Benchmarking in Business: What It Is and Why It's Important
6 min. Read
Last Updated: 03/16/2023
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Part of business ownership is continuously looking for ways to improve performance. That can mean different things to different companies: creating more efficient processes, selling more products and services, using new approaches and technologies to reduce costs, or scaling the business to increase profits and meet demand. On the flip side, when inefficiencies exist and productivity suffers, this can create a ripple effect throughout the organization that impacts leadership, employees, and customers alike.
Knowing how to improve business efficiency and performance is a key factor in any company's strategy for growth. To get there, benchmarking can help organizations compare themselves against certain standards and develop consistent ways of measuring performance. Benchmarking your business operations with defined metrics can also help you track progress and reach goals faster. Let's break down what business benchmarking is, how to do it, and why it's important.
What Is Benchmarking in Business?
The definition of benchmarking in business: Business benchmarking is the process of comparing industry and general business best practices against your own to identify performance gaps and achieve competitive advantages. This can be applied to any product, process, function, or approach in business. When you compare your organization, its operations, or processes against a competitor, industry peer, or other company, you use data to identify the business' strengths, weaknesses, and opportunities for improvement. The ultimate goal is to get a clear picture of how and where the organization needs to change to improve performance.
Growth and change often go hand-in-hand when it comes to business, and actions businesses take as a result of benchmarking is evidence of this. Benchmarking is a continuous process of fact-gathering and analysis. It shouldn't be a one-time task, but rather an integral component of your business plan to close the performance gap and maintain practices that will help the business grow and thrive. Some examples of benchmarking include:
- Conducting a competitive analysis to determine how other companies compensate their employees.
- Looking at companies outside your industry that are known for their impeccable customer service.
- Examining one high-performing business location's processes and procedures that could be emulated across other locations to benefit the company as a whole.
Types of Benchmarking
Depending on what you want to focus on, benchmarking can involve looking both inside and outside your business. As such, types of benchmarking generally fall into the following categories, and may be used individually or together.
Performance benchmarking is often the first step businesses take to identify gaps or areas of improvement. It's the process of measuring the performance of specific product lines, services, operations, or other business processes against top performers (other companies, competitors, or industry leaders). This type of benchmarking requires gathering and comparing key performance indicators (KPIs) or other quantitative data, with the goal of measuring metrics such as:
- Net promoter score (NPS)
- Customer retention rates
This analysis isn't limited to competitors and specific industries, but instead looks at any business that excels at a particular process or operation. And since performance benchmarking focuses on operational elements, action items stemming from this analysis might be more short-term in their scope and produce quick results (as compared to findings from strategic benchmarking, which is explained later).
There's a great deal a business can learn from assessing its own performance. With this in mind, internal business benchmarking is the process of comparing metrics or practices from one or more areas of the business — like products, departments and locations to determine the best ways to conduct business moving forward. Internal benchmarking relies on the business' own historical data, which can be analyzed to identify gaps or areas for improvement.
What are examples of what internal benchmarking could look like? It may be:
- Interviewing employees to understand whether they use certain technologies, and if so, how they use them.
- Analyzing the processes and procedures of high-performing department's output against another department.
- Comparing labor costs at one location versus another location.
External benchmarking looks at data from other organizations in regard to their products, services, processes, and other methods. This information can offer insight into how your business compares to others in or outside the industry, and what you may need to do to improve your standing. Acquiring this data may require more time and effort vs. an internal benchmarking initiative, but the findings can be extremely valuable.
External analysis can take shape via strategic or competitive benchmarking.
Strategic benchmarking involves comparing performance with a top performer. This could be a direct competitor, but strategic benchmarking looks at any business that has mastered a particular process or operation. And since this benchmarking process requires you to look beyond your own industry, this is a great way to think differently about longstanding practices or consider new approaches.
Findings from strategic benchmarking can be used to adapt a business' methods to your own procedures and processes. And as the name suggests, this analysis is about helping a business look at the larger, future-forward picture. Rather than quick changes, findings from strategic benchmarking encourage businesses to consider core competencies and new product development for long-term improvement.
Competitive benchmarking helps businesses identify industry performance standards by looking at competitors' products, services, or methods, with the ultimate goal of better understanding where they are in the current market and what they need to improve. One example of competitive benchmarking is comparing a competitor's NPS or customer satisfaction rates against your own. Once you have this information, you can analyze the differences and put an action plan together that addresses how to improve.
How To Benchmark
At its basis, the benchmarking process requires you to identify the metrics you want to track and assess your current state. From there, you take the benchmarking findings to create an action plan and track progress on an ongoing basis.
For a guide on how to benchmark, follow the steps below.
Prioritize With Stakeholders
Senior leadership should be involved in deciding what to benchmark and what's most critical to the company's success. Prioritization should be based on which metrics matter most to stakeholders.
Choose Who or What To Benchmark
Are you looking to benchmark processes within your own company, a competitor, or a company outside your industry? When determining this, also factor in how easily you can get data from these sources. For example, accessing a direct competitor's data could be difficult, so a solution may be to look at many organizations and gathering information from many sources.
Document Your Current Processes
You need a baseline for benchmarking and analysis, so it's a good idea to document current processes or have your own business metrics on hand so that you can more easily compare them against your benchmarks.
Collect and Analyze Data
Depending on the type of benchmarking, you may conduct research and interviews, send out questionnaires, look at employee data, or even reach out to business contacts. For external benchmarking, information may be publicly available on company websites, reports, marketing materials, or press coverage. Take note of any biases, such as personal anecdotes vs. facts, or a reporter editorializing in a news article. For benchmarking that evaluates employee performance, internal HR data and information in your time tracking system can be very valuable in assessing workforce costs and productivity.
Compare and Measure Your Performance Against What You Collected
Look at the data you've collected against your own metrics or processes. A side-by-side comparison will eventually illuminate gaps or areas where the person, group, or business as a whole may be lacking.
Implement Changes and Communicate Next Steps
Once you have a sense of the gaps, consider the best ways you can implement changes to make improvements. Lay out a plan with clearly defined goals, target dates, KPIs to measure, and team members who will be impacted or involved. Documenting plans and processes in writing is a great way to not only communicate the plan, but also make sure all employees are all on the same page working toward the same goal.
Review Results, Adjust, and Repeat
After a period of time, evaluate how well a new initiative is going and adjust if necessary. If things are going well, consider starting the benchmarking process again in another area of the business. If plans are falling short, identify roadblocks, communicate with those involved, and determine how processes can work better.
The Importance of Benchmarking in Business
Benchmarking is important because the process is focused on using evidence and data to illuminate areas for continuous growth and improvement. It can also help you see that as a business scales, needs will evolve as well. This means taking time to assess your current state, determine where you want to go, and implement process improvements to get there. Effective business benchmarking can help your organization:
- Streamline processes and procedures
- Understand the competitive landscape
- Identify areas where you can increase efficiencies, reduce costs, and streamline internal operations
- Shake up the status quo by challenging long-held beliefs about the business
- Improve product or service quality and increase customer satisfaction
Save Time by Outsourcing and Focus on What Matters Most
Among the many findings that can come from benchmarking, one of the most important ones is discovering ways to streamline your and your employees' already-hectic workdays. Consider outsourcing complex tasks that are integral to your business, but aren't necessarily within your realm of expertise. Payroll and HR administration, for example, are essential for overall business growth, but require time and resources that you simply might not have. A third-party provider can help you streamline essential payroll and HR tasks while you remain focused on short- and long-term business growth and improvement.