Types of benchmarking and levels
Benchmarking Training
Types of benchmarking
There are several 'types' of benchmarking including:
- Generic - e.g. comparisons in a general sense - often using terms such as customer, strategic or operational
- Functional - e.g. Finance, Sales or HR efficiency (e.g. HR staff to total employees)
- Process - e.g. insurance claims or delivery of bulk commodities
- Global - across the world
- Cost - focussing on cost dynamics
- Performance - looking at revenue or growth
The problem with more general benchmarking is that you are unable to drill down to the right level of granularity unless you get inside information. Analysts often compare Unilever and Proctor and Gamble but at group levels it is not a fair benchmark as Unilever doesn't sell nappies and Proctor and Gamble doesn't sell ice-cream. Similarly benchmarking LloydsTSB with Barclays at group level misses the subtle nuances of their operations - LloydsTSB for example has a much greater focus on retail banking than Barclays which has extensive corporate business. In order to gain value from benchmarking it is necessary to look at analogous processes - e.g. cashiering in branches. The closer you get to a benchmark then the more value that you will receive - but of course you must also give something in return as a quid quo pro or the other firm will not be interested in giving you access to its workings.
Benchmarking can take place at different levels:
- Internal
- Competitor/peer
- Best in industry
- World class
and these are explored below.
Internal- is looking at the differing levels of performance within your own organisation and highlighting best practice for dissemination to other parts. For example if an organisation has several factories making the same goods then it can analyse the best performing areas in each and then extrapolate these features to its other operations thus bringing all operations up to the best internal levels of operation. Due regard must be given to the context of the analysis as due to past decisions there will be differences in operations which must be allowed for, such as different IT or logistics systems, local variations in staff competencies or even raw material access, rail links etc such that the comparison is 'normalised'.
The benefits of internal benchmarking are that it is cost effective, that it is easy to gain access to all the information required, that it does not require you to give anything away to competitors or other outside parties and that the processes will be analogous. The diagram shows an example where an 'efficiency frontier' of several units has been plotted. The boundary maps the most efficient units on two fronts - transactions and revenue. This allows you to identify quickly the poorer performers (those inside the frontier) and where they fall behind. Extrapolating the current position up to the boundary or frontier gives you an idea of the possible gains - assuming it is possible.
The drawbacks of internal benchmarking include that fact that even the very best internal practices may not be adequate in the face of external pressures (e.g. having very competent cashiers is better than not having them but if customers want internet banking it misses the point); that it is only looking internally and may miss the bigger picture; and that it is unlikely that you will find a radical solution internally (but not impossible). It is generally considered a good idea therefore to benchmark externally (possibly as well)
Competitor/peer - is analysing those firms that you regard as competitors or peers. For example a peer group in banking might include Barclays, LloydsTSB, HSBC, RBS, HBOS - but might also include Egg or Smile or Cahoot depending on which facet you wish to explore; whilst looking at say retailing you might include Sainsburys, Tesco, Asda, M&S, Waitrose, Coop and so on but might include organisations such as Amazon or e-bay if looking at on-line retailing. The diagram shows some potential outputs from a peer group of banks.
Typically this type of benchmarking is carried out as part of a cooperative study involving a significant number of players - e.g. the major banks; or the global custodians or the major retailers; often with the cooperation and involvement of the 'trade association' body which ensures that the study is 'fair' and using independent consultants/advisors who retain the level of confidentiality required. Each participant gives information to the study in the knowledge that it will remain confidential to it and only it will know where it lies in the study.
The great advantage of this type of study is that the information so gained can be at a very detailed level of granularity which allows comparison; for example down to activity level. This facilitates identification of those important enablers as well as allowing a greater range of comparisons than with just one. It also allows you to decide what level of excellence you wish to target in your changes - which might not be the leader - especially if the majority of benefits can be gained from going part of the way. As all participants benefit, they will all give the information to enable the study to add real value.
Best in industry - is focussing on the firm that you consider to be the leader in your own field/industry sector and finding out what it is that it does that is so much better than you. This involves getting close to it and learning - but also exchanging information. Also it is likely that others in the industry will also wish to contact it so competition will be intense.
World class - is simply deciding that no matter what industry sector you are in - you wish to compare what you do against the best in the world. Of course the process must still be analogous, but it means that you are looking for a (probably) very stretching target. The issue here is - what can you offer the best-in-class firm to tempt it into helping you - and to make it choose you rather than any of the other firms wishing to benchmark it as well?
~ Neil Jones ~
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