Benchmarking Definition: Best Practice, Pros, and Cons

In my experience, companies seem to enjoy comparing themselves to other companies, often in the spirit of “grass is greener on the other side”. The term “Benchmarking” is often invoked within the context of learning about how so-and-so company is doing, how they are doing it, and why they are doing it. We know that benchmarking is not a strategy, but that begs the question, what is it then?

But, less often invoked is the question:

Should we even Benchmark at all?

Benchmarking Definition

Below is a standard definition and history of the term “Benchmarking”:

Benchmarking is the process of comparing one’s business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time, and cost. Improvements from learning mean doing things better, faster, and cheaper.

Benchmarking involves management identifying the best firms in their industry, or any other industry where similar processes exist, and comparing the results and processes of those studied (the targets) to one’s own results and processes to learn how well the targets perform and, more importantly, how they do it.

The term benchmarking was first used by cobblers to measure people’s feet for shoes. They would place someone’s foot on a bench and mark it out to make the pattern for the shoes. Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.

Also referred to as best practice benchmarking or process benchmarking, it is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice companies’ processes, usually within a peer group defined for the purposes of comparison. This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to improve their practices.

What’s Right with Benchmarking:

There are certain things that make sense to Benchmark. Here are a few:

1. Broad Industry Benchmarking
2. Salary Benchmarking (HR Benchmarking, Human Resources Benchmarking)
3. Competitive Bid Benchmarking
4. Software Benchmarking (speed of web browsers: Firefox versus Chrome versus Internet Explorer versus Opera versus Safari)

The above cases make sense to benchmark because that crucial information gives us a better sense of the competitive landscape – broadly. Where it doesn’t make sense to Benchmark, I believe, are in the following areas:

1. Process Benchmarking
2. Quality Benchmarking
3. Customer Loyalty Benchmarking

I believe that the areas above – which are very popular areas in which to Benchmark – often lead to misguided behavior, stemming from good intentions. Here’s why:

What’s Wrong with Benchmarking?

1. Benchmarking is often conducted by followers in an industry, aiming to Benchmark the Leader in the industry: This behavior leads to more following than it does to eventually leading. This vicious cycle then leads to continued Benchmarking of the leader, creating a deeper sense of followership for the Benchmarking firm toward the Benchmarked firm.
2. Benchmarked practices don’t transfer well: When an industry leader’s business practices are Benchmarked, that often creates many follower companies that blindly copy the industry leader’s business practices without regard for context. Without context, business practices don’t transfer well. For example, The Toyota Production System works very well for Toyota and its practices has also been adopted successfully by many outside of manufacturing. But, if Toyota’s success is blindly copied without regard for the unique needs of your business and without regard for the differences in your business versus that of manufacturing, blindly copying will lead to failure.
3. Often, not always, Benchmarking is conducted by companies that have no performance improvement plan – or an idea of how to improve performance: yes, this is a broad generalization; but, from my experience, Company X will notice that Company Y is doing really well, then the logic follows: “Hey, Company Y is doing well, let’s find out what they’re doing and let’s do that too”. This fallacy is related to the previous Benchmarking Fallacy, but the difference is that the company aiming to copy the industry leader’s business practice has no plan in place to improve, so they seek that plan from the leader.

Okay, it’s your turn:

What are your thoughts on Benchmarking?