Tonnis van Dam

Why is benchmarking so critical to an organisation

Why Is Benchmarking So Critical to Your Organisation’s Performance? Why do organisations benchmark? Allows us to answer that with another question: how does your business measure success? While success could be defined as a linear progression of sales, financial lucratively or even funding diversity evident from ascending graphs in important board meetings it is still incomplete. Most business people reading this may not understand why, well because success in any industry is relative. So, it only stands to reason that its measurement is relative too.

Take for instance the furniture industry. You own a shop selling furniture, which since it has opened has seen a 5% year on year increase in profits. The profits clearly outline that your business is thriving. But how much more successful is it compared to a similar shop that opened a block away from you with the same capital and type of rental space? If that particular shop in addition to perhaps dozens of others are averaging 20% in profits, then yours is pale in comparison. So, if you’re making 5% in profits, which is clearly in a highly lucrative industry, it is time to figure out why that’s the case. That’s where benchmarking data can help you. It is also why benchmarking is so critical to defining a business’s success.

How Does an Organisation’s Benchmarking Work?

Well to start with any business or organisation will need baseline data. Baseline data is going to be the business’s latest performance data. Now that data can be second half financial figures, sales figures or accumulated figures for the entire year or even five years. Once that data has been verified and established, it is then compared to data from competing businesses.

Generally, businesses will want to run a few different benchmarking tests. For starters, the data can be benchmarked against competitors in the same city or even the same area or country. However, department specific benchmarks can also be executed which for instance compares the performance of your organisation’s sales figures to those of a competitor.

The upside to running particular benchmarks is that it gives businesses insights into what they may not be doing correctly. Sometimes it also helps them identify what they are getting right which in turn means they can further hone those skills or attributes of the business.

For instance, a business may find out that because their products are 10% cheaper than the competition, they can sell more. However, competing companies are making more money because they have an established brand name. 

The benchmarking clearly shows that the business’s strategy to keep prices low is working, but by building brand value, they can help to turn a larger profit.

Important: Benchmarking data is only beneficial to businesses who want to change. Change depending on the size and type of a company can be difficult and time-consuming. In some industries, it can cost money, but if the benchmarking data shows that change is imperative, that change should be implemented.

Understanding the Competition – Why Do Organisations Benchmark?

Businesses do not exist in a vacuum. Every company is competitive and in every industry across the world. However, the key to beating the competition is knowing and understanding what they are doing. The better you can understand what strategies they are employing, the easier it will be to counter them or even leverage those same strategies to your advantage.

Benchmarking helps familiarize businesses with others in the same industry. You can learn a lot from the competition even if you’re an already established name. It works great because you’re looking outside, to explore what others are doing. Benchmarking also helps organisations redo their internal standards and processes so that they work better than before.

Take for instance a business in the manufacturing industry may run a benchmark of its production efficiency compared to six other competitors. What the business discovers is that their manufacturing is 25% slower yet 10% more expensive than competitors. It is a problem which needs to be addressed as it is affecting the bottom line so to speak. It may also adversely affect standard retail or wholesale pricing of the product.

So, the business will take that data they have gleaned from the competition and further investigate it. They may discover that the machines used by competitors are faster, they are perhaps employing more people or they may have outsourced some work to a third-party. All of this information is actionable and when used by the business can help it improve significantly.

Important Tip: Benchmarking should be performed across a multitude of verticals within the business. The biggest mistake you can make is to just benchmark business stats as a whole. For instance, only benchmarking the business’s total profits for the entire year. That type of broad benchmarking will yield little in the way of insights. You’ll get more information by benchmarking your sales performance for the past six months as compared to the competition. You can also further drill down and benchmark individual wholesalers, sales executives or sales teams. Targeted benchmarking, makes it easier to find the weak link so to speak.

Helps to Boost Employee Morale

So how to use benchmarking for performance improvement Perhaps one of the most overlooked advantages of business benchmarking is employee morale. It goes without saying that employees with a goal and purpose are more driven. They are motivated to perform better. Benchmarking gives them a target. It allows them the opportunity to compare how well they are performing compared to the competition. It is a lot like game theory, in the sense that an employee is motivated to play harder and longer when they are competing. When rewards are introduced, employers can help further motivate employees to outdo the competition.

Some may argue that benchmarking could backfire especially if the performance measured is subpar despite all the hard work being put in by the employees. However, by identifying weaknesses that are undermining performance, businesses can help employees improve by overcoming those issues. 

Take for instance, if the benchmarking data shows that work put in per employee on average isn’t more than 7-hours a day. Whereas the work put in by the competition is around 9 hours a day. Apparently, the competition is getting two extra hours of productivity. One way to rectify this for employers will be to offer performance bonuses. The other way would be to provide overtime incentives. In both instances’ employees will be motivated to spend less time procrastinating and more time being productive.

Start Gathering Data Today

If you are a business owner today is the best time to start benchmarking every aspect of the organisation. However, the first step is to begin collecting data. Collect financial, performance and employee data across your business. Then use that with the right benchmarking tools to confirm if in fact, your business is as successful as you thought!

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