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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. In the process of benchmarking, management identifies the best firms in their industry, or in another industry where similar processes exist, and compare the results and processes of those studied (the "targets") to one's own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful. 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 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", this process is 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.

BENCHMARKING BASICS
The goal of benchmarking is to identify the weaknesses within an organization and improve upon them, with the idea of becoming the "best of the best." The benchmarking process helps managers to find gaps in performance and turn them into opportunities for improvement. Benchmarking enables companies to identify the most successful strategies used by other companies of comparable size, type, or regional location, and then adopt relevant measures to make their own programs more efficient. Most companies apply benchmarking as part of a broad strategic process. For example, companies use benchmarking in order to find breakthrough ideas for improving processes, to support quality improvement programs, to motivate staffs to improve performance, and to satisfy management's need for competitive assessments.

Benchmarking targets roles, processes, and critical success factors. Roles are what define the job or function that a person fulfills. Processes are what consume a company's resources. Critical success factors are issues that company must address for success over the long-term in order to gain a competitive advantage. Benchmarking focuses on these things in order to point out inefficiencies and potential areas for improvement. A company that decides to undertake a bench-marking initiative should consider the following questions: When? Why? Who? What? and How?

WHEN.
Benchmarking can be used at any time, but is usually performed in response to needs that arise within a company. According to C.J. McNair and Kathleen H.J. Leibfried in their book Benchmarking: A Tool for Continuous Improvement, some potential "triggers" for the benchmarking process include: quality programs cost reduction/budget process operations improvement efforts management change new operations/new ventures rethinking existing strategies competitive assaults/crises

WHY.
This is the most important question in management's decision to begin the benchmarking process. McNair and Leibfried suggest several reasons why companies may embark upon benchmarking: to signal management's willingness to pursue a philosophy that embraces change in a proactive rather than reactive manner; to establish meaningful goals and performance measures that reflect an external/customer focus, foster "quantum leap" thinking, and focus on high-payoff opportunities; to create early awareness of competitive disadvantage; and to promote teamwork that is based on competitive need and is driven by concrete data analysis, not intuition or gut feeling.

WHO.
Companies may decide to benchmark internally, against competitors, against industry performance, or against the "best of the best." Internal benchmarking is the analysis of existing practice within various departments or divisions of the organization, looking for best performance as well as identifying baseline activities and drivers. Competitive benchmarking looks at a company's direct competitors and evaluates how the company is doing in comparison. Knowing the strengths and weaknesses of the competition is not only important in plotting a successful strategy, but it can also help prioritize areas of improvement as specific customer expectations are identified. Industry benchmarking is more trend-based and has a much broader scope. It can help establish performance baselines. The best-in-class form of benchmarking examines multiple industries in search of new, innovative practices. It not only provides a broad scope, but also it provides the best opportunities over that range.

WHAT.
Benchmarking can focus on roles, processes, or strategic issues. It can be used to establish the function or mission of an organization. It can also be used to examine existing practices while looking at the organization as a whole to identify practices that support major processes or critical objectives. When focusing on specific processes or activities, the depth of the analysis is a key issue. The analysis can take the form of vertical or horizontal benchmarking. Vertical benchmarking is where the focus is placed on specific departments or functions, while horizontal bench-marking is where the focus is placed on a specific process or activity. Concerning strategic issues, the objective is to identify factors that are of greatest importance to competitive advantage, to define measures of excellence that capture these issues, and to isolate companies that appear to be top performers in these areas.

HOW.
Benchmarking uses different sources of information, including published material, trade meetings, and conversations with industry experts, consultants, customers, and marketing representatives. The emergence of Internet technology has facilitated the bench-marking process. The Internet offers access to a number of databases-like Power-MARQ from the nonprofit American Productivity and Quality Center-containing performance indicators for thousands of different companies. The Internet also enables companies to conduct electronic surveys to collect bench-marking data. How a company benchmarks may depend on available resources, deadlines, and the number of alternative sources of information.

Benefits and use

In 2008, a comprehensive survey on benchmarking was commissioned by The Global Benchmarking Network, a network of benchmarking centers representing 22 countries. Over 450 organizations responded from over 40 countries. The results showed that: Mission and Vision Statements and Customer (Client) Surveys are the most used (by 77% of organizations of 20 improvement tools, followed by SWOT analysis(72%), and Informal Benchmarking (68%). Performance Benchmarking was used by 49% and Best Practice Benchmarking by 39%. The tools that are likely to increase in popularity the most over the next three years are Performance Benchmarking, Informal Benchmarking, SWOT, and Best Practice Benchmarking. Over 60% of organizations that are not currently using these tools indicated they are likely to use them in the next three years. Collaborative benchmarking Benchmarking, originally described as a formal process by Rank Xerox, is usually carried out by individual companies. Sometimes it may be carried out collaboratively by groups of companies (e.g. subsidiaries of a multinational in different countries). One example is that of the Dutch municipally-owned water supply companies, which have carried out a voluntary collaborative benchmarking process since 1997 through their industry association. Another example is the UK construction industry which has carried out benchmarking since the late 1990s again through its industry association and with financial support from the UK Government.

Procedure
There is no single benchmarking process that has been universally adopted. The wide appeal and acceptance of benchmarking has led to the emergence of various benchmarking methodologies. One seminal book on benchmarking is Boxwell's Benchmarking for Competitive Advantage (1994).[2] The first book on benchmarking, written and published by Kaiser Associates,[3] is a practical guide and offers a 7-step approach. Robert Camp (who wrote one of the earliest books on benchmarking in 1989)[4] developed a 12-stage approach to benchmarking. The 12 stage methodology consists of: Select subject Define the process Identify potential partners

Identify data sources Collect data and select partners Determine the gap Establish process differences Target future performance Communicate Adjust goal Implement Review and recalibrate

The following is an example of a typical benchmarking methodology: Identify problem areas - Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, re-engineering analysis, process mapping, quality control variance reports, financial ratio analysis, or simply reviewing cycle times or other performance indicators. Before embarking on comparison with other organizations it is essential to know the organization's function and processes; base lining performance provides a point against which improvement effort can be measured. Identify other industries that have similar processes - For instance if one were interested in improving hand offs in addiction treatment one would try to identify other fields that also have hand off challenges. These could include air traffic control, cell phone switching between towers, transfer of patients from surgery to recovery rooms. Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study. Survey companies for measures and practices - Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked to protect confidential data by neutral associations and consultants. Visit the "best practice" companies to identify leading edge practices - Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group. Implement new and improved business practices - Take the leading edge practices and develop implementation plans which include identification of specific opportunities, funding

the project and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.

Costs
The three main types of costs in benchmarking are: Visit Costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labor time. Time Costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required. Benchmarking Database Costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice now. The cost of benchmarking can substantially be reduced through utilizing the many internet resources that have sprung up over the last few years. These aim to capture benchmarks and best practices from organizations, business sectors and countries to make the benchmarking process much quicker and cheaper. Technical/product benchmarking The technique initially used to compare existing corporate strategies with a view to achieving the best possible performance in new situations (see above), has recently been extended to the comparison of technical products. This process is usually referred to as "technical benchmarking" or "product benchmarking". Its use is well-developed within the automotive industry ("automotive benchmarking"), where it is vital to design products that match precise user expectations, at minimal cost, by applying the best technologies available worldwide. Data is obtained by fully disassembling existing cars and their systems. Such analyses were initially carried out in-house by car makers and their suppliers. However, as these analyses are expensive, they are increasingly being outsourced to companies who specialize in this area. Outsourcing has enabled a drastic decrease in costs for each company (by cost sharing) and the development of efficient tools (standards, software).

Types
Process benchmarking - the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost

and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration. Financial benchmarking - performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity. Benchmarking from an investor perspective- extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor. Performance benchmarking - allows the initiator firm to assess their competitive position by comparing products and services with those of target firms. Product benchmarking - the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses. Strategic benchmarking - involves observing how others compete. This type is usually not industry specific, meaning it is best to look at other industries. Functional benchmarking - a company will focus its benchmarking on a single function to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison. Best-in-class benchmarking - involves studying the leading competitor or the company that best carries out a specific function. Operational benchmarking - embraces everything from staffing and productivity to office flow and analysis of procedures performed.[5] Energy benchmarking - process of collecting, analysing and relating energy performance data of comparable activities with the purpose of evaluating and comparing performance between or within entities[6]. Entities can include processes, buildings or companies. Benchmarking may be internal between entities within a single organization, or - subject to confidentiality restrictions - external between competing entities.

Tools
Benchmarking software can be used to organize large and complex amounts of information. Software packages can extend the concept of benchmarking and competitive analysis by allowing individuals to handle such large and complex amounts or strategies. Such tools support different types of benchmarking (see above) and can reduce the above costs significantly.

Metric benchmarking

Another approach to making comparisons involves using more aggregative cost or production information to identify strong and weak performing units. The two most common forms of quantitative analysis used in metric benchmarking are data envelope analysis (DEA) and regression analysis. DEA estimates the cost level an efficient firm should be able to achieve in a particular market. In infrastructure regulation, DEA can be used to reward companies/operators whose costs are near the efficient frontier with additional profits. Regression analysis estimates what the average firm should be able to achieve. With regression analysis firms that performed better than average can be rewarded while firms that performed worse than average can be penalized. Such benchmarking studies are used to create yardstick comparisons, allowing outsiders to evaluate the performance of operators in an industry. A variety of advanced statistical techniques, including stochastic frontier analysis, have been utilized to identify high performers and weak performers in a number of industries, including applications to schools, hospitals, water utilities, and electric utilities. One of the biggest challenges for metric benchmarking is the variety of metric definitions used among different companies and/or divisions. Definitions may also change over time within the same organization due to changes in leadership and priorities. The most useful comparisons can be made when metrics definitions are common between compared units and do not change over time so improvements can be verified.

SUCCESSFUL BENCHMARKING
There are several keys to successful benchmarking. Management commitment is one that companies frequently name. Since management from top to bottom is responsible for the continued operation and evaluation of the company, it is imperative that management be committed as a team to using and implementing benchmarking strategies. A strong network of personal contacts as well as having an open mind to ideas is other keys. In order to implement benchmarking at all stages, there must be a well-trained team of people in order for the process to work accurately and efficiently. Based on the information gathered by a well-trained team, there must also be an effort toward continuous improvement. Other keys include a benchmarking process that has historical success, sufficient time and staff, and complete understanding of the processes to be benchmarked. In almost any type of program that a company researches or intends to implement, there must be goals and objectives set for that specific program. Benchmarking is no different. Successful companies determine goals and objectives, focus on them, keep them simple, and follow through on them. As in any program, it is always imperative to gather accurate and consistent

information. The data should be understood and able to be defined as well as measured. The data must be able to be interpreted in order to make comparisons with other organizations. Lastly, keys to successful benchmarking include a thorough follow-through process and assistance from consultants with experience in designing and establishing such programs.

THE FUTURE OF BENCHMARKING


Although early work in benchmarking focused on the manufacturing sector, it is now considered a management tool that can be applied to virtually any business. It has become commonplace for companies to use in order to compete in and lead their respective industries. It has helped many reduce costs, increase productivity, improve quality, and strengthen customer service. In his book Benchmarking the Information Technology Function, Charles B. Greene noted that companies are increasingly interested in benchmarking for a number of activities, including: cost of supporting business driver (transaction costs, or cost per order) systems development activities, including maintenance, backlogs, development productivity and project management end-user support data centers/communication networks skills management business strategy alignment technology management customer/user satisfaction

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Five Key Components of a Successful Benchmarking System


Benchmarking is a process used by companies to measure its products, services and practices against its industry competitors. It is an important component and measurement tool in the business world today. Creating and applying a successful and dynamic benchmarking system for your company is essential. It plays an important role in acquiring business intelligence and best practices. Benchmarking is not

simple; it is a disciplined process and continuous cycle. The main purpose of benchmarking is to evaluate overall performance and to determine what is both necessary and feasible for your company.

Some important reasons for benchmarking include:


- Finding new or different ways to do things - Understanding what your strengths are and how to capitalize on them - Understanding what your weaknesses are and how to develop strategies to improve on them There are five key components to be successful at creating a benchmarking system: 1. Determine

What to Benchmark

It is important to know WHAT to benchmark, and it will be different for each business. You will want to focus on areas which are the most crucial to your business needs and ultimate success. 2. Set

Goals and Objectives

Successful companies will keep their goals and objectives simple, which will make them easier to focus on. The data gathered from the selected goals and objectives should be well-defined, easily interpreted and measurable. 3. Management

Commitment

It is imperative that management be committed as a team to implementing and utilizing benchmarking strategies. This is especially true since management is ultimately responsible for the ongoing operations of the entire company. 4. Create

a Strong Network

Creating and maintaining a strong network of business and personal contacts is important. A welltrained team with common goals and a desire for continuous improvement is key to functioning efficiently. 5.

Follow Through

A dedicated follow-through process is the last, but most important, aspect of creating and maintaining a successful benchmarking system. A checklist is an excellent tool for this process and can be used to measure continued progress.

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