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The Six Benchmarking Steps You Need

March 11, 2001
Related Topics: HR Services and Administration, Featured Article
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Benchmarking, step-by-step:

    The new economyrepresents a transformed business environment brought about by changes relatedto technology, people, culture and process; a marketplace created by significantshifts in business and cultural value dynamics which demand that we place agreater emphasis on non-physical assets, such as organizational structure,customer satisfaction and employee growth. The new economy values one thingabove all else: knowledge - the currency of the new millennium.

    Knowledge comes inmany forms. One such form is the knowledge that is distilled from comparing oneorganization's performance against another's in order to gather criticalinformation about business processes, risks and controls, and develop metrics bywhich to improve performance. In a word, benchmarking.

    Benchmarking is wellsuited to the new economy, an economy which requires that successful companiescreate value in new ways, namely by recognizing that competitiveness now demandsemphasis on both tangible and non-tangible assets. Benchmarking incorporateswhat we know is true about sustained, long-term business success in this neweconomy.

    Consider theAmerican Productivity and Quality Center's definition of benchmarking:"Benchmarking is the practice of being humble enough to admit that someoneelse is better at something and wise enough to try and learn how to match andeven surpass them at it." Put another way, effective benchmarking requiresthat you are wise enough to realize your organization has weaknesses, whichtranslate into business risks, and determined enough to do something about thoserisks.

    True benchmarking isquantitative and qualitative, and it involves both competitor comparison andexploration outside your industry. It is a management process built aroundmotivation, measurement and improvement. It is the perfect tool for new economycompanies.

    However,benchmarking is not a silver bullet; it must be managed correctly andmethodically to be successful. It is not simply a venue for collecting data,rather it is a tool for critical insight, which can motivate change and lead youto more efficient, effective and innovative business practices.

Step One: Select theprocess and build support
   The first step is to select thebusiness process to benchmark and build support from both upper and middlemanagement in order to gain the appropriate resources and to foster the spiritof participation required in an effective benchmarking initiative. Not targetinga specific process to examine or attaining management support will almostcertainly mean that your benchmarking attempt will fall short of its goals.

    For example, a recent Arthur Andersenclient wanted to benchmark many processes, from the purchasing function topost-sales customer relationship management. This client also wanted toaccomplish this goal in less than 30 days and with no formal resources orbudget.

    We suggested breaking the largerproject into smaller, more manageable subprojects. Specifically, we encouragedthe client to target the supply-chain function, which could be further dividedinto purchasing, inventory management, logistics and order fulfillment.Purchasing was the natural place to begin because, as a benchmarking project,this process was manageable. The client agreed and focused initial benchmarkingefforts on the purchasing process. As a result, the positive suggestions thatoriginated there were used to fuel additional projects.

    Selecting the process means determiningwhich processes or issues are critical to the goals of the organization andwhether benchmarking is the appropriate method to determine the efficacy of theprocess. In this initial step, it is important to gain commitment frommanagement, process owners and staff to participate eagerly on the benchmarkingproject, and then to develop an action plan to focus efforts and keepinformation organized.

Step Two: Determinecurrent performance
   In the next step, it is crucial todetermine the state of the current business environment. Too often, companiesembark upon benchmarking efforts because they want to achieve the well-knownresults of such companies as Motorola or General Electric. This is misguidedbecause benchmarking is company- and issue-specific. Without a clearunderstanding of the business environment and the impact of specific businessprocesses on overall business performance, benchmarking will fail to yieldmeaningful results.

    Before benchmarking your companyagainst another to discover how they achieve high levels of businessperformance, you must understand your own performance. An initialself-assessment should include questions to determine if the process has beenflowcharted; if the process owners have been correctly identified; where keyhandoffs exist within and outside of the process; if automated and manualactivities have been identified; and finally, if redundancies or inefficiencieshave been targeted.

    We have found that an exercise calledprocess mapping will facilitate a thorough understanding of any businessprocess. Interviews, focus groups and charting help process owners understandthe inputs, activities and outputs of the process. If benchmarking is a neweconomy tool, process mapping is also a tool - a vital component of effectivebenchmarking. It raises the level of knowledge before the benchmarking effortbegins ensuring that any information gathered during benchmarking will be highlyrelevant to the issues at hand.

    Determining the "as is"requires selecting the appropriate tools to study the business process, such asprocess mapping which involves interviews, focus groups, flowcharts andself-assessment. It is necessary to document the inputs, activities and outputsof the process under study, and finally to identify any key performance measuresfor the process.

Step Three: Determinewhere performance should be
   Part of the work of step three isactually accomplished in step two; during the time spent learning more about thebusiness process under examination, you will instinctively develop somesuggestions for improvement. However, this step puts your process to the test asyou will compare it quantitatively and qualitatively to other processes,internally, externally or both.

    The first part of step three,determining the "should be," is choosing potential benchmark partners.Benchmark partners are organizations, including your own, that are successfullyexecuting the process being examined. For example, we recently studied theinventory management process for an office-products company. Their team and oursconducted extensive research and screening to determine which organizations werethe best benchmark partners to avoid wasting time comparing the company againstorganizations that weren't challenged with similar problems.

    However, we did not look at theclient's industry alone; we knew there were companies in different industriesthat must manage inventory effectively to be successful in their businessenvironment. We benchmarked against companies in several industries to gather avariety of insights for improving inventory management and to provide anopportunity for quantum-leap improvement, instead of merely keeping pace withthe client's competitors.

    Determining the "should be"is where you begin to focus on examining the process from an externalperspective, conducting secondary research to supplement internal exploratoryefforts and discovering which criteria are important. This understanding willlead you to the most appropriate benchmark partners.

    Being prepared by gatheringquantitative information in advance of your benchmarking efforts will balancethe odds in your favor so that your benchmarking initiative will be a success. Afew additional tips:

  • Submit qualitative discussionquestions in advance.

  • Give something back. Build long-termrelationships by avoiding sensitive areas. Provide a summary of what youlearned during your project.

  • Look for evidence of superiorperformance. Just as you did when documenting your own process, identifywhere the benchmark partner uses automation to streamline steps, and lookfor handoffs, process owners, performance metrics and measures.

Step Four: Determine theperformance gap
   Consider where you should be andsubtract where you are - the difference is the performance gap. The larger thegap, the higher the priority to narrow it. In this step, you must consider ahost of issues and try to analyze them logically. For example, examine a processfrom a cost, quality, time and productivity perspective, with the understandingthat strength in one area does not necessarily indicate strength across theboard.

    One of our customers asked us tobenchmark their payroll function, assuming it would be a top quartile performer.We benchmarked this organization against more than 100 organizations using about25 performance measures. We found that they were top quartile performers onmeasures such as payroll cost per paycheck and payroll cost as a percent ofrevenue.

    However, looking deeper, we found thatthey were among the worst on measures such as error resolution time and errorrates. According to the payroll manager, his goal was to cut costs as part of ageneral and administrative cost containment initiative. To accomplish this goal,he offered his senior payroll clerk early retirement and hired an inexperienced,poorly trained replacement.

    This example illustrates that unlikemost other business tools, benchmarking can help accurately identify and sourceperformance gaps and lead to risk avoidance and process improvement. The payrollmanager achieved his goal of cost optimization but sacrificed quality, time andproductivity. We predicted that those deficiencies would ultimately result inhigher costs in the near future.

    For performance gaps to be useful, theymust be logically identified, organized and categorized. This means in part thatthe causal factor behind the gap should be attributed to people, process,technology or cultural influences. In addition, each gap should be ranked basedon a priority indicator.

Step Five: Design anaction plan
   Some of our benchmarking initiativesare vast. One in particular spanned four months and four continents and involvedbenchmarking over 20 divisions on more than 70 measures of performance. In thisparticular case, we worked with the teams to create action plans. We felt thatour effort was exhaustive and meaningful. The result? Many of the teams did notimplement their plans, and the upshot of our comprehensive benchmarking effortwas a very expensive binder that collected dust in a manager's office.

    This unfortunate outcome can and shouldbe avoided. There are several ways to ensure that your benchmarking effortsproduce positive results. One way is to use goal-oriented, attainable anddetailed action plans to plot the improvement course. An action plan templateshould include a description of the overall action plan detailing each specificaction step and each problem the actions are targeted to solve. The action planshould also describe the chronological steps to implementation, definingrequirements and specifications, and allotting an appropriate time frame for theimplementation.

    Finally, the action plan shouldidentify those accountable for implementation and describe rewards if theirefforts are on time or ahead of schedule. Perhaps most important is to ensurethe action plan has buy-in from all key parties, including management, processowners and those affected by the proposed change.

Step Six and Beyond:Continuously improve
   Just as there is no end to learning andjust as there is no such thing as accumulating enough knowledge, benchmarking isnot an activity that you do only once. Rather, it is part of an ongoing,continuous improvement effort that is vital for organizations seeking to achieveand maintain competitive advantage in the new economy. The secret to long-termsuccess is to keep business processes effective and efficient through continuousmonitoring and measuring.

    The new economy is nothing if not anopportunity to embrace change. Using benchmarking as a tool for continuousimprovement is one way to determine if your business is doing everything it canto meet the challenges inherent in our global, intensely competitive businessenvironment. There has never been a better time to stop and take a moment to seewhat the other guy is doing.

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