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7 reasons for business to use benchmarking
Does your business have a set of best practices? How were those best practices developed, i.e. was it through experience or by observing other companies? If it was through experience, then that’s the hard way to do it, not to mention highly time-consuming. In today’s fast-paced world where your competitors are working to gain an edge, every minute of the day, time is of the essence. So, the answer to why do organisations benchmark is simple, to get ahead in every possible way.
Though the above is the simple answer, it still does not answer a dozen or so other questions. That’s why we’ve laid out the aftermentioned seven reasons why businesses should be benchmarking starting from their first year in business.
However, benchmarking is impossible if you do not measure every aspect of performance across all departments. So, keep that in mind while you discover the reasons all successful businesses are benchmarking!
1. Efficiency and Effectiveness
Of all the reasons to benchmark, business effectiveness and efficiency have to be the most important. But it isn’t just important in manufacturing and sales. Service driven businesses need to be effective and highly efficient too because without it they will be losing to the competition.
So, how effective is your business’s marketing, support, advertising, and sales? Is it more effective than it was three years ago? If those are the questions, you’re trying to answer it means you’re trying to compete with yourself. What should you be asking is how effective and efficient is your business compared to the Big Three in the industry?
Benchmarking proactively allows you to figure out just how well others are doing in the industry. It will help you answer the following game-changing questions for your business:
- How efficient are the leading companies in your niche?
- Why are they more efficient?
- What steps can be taken to improve effectiveness across all areas of the business?
- How can benchmarks be improved for next year’s evaluation?
Important note: Even though the assumption is that efficiency and effectiveness go hand in hand, that’s not always the case. Some businesses can be efficient in some aspects but not effective in delivering results. For instance, a company selling budget-friendly cars could be efficient at manufacturing those vehicles, perhaps even the most efficient in the industry but they aren’t effectively outselling the competition.
2. Improves Performance Potential
Many businesses ask how to use benchmarking for performance improvement? What to benchmark for performance insights? Well, one of the reasons that companies have started using benchmarking is because it helps them improve performance. One way it does that is by offering insights into the performance of other companies. However, you’ll only gain those insights if you measure the right performance metrics. What that means is if you’re trying to improve the performance of your sales team, make sure to take into considering sales figures for the entire year and not just profits earned.
Many businesses exclude chargebacks, returns, and refunds from sales figures which is incorrect. If you want to benchmark sales, it should be done with the raw figures.
Now when you benchmark sales figures you may learn the following:
- The competition’s sales team is on average selling 25% more than you.
- The sales team works 6-days a week, whereas the competition’s teamwork maybe 5 days a week.
- The competition is on average offering a 10% commission off each sale whereas you’re not offering a commission.
- The competition has partnerships with major companies which are frequent annual buyers whereas you don’t.
- Competing companies may also have a 40% larger sales team.
So, to improve sales performance, you’ll probably have to do the following:
- Give the sales team an extra day off to unwind.
- Reduce salary and instead offer a commission with performance bonus to motivate the team.
- Add more experienced salespeople to the team.
- Focus on business development and forming alliances with major companies.
It is fair to say that once you’ve incorporated the abovementioned factors into your business sales should improve. In most cases, it has for other businesses so yours shouldn’t be an exception.
3. Expanding Your Business’s Horizons
We know it sounds like a cliché, but many companies are stuck in a rut because they aren’t sure what they are capable of achieving. If you want to know why do organisations benchmark? Well, this is one big reason why they do!
We are all for businesses looking inwards for success, but sometimes it pays to look outwards too. When you run benchmarks on things like annual sales and profit figures with competing businesses it is not hard to see that they are making a bigger profit. So, the question is why are they making more money? What are they doing apart from what you are doing to turn a larger profit? Those are questions which will prompt you to study what other sources of income those businesses have.
Take for instance if you’re providing electrical repair services with a $150,000 in annual profits. But your nearest competitors are reporting $300,000 if not more on average. When the benchmarks show that the business is achieving almost half of what you have the potential of doing then its time to study the competition. When you do it may not be hard to see that the other services are also working on government contracts, for instance, they also provide door-to-door appliance repair, etc. So, you could be doing all of this and making more money…its just that simple!
Pro tip: While benchmark figures may show that you have the potential to do more that may not always be a good idea. Sometimes catering to a niche and specializing in that niche can turn a higher profit over the long term but with a lower investment regarding time, labor and effort.
4. Helps to Motivate Staff
One of the reasons to benchmark is that it helps get businesses and their staff out of the comfort zone. The comfort zone is where you never want the staff to be because it leads to stagnation. When you’re benchmarking individual departments against the competition, the result good or bad can be used as a source of motivation. It helps to set goals and then its everyone’s to job to work towards achieving those goals.
5. Instigates Innovation from Inspiration
So, what to benchmark to inspire innovation and inspiration? That’s a question we get a lot of, and the answer is not as complex once your business type has been identified. However, generally speaking, you can learn a lot from how the competition is achieving a certain goal. That is your source of inspiration. Combining that with your unique methods and human resource is what will lead to innovation.
An excellent example of this innovation is a lending company which runs a benchmark of its lending packages against the competition. It discovers that the competition is doing the following:
- They have 0% interest during the first month
- A high approval rate for those who have lower than average credit scores
- Don’t charge for documentation also known as administrative fees
Inspired by this the lending company in question can come up with a different package designed exclusively for people with low or bad credit scores. So, instead of just focusing on people with subpar credit scores, they can continue to focus on their regular clients but also add those who were previously not eligible. Those new packages they come up with will be innovative in the sense that nobody else is doing it exclusively for people with below-average credit.
6. Understanding the Competition
Understanding and respecting competing businesses is just as important as making sure that you’re competitive. Benchmarking gives you insight into what the competition is doing but not necessarily how they are doing it. But once you know what they are doing it is only a matter of good research to find out how they are doing it.
Once you understand the competition’s methods, it becomes possible to outdo them. Benchmarking allows you to learn and expand on what you’re currently doing with that knowledge.
7. Insight into Present Performance
The big question for all businesses is how far they can stretch their performance if all things remain equal? Well, that’s where benchmarking can help a great deal especially when you compare your performance to those of similarly sized businesses.
You will learn exactly why your performance is lagging and when it lags. Plus, it will tell you if there is even a possibility to expand if all things are kept equal. So, looking inwards becomes especially easy when using internal benchmarking.
What Does All This Mean?
Well, it means a lot, but it isn’t all applicable to every business under the sun. Why do organisations benchmark vary from one industry and business to the next? So, you need to think of why it is crucial for your organisation then run benchmarks accordingly. Nevertheless, the abovementioned reasons may work as a starting point for any business that isn’t benchmarking performance.
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