“How do we compare to the best in the industry? Have we benchmarked ourselves?”
A best practice when assessing the performance of a program is to “benchmark” it against others. Is it bigger or smaller? More efficient or less? Higher growth or lower? There’s both an art and a science to benchmarking, which can provide powerful insights to help businesses improve, but must be thoughtfully considered to prevent misuse.
The term benchmark derives from the symbol (a horizontal line with an upwards arrow beneath it) carved in stone at fixed points of elevation that was used in the late 18th century to map topography. Today, benchmark refers to a standard of success, a bar to which to compare oneself. In business, external benchmarking is the process of comparing operational performance against industry peers and competitors, highlighting strengths and weaknesses, and identifying opportunities for improvement.
Famously, Henry Ford borrowed the idea of an automated assembly line from a visit to a slaughterhouse, which he then applied to mass-producing cars. Xerox radically reduced their copier production costs after comparing their processes with Japanese manufacturing operations. These and many other examples highlight the value of an outside-in perspective that can inspire new thinking and jump-start change.
Beyond obvious business outcomes like revenue and profit, teams may choose to benchmark themselves on key metrics like customer service, employee engagement, or sales velocity. Or they may want to compare cost structure, process efficiency, or skills. Whatever the metric, benchmarking forces teams to consider what “best” looks like in their industry, identify differences, target specific areas for improvement, and chart a course to optimize outcomes.
Benchmarking is not limited to business. It’s often used to gauge a child’s growth relative to others at a similar age. For instance, if a toddler suddenly drops on the growth curve from 50th percentile down to 20th percentile, then a doctor might do further tests to explore the cause: inadequate caloric intake, a growth hormone deficiency, or another medical issue. Of course, height and weight are largely driven by genetics and vary by gender, race, and other attributes. Nevertheless, having a benchmark to which to compare can be helpful to understand what is typical and when intervention is needed.
Benchmarking is also used in assessing student performance. In the United States, Star Assessments evaluate the reading and math skills of students in grades K-12 relative to others in a common norm-referenced benchmark group. For example, a third grader who scores in the 10th percentile for reading proficiency compared to other third graders might be identified for interventional support services.
Similarly, the SAT and ACT standardized tests provide benchmark scores that allow colleges to compare applicants with different backgrounds and experiences. These tests are intended to be predictors of college success, but they have been challenged as biased and not effective indicators of capabilities or future performance. If students test well, it may simply mean that they are good test takers. If students struggle with the test, it may imply nothing more than they are not great at timed standardized tests, which fail to assess creativity, teamwork, leadership, and other essential skills for college and life. It took a global pandemic for many schools to rethink standardized testing, and today roughly 75% of U.S. colleges are test optional.
These examples point to the value and perils of benchmarking. When done carefully and thoughtfully, benchmarking can be quite useful. But what we measure matters, so it’s important to consider how the data and insights will be used. For instance, if I “benchmark” myself against those who earn the highest salaries in the industry or those who have run the most marathons or those with the largest social media following…perhaps I would be motivated to close any gaps, or more likely I’d simply become disheartened at how far I fall short. But, if my criteria for success is a happy family and a full life, then maybe those other benchmarks don’t really matter.
In business, benchmarking is used to compare with either internal or external reference groups. A retail company might compare customer satisfaction among different stores in a franchise (internal) or versus customer satisfaction at other companies (external). A financial services company might compare process complexity between different departments (internal), versus other financial services companies (external), or in comparison to healthcare or consumer companies (external).
Typically, a business benchmarking process starts with data collection. In some cases, there are public or proprietary datasets that can be used for comparison. It may be useful for an outside team to assist with an objective “apples to apples” comparison. The IBM Institute for Business Value’s business process benchmarking service helps companies compare performance again peers. Gartner, BCG, Deloitte, and other consulting companies enable businesses to understand how they match up against best-in-class industry leaders.
Let’s consider IT benchmarking, which compares IT spending, staffing, operations, solution delivery, outcomes, and other metrics across different industries or sectors. IT benchmarking is a valuable calibration tool that can help find discrepancies, ensure common metrics and assumptions, and identify opportunities for improvement.
Say, in a hypothetical example, that my IT team is assessed as spending 50% more than the industry benchmark on IT. (It’s not!) That’s a compelling statistic – but what does it really mean, and what actions should we take as a result?
First, I’d ask some important questions: Do we have the same scope and are we counting “IT” the same way across companies? Who is in the peer group to which we are being compared – by industry, size, and complexity? What is the spending breakdown across infrastructure, software, labor, and support – and where are we industry leaders versus laggards? Is there a valid reason for a greater investment (such as bubble costs during digital transformation), or does it point to some inefficiency or negligence that should be corrected? What are some best practices from standouts? Where do we stand versus industry benchmarks on non-cost metrics such as employee productivity, business cycle time, and production service levels? After answering these questions we’d be in a position to understand gaps, opportunities, and next steps.
Alternatively, say the analysis determined my IT team is spending 50% less than the industry benchmark on IT. (It’s also not!) That might suggest that my team is incredibly efficient and has adopted automation in a way that others in the industry have yet to achieve. Or…it may suggest that I’m under-investing in long-term innovation that will preserve my team’s ability to deliver value to our company in the future. Again, the benchmarking process is helpful to pick our heads up, consider how and why we’re different, and decide if there’s anything we need to do about it.
For benchmarking to provide greatest value, one must beware of common issues. First, it’s often hard to get reliable data and difficult to ensure a fair “apples to apples” comparison. For instance, does the IT scope include internal and commercial applications and both base and transform initiatives for all businesses surveyed? It’s critical to carefully select the set of companies to compare against and the key metrics on which to benchmark. Also, most of us don’t aspire to be “just like others in the industry”; there are usually differentiated products, go-to-market, culture, and business models that set companies apart and give rise to unique requirements and warranted differences.
If you and your business are committed to uncovering opportunities to improve, benchmarking is essential. As with any powerful practice, however, you should avoid pitfalls to ensure that benchmarking insights are valuable and actionable.