Benchmarking can provide an enterprise with valuable insights into performance, efficiency and profitability. To be fully effective, a benchmarking project must be properly structured, use appropriate data and incorporate a process for taking corrective action.
What is Benchmarking?
Benchmarking is the process of comparing performance metrics (usually Key Performance Indicators) between enterprises. The objective of benchmarking is to use best practice metrics to identify performance shortcomings and then implementing corrective improvements as needed.
Where to benchmark?
- Benchmarking comparisons can be undertaken on a number of levels;
- Between different divisions or units within an enterprise – known as “internal benchmarking”
- By comparing metrics between competitor enterprises operating the same industry – competitive benchmarking
- By comparing metrics for similar functions (e.g. finance) across industries – functional benchmarking
- By comparing metrics for enterprises operating in different industries – generic benchmarking
There are pros and cons of each approach. Benchmarking very similar enterprises is relatively straightforward and efficient, but may not provide paradigm changing insights. On the other hand, benchmarking against disparate enterprises may not yield practical insights due to widely differing business models and operating methods.
What to benchmark
- Key Performance Indicators (a set of metrics which measure the key “drivers” of a business’ performance) will usually form the basis of a benchmarking study. Additional non-financial measures are also often included to provide a holistic view of the enterprise. Areas typically covered include;
- Financial measures – profitability, gross margin, net margin, expense ratios
- Productivity – staff ratios, rate of output, stock turn, excess capacity
- Human Resources – rate of turnover, salary expense to sales ratio, staff #’s to sales ratio
- Support functions – human resources, finance, legal support
The scope of subjects that can be benchmarked is only limited by the breadth and quality of available data.
Where to obtain benchmarking data
- The key to effective and actionable benchmarking is data. Objective, current and accurate data ensures benchmarking results are valid, and can form the basis for positive change. Benchmarking data can be obtained from a variety of sources;
- Cooperative surveys (normally completed anonymously) among a peer or industry group
- Benchmarking metrics databases
- Third party providers and professional firms – many professional firms maintain benchmarking data and conduct regular surveys amongst clients
- Independent research firms
Where to obtain benchmarking data
- A procedure for a successful benchmarking study might include the following steps:
- Select a time period (usually the most recent 12-month period) for the study
- Identify KPIs and other measures to be benchmarked
- Identify benchmarking data sources – peers, competitors, databases & other 3rd party providers
- Implement a process to capture, analyse and evaluate results
- Implement action plans in areas requiring improvement
What can we learn from a Benchmarking Study?
The most valuable aspect of benchmarking is understanding the underlying causes or drivers contributing to significant differences between enterprises. Why are our profit margins lower? Why are comparable expenses higher?
While many areas will lead to actionable change, it should also be recognised that some differences result from environmental or structural factors outside the control of the enterprise – for example, a manufacturing firm will necessarily have a higher working capital requirement than say a marketing agency.
A benchmarking study should therefore incorporate a structured process for the analysis of the results, and the development of reasonable and practical plans to address identified areas requiring improvement.
The most valuable aspect of benchmarking is understanding the underlying causes or drivers contributing to significant differences between enterprises. Why are our profit margins lower? Why are comparable expenses higher?
Enterprises can gain valuable and surprising performance cues from a properly conducted benchmarking study. If you need help with benchmarking, reach out to the team at Fullstack whom can help with these and other outsourced CFO insights.
