Every company wants to improve its performance. Conversations about how to do so will happen in boardrooms, especially in the last quarter of the year. However, when the word “benchmarking” starts being thrown about, this is when I want to say, “Been there, done that. Let’s come up with another idea!”
Typically, companies embark on a benchmarking exercise to see how they compare with other companies. They hope that by doing so, they can gain magical insights on how to improve their performance. Unfortunately, in my experience, almost every company that tried benchmarking will spend a lot of time and money only to end up frustrated with the results.
I’m not saying that benchmarking is entirely pointless.
Some key industry benchmarks are important – especially when it comes to competitor analysis. A company must always be aware of its position in the market.
In the book, The Game Changer, Alistair Gray described how General Motors (GM) discovered that a Toyota assembly plant could stamp one model to another in eight minutes. GM plants took eight hours. Obviously, this was something they had to improve.
However, benchmarking usually works best in very narrow fields. For example, in the oil and gas industries where the benchmarking is often extensive. Even then, it is focused on refineries because their performance can be easily measured.
But outside of this, benchmarking often ends up being a waste of time.
For example: How many people should we have in a Human Resources department? How many days should it take to come up with a new marketing campaign?
Benchmarking these will be a futile exercise because every company’s marketing or human resources departments are set up differently, so it will be pointless to compare one company with another.
Why benchmarking may cause more problems
Benchmarking can indeed highlight performance gaps. But as I mentioned before, it only works in certain situations. Often, benchmarking causes more problems.
While benchmarks can easily be obtained from trade associations — there are even benchmarking services — the data is often outdated. Also, they are often not relevant to the company’s unique situation or context. Would it make sense to compare the performance of a race car with a city vehicle? Yet, that’s what many companies end up doing. Another argument can be made: Do you really want to be like your competitors or differentiate yourself from them?
Secondly, it sets everyone on the defensive. You can end up in endless, pointless discussions as executives try to defend why they are not where a benchmark said they should be.
Benchmarking exercises are often time-consuming and expensive. Assembling the appropriate data in the required manner takes a lot of time and expense.
The other problem with external benchmarks is fraud. Numbers can be easily massaged to give the appearance that the company meets industry standards while it hides massive internal problems. The Evergrande Group in China built housing using more debt to give the appearance that it was growing. It was only when Beijing insisted on some healthy benchmark levels that the practices inside Evergrande were said to be corrupt. In reality, Evergrande shouldn’t have needed an external benchmark to do this.
They should have been looking internally to drive healthier practices.
It is far more effective to use an alternative approach: Measure current performance against the results that the company wants to achieve. Meaning, conduct an internal benchmark.
This means measuring the company’s current internal performance and set targets are challenging to achieve. Identify improvements to be made and work towards the goal. You’ll make much more progress this way than trying to compare yourself externally because that’s a very difficult thing to do.
A company should continuously improve, tweak and refine performance so that it becomes a better version of itself. That’s the better way forward.
It’s human nature to want to compare yourself to others. Perhaps that’s why we see the same desire in companies. However, as they often say in self-help circles: Don’t compare yourself to others. Instead, strive to be better than you were yesterday. In other words, be the best version of yourself. This, too, is true for companies.
This column was first published in Business Today.