, sharing cost data can be considered to be the same as price sharing.) Any information obtained from a benchmarking partner should be treated as internal, privileged communications. If "confidential" or proprietary material is to be exchanged, then a specific agreement should be executed to indicate the content of the material that needs to be protected, the duration of the period of protection, the conditions for permitting access to the material, and the specific handling requirements that are necessary for that material. About APQC Founded as a nonprofit organization in 1977, the American Productivity & Quality Center (APQC) is a world- renowned resource for process and performance improvement for organizations of all sizes and industries. The evolution of best practices and benchmarking as tools for breakthrough improvement led APQC to form the International Benchmarking Clearinghouse in 1992. The Clearinghouse was designed with input from 86 diverse businesses to promote, facilitate, and improve the process of learning from best practices. Today, APQC continues to work with organizations to improve productivity and quality by providing the tools, information, and support to discover and implement best practices and obtain results in dozens of process areas. These efforts include several benchmarking studies evaluating corporate CI operations, conducted by APQC in partnership with SCIP. To learn more about these and other benchmarking efforts, visit www.apqc.org. 10 11
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