Benchmark Management: Challenges, Risks & Solutions
It’s human nature to want to know how we compare to others. The same is true for businesses when it comes to gauging performance compared to other similar organizations. A way to make these kinds of comparisons is to engage in an exercise called benchmarking, and its success is grounded in effective benchmark management.
Benchmarking is the process of comparing your company’s performance to other similar businesses in your industry. Many businesses compare certain key performance indicators (KPIs) to the KPIs of other businesses to see how they stack up against industry leaders. Best-practice benchmark management can help you determine which of your processes might benefit the most from improvement and gauge how effective your improvement initiatives are over time.
Key Comparisons & Challenges
The idea of benchmarking is based on the fact that KPIs in and of themselves are of little use if you don’t have something to compare them to. Benchmarking has traditionally been used in the manufacturing industry, but any business could benefit by monitoring internal KPIs and then comparing them to similar companies.
So what kinds of performance metrics should you monitor and compare? Some of the KPIs that are commonly watched by businesses with strong benchmark management processes include:
Financial performance and ratios
Overhead and expenses
Customer satisfaction and retention
Companies typically experience unique challenges as they implement new benchmarking initiatives. For example:
Obtaining benchmarking information can be difficult. The best source for this information is usually trade groups that support your industry.
Once obtained, benchmarking data must be properly segmented so it’s relevant to your business.
Personal bias can sometimes creep in when setting benchmarks. You need to be careful to go where the data tells you to go.
Benchmarking needs to be viewed as a valuable tool, but not a panacea that can cure all of your company’s ills.
Negative Impacts to Avoid
Without best-practice benchmark management, these challenges could result in negative impacts for your company. For example, if the wrong benchmarks are used, this can lead you to follow a course of action that is detrimental to your operational health. You need to drill down into the information below the benchmark to make sure you’re taking the proper corrective action so you can meet the benchmarks in the future. You also need to update your benchmarks as your company grows and matures.
An on-demand CFO can help you avoid these negative impacts and implement a successful benchmarking initiative. This high-level financial professional will possess numerous industry contracts and can best determine the proper source for benchmarking data. A CFO partner will also be in the best position to grade your company’s performance relative to the benchmark and put in place an action plan to achieve benchmark performance.
Your business could realize multiple benefits by bringing in a project CFO or part-time CFO to help you implement a benchmarking initiative, including the following:
You can establish benchmarks that are relevant to your size, location and industry segment.
The benchmarks selected will be a good indicator of how similar companies are performing.
You will be able to “peel the onion” by diving into the numbers and finding actionable items that can help you achieve benchmark performance.
Areas where the company is already meeting or exceeding benchmark performance will be recognized for their success and not altered in a negative way.
The process of benchmarking helps businesses compare their performance to similar organizations in their industry. The idea is based on the fact that KPIs in and of themselves are of little use if you don’t have something to compare them to. Effective benchmark management is required to avoid benchmarking pitfalls and realize the full potential value of an initiative. While the manufacturing industry has traditionally applied benchmarking, any business could benefit by monitoring internal KPIs and then comparing them to similar companies. An on-demand CFO from a CFO services firm can help you determine requirements and implement best-practice benchmark management.
Mark S. Becker, Partner, CFO Edge, LLC