Benchmarking is a process of measuring the performance of your firm against those considered to be the best in the industry using a set of metrics. Benchmarking provides the business with useful information on how it is doing against competitors which will later help the company determine what improvements could be taken to increase performance.
Benchmarking falls into two broad categories; internal and external benchmarking. Within each category there are numerous types of benchmarking that expand into more detailed areas.
1. Internal benchmarking is a comparison of a process or practice with a similar one in the past within the organization. This type of benchmarking is used when a business has been long-established in the market and has a proven record of the process that needs to be measured in the past. It is also used when there are no comparable businesses or when there is very little competition in that particular industry.
Benefits of internal benchmarking
- Cost efficient and easy to do
- Allows for the identification of any problematic areas that need improvement
- Great starting point for understanding your business
- Tracks how the company is performing over time
- Allows for setting performance expectations
- Fosters a culture of continuous improvement
- Increased performance and enhanced customer satisfaction.
Challenges of internal benchmarking
- Subject to internal bias
- Not concerned with how competition is doing
2.External benchmarking is a comparison of a firm’s product, service or process against competitors within that industry This type .of benchmarking is used in order to assess and evaluate performance against the ‘best in class’, identify industry leadership and set targets for moving forward.
Benefits of external benchmarking
- Tracks how direct competitors within that particular industry are preforming against your company
- Tracks how indirect competitors within another industry are performing
- Allows for goal-setting and performance improvement plans
- Tool for measuring the performance of your workforce
- Enables the identification of performance gaps that need to be improved.
- Fosters cultures of continuous improvement that leads to increased organization performance
- May identify partnership opportunities
Challenges of external benchmarking
- May provide misleading information
- Insufficient information available
- Competitors could gain advantage over your weaknesses
- Lack of understanding
- Focus shifted on how competition is doing while ignoring internal performance improvement
Without a doubt, benchmarking is a vital tool that can yield many benefits if applied correctly. In order to ensure that you are following the correct process to benchmarking, it is important to follow a series of steps.
1. Planning: The first step before you start benchmarking you need to have a complete plan of the products, services or processes that need to be benchmarked as well as the required resources and activities in order to initiate the benchmarking process.
2. Analysis: This is where you collect all the information needed and start analyzing. In order to avoid internal bias and subjectivity it is advised that this step is done by someone specialized.
3. Acton: In this step you will communicate the results to the stakeholder and start implementing the changes that the benchmarking process has instructed.
4. Review: The last step of the process involves the evaluation, assessment and review of your benchmarking analysis in order to identify and errors made.