Benchmarking

Organizations use a variety of measurements to evaluate business performance, such as revenue, stock price, voluntary attrition, or employee attitude survey results. Comparing these measures to relevant benchmarks provides decision makers with a standard that can be used to interpret the organization’s standing and draw meaningful conclusions. The standard, target, or benchmark can be derived from internal organizational data or from data external to the organization. Benchmarking databases are similar to normative data used in clinical psychological testing to establish parameters for normal and abnormal results. Although benchmarking commonly uses numeric data for comparisons, nonnumeric benchmarking is also used to aid decision making, in areas such as strategic organizational direction, or in processes such as supply chain or marketing. The benefits, caveats, and sources of benchmarking are addressed in the following text.

Benefits of Benchmarking

The benefits of benchmarks are to provide an empirically substantiated target figure that is more realistic and has more credibility and weight than one determined subjectively, such as gut feeling. Targets created in an internal vacuum may result in setting goals that are neither challenging enough nor attainable. Research has shown that these types of goals are de-motivating. Although benchmarks based on internal organizational data can be constructed, external benchmarks, especially when competitors are involved, have gravitas that usually gets the attention of executives who make strategic decisions regarding an organization’s future direction and can serve to inspire positive changes. In addition, benchmarking allows best practices to be identified: approaches yielding results surpassing all others.

Caveats of Benchmarking

There are a number of caveats regarding external benchmarking. Some benchmark databases are composed of samples of convenience that may contain comparison groups that are neither relevant nor equivalent, thus making differences between an organization’s scores and the benchmark of little or no value. Other benchmark databases may be of questionable quality. These types of poorly constructed benchmarks again can result in setting de-motivating goals that are either unrealistic or not challenging enough. Similar to the need for norm groups that are representative of the population of interest in interpreting scores on clinical psychology tests (e.g., matched on salient demographics; excluding those with impairments), comparable organizations, such as same industry and similar size, are best for benchmarking purposes in a business setting. However, it is important to keep in mind that even organizations in quite different industries may be similar on other dimensions such as competition to recruit the same top employee talent. In this case obtaining external benchmarks on such things as workplace climate provides a context for evaluating an organization’s position as an employer of choice.

Economic and cultural differences are also important to consider and control for to develop appropriate business benchmarks. For example, comparing business results in countries in emerging economies to results in countries with more established economies is not a useful comparison. An additional example comes from employee opinion research where it is widely known that employees in some countries typically have more positive responses compared with employees in other countries. If these responses are pooled across all countries, an organization with representation in countries with typically less favorable responses will be compared with a database skewed in a more positive direction.

In addition, comparability of question translations across companies that contribute data to a benchmark database needs to be considered when evaluating benchmarks for global employee opinion surveys. For example, two different question translations may result in different interpretations of the question, thus producing poor-quality benchmarks. Some consortia attempt to solve this problem by establishing common translations that organizations must use to submit data to the benchmarking database.

Internal Benchmarking

Internal comparisons can avoid some criticisms applied to external benchmarking. Types of internal benchmarking include tracking trends over time, polling executives to set goals, or identifying perceived gaps between executives’ expectations and the current state in an organization. However, in the absence of external values, it can be difficult to determine reasonable targets for an outcome or strategic direction. That is, internal improvements over time may not be enough if results remain below par compared with competitors. Further, internal benchmarks across different units within a single organization can promote unhealthy internal competition versus all internal efforts being directed at external competitors.

Internal improvements also may reach a ceiling, a numeric level that is typically not exceeded. For example, in workplace climate research the best achievable score for employee satisfaction with compensation is routinely much lower than the best achievable score for satisfaction with organizational teamwork. Without external benchmarks, these ceiling differences would be unknown, and unrealistic targets for improvement could be set.

Benchmarking Sources

Sources of external benchmarks include nonprofit consortia. Consortia typically collect a fee, have rigorous standards for company membership and data contributions, and a hire a third party vendor to collect data and provide reports to members. Consortia have additional benefits in terms of cross-company information sharing, networking, and standardization of instruments for collecting the data submitted to the benchmarking database. Well-known consortia exist in the life insurance and banking or financial industries. Others focus on specific metrics such as employee opinion survey research.

Consultants may also provide benchmarking data to clients using their client base as the source. Benchmarking data may also be available via public information sources, such as financials for publicly traded companies.

The list of organizations included in the database— their size, the number of data points from each organization, the countries from which the data originate, and the time frame in which the data were collected— are all important questions to ask the provider when evaluating benchmark data.

Summary

External and internal benchmarking are extremely valuable organizational tools that potentially provide appropriate targets and direction for actions that can contribute to greater success in an organization. Recognizing the limitations and applications of benchmarking and benchmarking sources will avoid obtaining inaccurate data that may lead to misinformed decision making and ill-directed corporate strategizing.

References:

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