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Benchmarking is a management technique aimed at detecting “best practice” in other organizations and then adopting it in one’s own.

According to Keith Session and his associates, writing in an occasional paper titled “All Benchmarkers Now?,” the practice has its roots in Japanese reverse engineering efforts in the 1950s and in kaizen, meaning continuous improvement, a practice introduced by Toyota. Benchmarking, in other words, is a competitive response: “Others are doing a better job. How do they do it? Let’s do the same thing.”

According to Session et. al., the practice is “very much associated with Xerox in the USA, leading to the first book on the subject by the company’s head of benchmarking in the 1980s… . Initially, in the late 1970s and early l980s, Xerox focused on the activities of its Japanese competitors.

This ‘competitive benchmarking’ was quickly joined by ‘generic benchmarking’, in which Xerox looked beyond immediate competitors, to include companies with strong practices wherever they were to be found—railways, insurance and electricity generation, for example.”

Since that time benchmarking has been applied in a formal fashion (following strict rules) to all manner of technical and administrative procedures. The phrase has also come to be used somewhat loosely to indicate any kind of comparisons between companies, departments, and discrete processes. It may be applied very narrowly to such matters as Internet download time performance and as broadly as comparing marketing campaigns.

Benchmarking has become a well-accepted management tool among larger corporations, both as a means of remaining competitive and in justifying their own performance. Richard T. Roth, writing in Financial Executive, leads off his article on benchmarking by saying: “The benchmarking concept, a familiar one to most executives, keeps gaining converts. Bain & Co.’s most recent Management Tools study, which charts the tools that companies use to set strategic direction, finds that for the past four years, benchmarking has held steady in second place, with 84 percent of all surveyed companies using it. Only formal strategic planning surpassed benchmarking in the ranking.” Benchmarking picked up with the onset of the recession in the late 1990s: it helps document a business unit’s contribution to corporate performance no matter which way the economy moves.

Benchmarking also helps to make the case for necessary but painful change.

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How It Works

Benchmarking is a study of best practices elsewhere and the implementation of findings “back home.” Studies may be very broad (generic benchmarking), industry-wide (industry benchmarking), specific to a business function like purchasing (functional benchmarking), or aimed at a particular process (performance benchmarking).

The general procedure involves selection of a target, identifying best practitioners, surveying best practices by interview and other means, analyzing the results, and making whatever changes are needed internally to apply the discoveries made.

Unless the practice is well-integrated and institutionalized, barriers to effective benchmarking abound, especially in smaller organizations. Formal programs usually require a substantial commitment of staff time and direct expenditures. For maximum effect, therefore, top management involvement is vital but not always forthcoming: benchmarking initiatives may arise at lower levels in order to “nudge” upper management. Identifying best practice may prove difficult and may involve extra costs. It is obviously most difficult to benchmark direct competitors: they tend to shy from sharing the secret of their success. Once best practices have been identified, their analysis can present serious difficulties. Frequently “best practice” is due to unique circumstances, sometimes intangible qualities like a leading personality, and are therefore very difficult to adopt. Finally, implementation of best practice may be fiercely resisted within the company slated for improvement.

For these reasons, benchmarking programs are most successful when their aims are fairly narrow and quantifiable, awareness of the problem within the company is widespread and shared, best practice is reasonably accessible, and implementation is well rewarded.

Benchmarking And Small Business

Benchmarking tends to be a method most suited to large, centralized, and bureaucratically organized institutions.

Smaller companies sometimes attempt it, but success appears to require effective top management participation. James Dodd and Mark Turner, writing in National Public Accountant, accurately assess small business attitudes toward this management technique: “Most regard their businesses as too unique to warrant detailed comparison across industries,” they write. “They see no valid comparisons and, therefore, do not recognize any meaningful benefit from examining practices outside their own industries.” There is also the further consideration that small businesses have better uses for their money than visiting scores of distant companies to learn how they collect debt or display merchandise. The functional equivalent to benchmarking, however, does take place when small business owners interact with competitors and peers in the marketplace—and keep eyes and ears open.