Bruce E. Jacobs
Any time the topic of benchmarking is brought up, it’s generally in a discussion about how one company compares in performance to another. Accompanying that discussion is the relevance of the companies chosen for the benchmark. Further discussions occur around whether benchmarking can be done with companies that are privately held, are similar in sizeand have comparable product lines or are competitors.
Publicly traded companies have an abundance of readily available and public information that can be used as benchmarks. But they may not be an exact fit for comparison because of their size, product offerings, sources of capital and industries where they compete. More often than not, when benchmarking is performed and the comparison performance to the benchmarked companies is not favorable, an enormous effort goes into discrediting the use of the companies chosen for benchmarking.
A never ending list of explanations is often offered to discourage the use of
the benchmark: the industries are different; one company is publicly traded; the products are different; or one company conducts business overseas.
Defining the Benchmarks
There are several reasons benchmarking is not highly regarded:
• Benchmark measurements are not defined in order to understand what the comparisons represent.
• Validity of data and benchmark information are suspect because no benchmark company is identical with the company with which it is being compared.
• Time frame of the benchmark information may not represent the present.
• Purpose and use of the benchmark comparisons are not established before the benchmark process is performed.
Benchmarking can be a revealing process to help a company assess its performance, identify opportunities for improvement, identify performance targets to achieve and to identify best practices that may be applicable for use by the comparison company’s management. It is a method of taking an objective look outside the comparing company to identify the realm of the possible for improvements and best practices and to learn from other companies.
There are numerous topics and subjects that can be used as benchmarks. Before the process begins, the benchmarks need to be determined. It’s not practical to benchmark every subject, practice or performance measurement, and the defining element of a good benchmark study is the availability of information. Publicly traded companies’ financial performance data are readily available. Operating practices, business strategies and performance targets are generally revealed in the annual reports of publicly traded companies. Benchmarking comparison data also can be made with industry or trade associations that provide regular compilations of performance and operating statistics to their membership. The most difficult benchmark comparison information to acquire is from privately held companies. Financial performance, operating practices, policies and business strategy information are rarely shared, if ever.
The first step to benchmarking is defining the benchmark performance metrics for comparison. Identify the metrics for comparison of your company, and define how the measurements are calculated. Then, identify the companies to use in the benchmark comparison. Benchmark metrics for comparison may include key financial, operating, profitability and growth metrics, as well as metrics of improvement or changes in the business. For example, the percent of revenue generated from outside the United States or from new products and their growth rates would be benchmark metrics. These metrics would be gleaned from the contents of the benchmark’s annual report. Additional benchmark metrics would include return on assets, return on equity, return on total capital, growth in revenue, growth in profits, costs as a percent of revenue, inventory turns, growth of assets, inventory growth, net cash cycle and various other financial, operational and cost metrics.
There are numerous benchmark metrics that can be developed and compared, but the fundamental rule to make benchmarking valuable is to define what should be benchmarked. Then, calculate the benchmark metrics of your company for comparison to the metrics of the companies serving as benchmarks.
Benchmarking Made Simple
There are various methodologies that can be used to benchmark, and there are numerous levels of benchmarking sophistication, data, information research and mining, as well as the analyses of the information. If your objective for benchmarking is to gain a different perspective of your company’s performance, challenge the present mindset thinking and raise the question,“What is the realm of the possible?”
The benchmarking process can be distilled down to data gathering and analysis activities once the benchmark model is established.
To get started, establish two benchmark groups that will compare the benchmark metrics you have established. One group is the industry group of benchmark companies that are publicly traded and whose information is readily available. The industry group should consist of no more than the five best-performing companies in your company’s industry segment that have similar characteristics in their business models. The second group is the peer group. The peer group consists of the top best-performing companies that are in the same primary industry as your company, i.e., manufacturing, distribution, chemicals, oil and gas or retail. For example, a company in the medical device and equipment industry would select the top-performing companies that manufacture medical devices and equipment in their industry.
These might be Invacare, Hill-Rom, Medtronic, Stryker and Danaker. The peer group may consist of the best-performing manufacturing companies that produce equipment. These might include Emerson Electric, Eaton, Ingersoll Rand, Raytheon and Honeywell. Once you have established these two groups and identified the benchmark companies in them, begin to gather and assemble their information. Develop three to five years of financial results and information and the benchmark metrics for each company in each group. Now determine the performance of each benchmark metric in the aggregate for each group. In other words, the benchmark metric—return on assets—averaged 17.5 percent for the industry group and 22.4 percent for the peer group. Calculate each benchmark metric for each group for comparison to your company’s benchmark metrics.
Comparisons can now be made of each benchmark company’s metrics with your company’s metrics as well as comparison of your company’s metrics with the industry and peer aggregate benchmark metrics. The next step in the benchmark process is to perform a gap analysis of your company’s metrics with the industry and peer groups’ benchmark metrics.
The gap analysis should be performed for each metric for each benchmark company in the two groups as well as determine the gap between your company’s performance and the performance of the aggregate metrics for the industry and peer groups.
A separate comparison can now be made. Where your company’s metrics fall below the performance of each aggregate metrics from the industry group and the peer group, readjust your metric to the aggregate metric and determine how your company’s performance would have improved had it performed at the equivalent industry or peer group’s metrics. This analysis begins to identify the order of magnitude of the opportunities for improvement and performance gains that may be achievable.
Benchmarking performance should be used to establish a point of origin of your company’s performance compared to others. For the best value, the benchmark companies should be the best in your industry segment, such as medical devices and equipment, and the best in your overall industry, such as manufacturing.
Other benchmark comparisons can be made to identify best in class and best of breed. These are comparisons of benchmarks with companies that are the best in their class in their markets while best of breed is the comparison of benchmarks with companies that are the best performers regardless of market, industry or industry segment.
The benchmarking process is always revealing, and every company should have a set of benchmark companies it compares with to challenge and improveits performance.