Benchmarking was a 1990s management buzzword that in recent years lost its luster.
However, benchmarking remains a highly useful tool for establishing important metrics as Key Performance Indicators (KPIs), profitability, and compensation levels. Benchmarking looks outward to find best practices, then measures or judges actual business operations against those standards.
Some business owners view benchmarking as costly market research. But with proper planning, it can be done in-house and inexpensively. Where to begin? Identify ways to improve your company that tie in with its overall objectives. Such goals should be quantifiable. For example, such intangible goals as "improving communications" are tough to benchmark, while "raising client satisfaction" is a good candidate for benchmarking.
Benchmarking levels for which to compare your company's progress can be found in trade journals, industry publications, and ratio analysis resources as The Risk Management Associations' Annual Statement Studies, Financial Ratio Benchmarks. Or, you can simply establish your own internal benchmarks.
Many new to benchmarking mistakenly track too much information at once. Instead, identify and monitor just a few key areas. For example, one manufacturer focused on shortening setup time for a particular part and process. Management identified specific goals set against established benchmarks then monitored progress toward reaching them. Their efforts shaved 25% off setup time, or about $100,000 in labor annually, savings that went directly to the company's bottom line.
In another case, a growing medium-sized manufacturer needed to raise process efficiency because of competitive pricing pressure and labor-cost hikes from a shortage of skilled workers. Management identified uptime/downtime ratio and percent of defective product as KPIs, and set measurable goals for improving them. The company emphasized training of equipment operators and scheduled regular inspections of processes. The result: less downtime, improved product quality, and more satisfied customers. Profit margins improved 25%, despite the lowering of prices to customers by 10%.
Yet another company was seeing a significant decline in sales. It implemented a benchmarking program that set goals for and tracked face-to-face contact with its more significant OEM accounts as well as interactions with outside sales reps. The effort led to customers getting more attention from sales reps which boosted sales 5% the first year and 15% the next.
For the benchmarking process to work, however, management must involve the entire organization, from plant-floor workers, to customer-service reps. Be sure team members are part of the goal-setting process and reward them when their performance meets specified levels.
Benchmarking need not be complicated or expensive. No sophisticated software is needed; an Excel spreadsheet can do the job. Start the process slowly and focus on one key area for improvement.
Brockman, Coats, Gedelian & Co. (www.bcgcompany.com) is a certified public accounting and consulting firm.