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A few thoughts on Benchmarking

Most ERP and BI projects start with a strategy engagement. And without fail, one of the things that gets brought up in these strategy engagements is the desire of management to benchmark a given company against some other company/industry/competitor. The success of Xerox in benchmarking was a big lesson that my professors used to drill into our minds in business school. So, by the time I became a consultant – I had a definite idea that benchmarking is a vital part of a company’s business strategy.  But having had the chance to do it many times over, my thoughts on this subject have become a little more nuanced.


1. Who do you compare to?


This is the fundamental problem. Let us say you are going to find how you fare in Days Sales Outstanding (DSO) as compared to others in your industry. Lets say DSO is 100 days on an average in your industry, and your DSO is 90. Does that mean you are doing great, and that you should find another avenue to focus for better efficiencies? Well – just to double check, may be we should also check on the spread of DSO across companies in your industry. Say the best case is 40 days in your industry – would you try to beat that? May be we should check if that company’s scenario is similar to yours – maybe they have just a tenth of the number of customers they serve compared to you. 


Moral of the story : it is very difficult to find a reference company that can be benchmarked against. And even if you find some such company – you can only benchmark against publicly available information. You do not get to know all the information that led to the metric you are trying to benchmark.


So, when your BI reports show nice graphs that compare  your performance against the benchmark – make sure the consumers of the information know the whole background information.


2. How much of your business strategy will you base on benchmarking?


Benchmarks are made on past data. You know how markets changed in the past, and you can get some trends on how the industry as a whole,  or companies in that industry, performed in those situations. Now if we try to formulate a strategy based on this information – all we are doing is to make sure we are some how geared to follow the trends of the past in case it happens again. For an example would you be satisfied if in a terrible economy – you did terribly, but all your competitors did terribly as well? The idea of being a successful business  is to make yourself stand out from competition, not be part of the average.


3. What will you compare against others?


There are many different types of benchmarking, as you might know. Some are more readily compared to others than others. For example – if you can test drive a BMW and a Mercedez, you can compare the time it takes to get them from 0 to 60 MPH. A team of engineers can reverse engineer a product and find some competitive information to benchmark against. But at a process level – the information is not easy to find. No company has an incentive to share its competitive strengths freely with its competition. So, some types of benchmarking tend to abstract things in a way that specifics are not given away. This is not always very useful in practice. 


So, when we hear about “best practices” – we should realize that it is an abstraction of the best practice – and not the “actual” best practice that the best companies in the industry are using. The good thing is that over a period of time, certain processes become commoditized and then every one can use them and benefit from them.


And for obvious reasons, I cannot emphasize enough the need to be ethical about benchmarking. There is a code of ethics that needs to be followed without fail.


4. Can you prevent the death of creativity ?


To some extent, benchmarking is an attempt to copy what the other guy is doing, and then try to go one up. Unless top management takes an active interest – managers can very easily form the habit of following a “best practice” and not think for themselves and innovate. And they do it with good intentions most of the time – after all, if the big company is being successful doing a certain thing, it must work for others too, right?


5. You know best about your company


There is plenty of information within your company that could give you valuable insights. Are you making good use of that? Are you tapping into the brains of employees who work in the company? And remember – as opposed to finding information about industry, and competitors – you don’t have to do any guesswork to find your own information.


So does that mean benchmarking is a useless exercise?


Not at all – I believe it is a very useful exercise for most companies. All I am trying to say is that companies should take a holistic view, and not try to take a very narrow view. Benchmarks should not become goals by themselves – instead, benchmarks  should be used to determine goals that make sense for the organization.

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  • Beyond Budgeting ( preaches benchmarking as a key concept for running an effective business. Toyato follows beyond budgeting and benchmarking.

    Benchmarking allows you to get beyond your known territories and explore and explode opportunities and keeps you in check whether you are aligned to general business in your industry

    Good blog Vijay

  • I have a similar view point and it comes from the general concept of goal setting.  My complaint is that goal setting or KPIs can be limiting to the user.  Yes, KPIs provide focus and visibility into a key metric but I also think it causes people to overly rely on them and focus solely on them.  Seems to be a way to dumb-down our own analysis. 


    • Agreed – focus on KPI should not be to the extent that it affects the organization’s ability to respond quickly to its ever changing environment
  • Another great blog Vijay!
    Had similar experiences in the past, benchmarking is not always keeping all it’s promises. However one thing I have experienced over the years is that benchmarking excersizes can be highly educational for both business and IT teams (ideally together) to put numbers into the context of larger end-to-end processes, e.g. investigating “why” DSO might not be good compared to other companies or even other regions/countries within the same company. It helps identify locations or teams with best practices, where benchmarks are stellar or areas where improvements are necessary. I’ve been mostly on the IT side of things in the last years and such benchmark excersizes definitely helped us to understand what numbers are important, what factors go into them, what their significance really is etc.
  • I think what is missing in this discussion is one important link – to the details of SAP Benchmarking Programs: It describes what and why is done during benchmarking and you can find pretty interesting samples there.
    I remember talking to a person from one CPG company during last year SAP World Tour, and they were quite happy with this SAP service.

    PS. I am not SAP employee and do not benefit from promoting these services 🙂