Benchmarking

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For the geolocating game, see benchmarking (geolocating). For other uses of the term 'benchmark' see benchmark.

Benchmarking (also "best practice benchmarking" or "process benchmarking") is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice, usually within their own sector. This then allows organizations to develop plans on how to adopt such best practice, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to challenge their practices.

A process similar to benchmarking is also used in technical product testing and in land surveying. See the article benchmark for these applications.

Contents

1 Advantages of benchmarking
2 Competitive benchmarking
3 Collaborative benchmarking
4 Procedure
5 Cost of benchmarking
6 Benchmarking in financial markets
7 External links

Advantages of benchmarking

Benchmarking is a powerful management tool because it overcomes "paradigm blindness." Paradigm Blindness can be summed up as the mode of thinking, "The way we do it is the best because this is the way we've always done it." Benchmarking opens organizations to new methods, ideas and tools to improve their effectiveness. It helps crack through resistance to change by demonstrating other methods of solving problems than the one currently employed, and demonstrating that they work, because they are being used by others.

Competitive benchmarking

Some authors call benchmarking "best practices benchmarking" or "process benchmarking". This is to distinguish it from what they call "competitive benchmarking". Competitive benchmarking is used in competitor analysis. When researching your direct competitors you also research the best company in the industry (even if it serves a different location or market segment and is therefore not a direct competitor). This benchmark company is then used as a standard of comparison when assessing your direct competition and yourself.

Collaborative benchmarking

Benchmarking, originally invented as a formal process by Rank Xerox, is usually carried out by individual companies. Sometimes it may be carried out collaboratively by groups of companies (eg subsidiaries of a multinational in different countries). One example is that of the Dutch municipally-owned water supply companies, which have carried out a voluntary collaborative benchmarking process since 1997 through their industry association VEWIN.

Procedure

Identify your problem areas - Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, reengineering analysis, process mapping, quality control variance reports, or financial ratio analysis.
Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.

Cost of benchmarking

Benchmarking is a moderately expensive process, but most organisations find that it more than pays for itself. The three main types of costs are:

Visit costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labour time.
Time costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.
Benchmarking database costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice now.

Benchmarking in financial markets

Benchmarking may be performed in the public equity, private equity, public debt and private debt markets.

Public Equity

NAREIT, Wilshire, Morgan Stanley

Private Equity

NCREIF Family of Index Products

Public Debt

Lehman Brothers Indexes

Private Debt

Gilberto-Levy, Index of Whole Loan (Life Insurance Company’s) Returns

Benchmarking is very effective, but there are problems with benchmarking in private equity as follows:

1. Smoothing – Not too serious of a problem because evaluation periods are long and in most cases, the returns are being compared to the NCREIF benchmark which are also smoothed.

2. Random Error (“noise”) – Need more than one observation to infer the quality of the manager. Maybe the manager just got lucky over the period in question.

External links

[Benchmarking and Best Practices] at the Open Directory Project
[Benchmarking Success]: The specialist Supply Chain Benchmarking provider and has extensive experience in the application of benchmarking, key performance indicator [KPI] systems, and best practice methodologies to improve supply chain and business performance.

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