Benchmarking

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Benchmarking Bengt Karlöf Karlöf Consulting

I. INTRODUCTION II. THEORY AND REVIEW OF BENCHMARKING III. METHODOLOGY OF BENCHMARKING

IV. BENCHMARKING—PITFALLS, SPRINGBOARDS, AND OBSERVATIONS V. SUMMARY

GLOSSARY

strategic benchmarking A looser and more inspirational version of benchmarking to enhance creativity in strategy processes. strategy A pattern of decisions and actions in the present to secure future success and exploit opportunities.

benchlearning Combines the efficiency aspects of benchmarking with the learning organization. It thereby combines hard and soft issues in making people learn about what is important for the success of the operation. benchmarking A management method deriving from the land surveying term “benchmark” which is a point fixed in three dimensions in the bed rock. Benchmarking means calibrating your efficiency against other organizations, getting the inspiration and building on other peoples experiences. causality Illustrates the cause and effect logic that is important to understand in benchmarking. Why is someone performing better and how do they do that? cross-industry benchmarking Means that you take out a function or a process in a company and compare it to the corresponding organizational units in a company in another industry. Take for instance billing in the telecom industry that can be benchmarked with billing in credit card operations or energy companies. efficiency The function of value and productivity. Value is in turn utility (or quality) in relation to price. Productivity means the cost of producing and delivering a unit of something. Efficiency thereby includes effectiveness and productivity. internal benchmarking Surprisingly often learning does not take place across a decentralized structure with many similar units. Internal benchmarking has the purpose of creating cross learning.

I. INTRODUCTION Benchmarking is a widely used concept, but one that is often misinterpreted and insufficiently used. Although the simple definition of benchmarking is to make a comparison between parts of or the entire operation, there is much more to it. This article sorts out the correct meaning and application of benchmarking. Based on several years of experience working with the method, this article also shares the most important lessons learned from the practical use of benchmarking. This article views benchmarking from a management point of view and does not have a specific information systems approach. Benchmarking derives its force from the logical trap that it springs on those who oppose change. The psychology that makes benchmarking so effective compared to most other methods can be summed up as a reversal of the burden of proof. It works like this: In normal circumstances, those who want to change something have to show proof of why it should be changed. Application of advanced benchmarking shifts the burden of proof to the conservatives, who have to show proof of why the change should not be made.

Encyclopedia of Information Systems, Volume 1 Copyright 2003, Elsevier Science (USA). All rights reserved.

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II. THEORY AND REVIEW OF BENCHMARKING A. What Is Benchmarking? Benchmark is a term used in surveying. It means a fixed point, often marked by drilling a hole in bedrock and painting a ring around it, with a defined location in three dimensions (altitude, latitude, and longitude, not time, mass, and energy) from which the locations of other points can be determined. Etymologically the word can be traced back to the British weaving industry in the 18th century. The original meaning is uncertain, but is in any case irrelevant to the use of the word in a management context. In management, the terms benchmark and benchmarking are used as a metaphor for criteria of efficiency in the form of correct key indicators, but above all they refer to a process in an organization that leads to more efficient operation in some respect, better quality, and/or higher productivity. The word benchmark has been used in functional parts of companies to denote calibrated key indicators or other comparable quantities. In the former sense, the word has been used since the 1960s for comparison of production costs in computer operation. In the advertising business it has been used in comparing quality/price relationships between comparable products. Nothing is new under the sun. That also applies to benchmarking. The practice of acquiring knowledge from colleagues has been customary in the medical profession ever since the days of Ancient Egypt, and a similar phenomenon has been observable in Japan since the Imperial Meiji Restoration of the 1860s. The origin of benchmarking in its modern, deliberately applied form is, however, generally ascribed to Rank Xerox, which in 1978 was severely shaken by price competition from Japanese manufacturers of small and medium-sized office copiers. This competition was initially dismissed as dumping or faulty arithmetic, but then a fact-finding expedition was sent to Japan and found, to its dismay, that the Japanese had managed to reduce their production costs far below what Rank Xerox then considered feasible; their own targets for productivity improvement turned out to be hopelessly inadequate. IBM likewise adopted benchmarking a decade later, but on a scale that was far too limited; their benchmarking was between their own production units and with other mainframe computer manufacturers. The most important aspects of current benchmarking can be summarized as follows:

1. A complete and correct description of the processes and activities that create value-adding performance 2. Correct and accepted comparison with another party—a good example 3. In-depth understanding of causality, i.e., of the differences in work organization, skills, etc. and so on, that explain differences in performance. (In short: why, why, why?) 4. Reengineering of work organization and routines and development of new skills to make operations more efficient; inspiration from, not imitation of, the partner 5. A goal-related, result-rewarded process of change that uses benchmarking as the starting point for an institutionalized search for new examples for continuity Benchmarking is thus essentially a dynamic, improvement-oriented process of change, not a static comparison of key indicators which at worst are not calibrated and therefore not comparable. This last must be particularly emphasized, because benchmarking has often been wrongly applied using uncalibrated indicators in which nobody believes, therefore making them entirely worthless. New methods, usually with catchy names, are constantly being launched in the field of management. The danger of a label like benchmarking is that it may be filed away in the same pigeonhole with many other concepts whose effectiveness is only a fraction of that which benchmarking possesses. So it is important for the reader to make this distinction in order to appreciate the usefulness of the method. Its potential lies perhaps not so much in the quick and easy boost to efficiency that it offers as in the institutionalized learning process, which is hereinafter termed Benchlearning. That name is a registered trademark and stands for organizational skill development. Benchmarking can be advantageously defined in terms of what it is not, namely: 1. Key indicator analysis 2. Competition analysis 3. Imitation It may, however, be useful to emphasize a few side effects that often tend to become the principal effects of benchmarking: 1. Definition of the content of one’s own work 2. Determination of measurement parameters

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3. Sound learning, which generates a demand for even more knowledge Benchmarking is almost always initiated by the management of a company or organization or unit thereof. The aim is almost always to improve efficiency, leading to higher quality or productivity. The mistake is often made of taking certain things for granted, for example, that processes and activities are defined and that parameters exist for measuring them. Such is in fact seldom the case, and this necessitates a thorough review of the situation, which performs the highly useful function of creating awareness of what the tasks are and how they relate to the company’s corporate mission. Institutionalized learning is seldom if ever the focus of a benchmarking process. Its psychosocial consequences are thus not the original reason for starting the project. In the best case they come as a pleasant surprise—provided, of course, that all concerned have been given time to reflect, make their own discoveries, and solve their problems. The one thing that is more crucial than anything else to success in any organized enterprise is efficiency. This concept is therefore considered in detail next.

B. Efficiency: Technocracy, Software, and Reality Half in jest, I often define a technocrat as a person who approaches technical or economic problems from a strictly rational standpoint, unmoved by human, cultural, or environmental considerations. Semantically, the term efficiency is an exceptionally vague one. Most people associate it with productivity in the sense of “working harder and faster.” In the

line of reasoning we shall follow here, productivity is just one axis of the efficiency graph. Productivity means doing things right, i.e. making or delivering products and services of a given quality at the lowest possible unit cost. Let us begin by looking at an efficiency graph (Fig. 1), on which the following discussion is based. As the graph shows, efficiency is a function of value and productivity. This means that an organization can achieve high efficiency either by working on its productivity to lower its production costs, thereby enabling it to offer lower prices and thus greater value, or by concentrating on quality, which increases the numerator of the value fraction and offers the options of either greater volume or higher prices. Conversely, inefficiency can take two forms. One is when the value (price/quality ratio) offered to the market is acceptable, but low productivity leads to losses when the product is sold at the price the market is willing to pay. That, until recently, was the situation of several automakers like Saab, Volvo, and Mercedes-Benz. The market was willing to pay a given price for a car of a given design, but unfortunately the cost of making the car—materials, components, and labor—was far too high. In the automotive industry they use assembly time in hours as an approximation of productivity. An unprofitable factory with a sellable model can thus define its short- and medium-term problem as one of productivity and try to reduce the cost (or assembly time) per unit, assuming that the situation has been correctly analyzed. This brings us to one of the key questions regarding the graph, along with two others: 1. Where are we on the graph compared to our competitor or whomever we are comparing ourselves with?

Figure 1 The efficiency graph.

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68 2. Given our position, in which direction should we move on the graph? 3. How quickly do we need to do it, i.e., how much time do we have?

ginning of the 20th century. The reason, of course, is that direct material and labor costs have historically been the dominant components in the selling price of a product. John Andersson has put it this way:

Sometimes you can get halfway to solving the problem simply by asking the right question. If Saab, for example, has produced a model that the market is unwilling to buy in sufficient numbers at a price that is impossible to achieve, there is no point in messing about with assembly time and productivity. There are two analytical parameters, value and productivity. The foregoing example illustrates a situation in which value is judged to be satisfactory and productivity is the problem. The reverse situation, alas, is much more common and more treacherous, i.e., one in which productivity is high but the value is too low or, even worse, has never been tested on a market. The most obvious examples of the latter situation are to be found in production of tax-financed public services. Productivity in the public sector in, for instance, my own country, Sweden, is often remarkably high. Measured in terms of processing times for inspection of restaurants or issuing of building licenses or passports, Swedish civil servants are outstandingly productive compared to their counterparts in other countries of which I have experience, such as the United States, the United Kingdom, France, or Germany. The problem, just as in companies, is that their products and services have never been put to the market test. This frequently results in production of things for which there would be no demand if they were offered on a free market where the customers could make their own choices. The situation is obscure but probably even worse in countries that also suffer from low productivity in the public sector. Many of us have noticed this since joining the European Union (EU), which has meant that yet another publicly financed system has been superimposed on those we already had. The efficiency graph raises some central issues in a benchmarking context:

There used to be 14 blacksmiths for every clerk. Now there are 14 clerks for every blacksmith.

1. 2. 3. 4.

How do we define what we produce? What is the cost per unit produced? Who uses what we produce? By what criteria do users judge what we produce and deliver?

Productivity in administration and production of services is a subject that has received scant attention in the literature. The question of manufacturing productivity, on the other hand, has been discussed in detail ever since the heyday of F. W. Taylor in the be-

The sharply rising proportion of distributed costs has prompted growing interest in distributed costs in general and administrative overhead in particular. This is one reason why ABC (activity-based costing) analysis and other aids to calculation have been developed. In an era of mass production and mass consumption, productivity in manufacturing was a prime consideration. It was more important to have a car, any kind of car, than no car at all. The same applied to refrigerators, shoes, etc. Most of what the economist Torstein Veblen has called conspicuous consumption takes place in modern Western societies. That term refers to values which in Abraham Maslow’s hierarchy of needs are classified as self-realizing. These developments have led to a growth of interest in value theory. There is a shortage of literature, and indeed of general knowledge, about the value axis of the efficiency graph. Value is a subjective phenomenon. Perhaps that is why analysts, regarding it as vague and lacking in structure, have paid so little attention to it. Adam Smith, the father of economic science, tried to explain value in terms of the amount of work that went into a product; but he never succeeded in explaining why a glass of water, which is so useful, is worth so little while a bag of diamonds, which is of no practical use, is worth so much. It was the Austrian economist Hermann Heinrich Gossen (1810–1858) who came to consider how precious water becomes to a thirsty traveler in a desert. That thought led him to formulate the theory of marginal utility, as follows: The marginal utility of an article is the increment to total utility provided by the most recently acquired unit of that article.

Gossen’s simple observation was that the parched traveler in the desert would be willing to trade a sizable quantity of diamonds for a liter of water, because the utility of the water far exceeded that of the diamonds. Value theory and its corollaries regarding quality will command increasing attention from leaders of enterprises. This is especially true of leaders of units that have a planned-economy relationship to their “customers.” In most cases it is desirable to specify the value axis by constructing a value graph with quality as the abscissa and price as the ordinate, as shown in (Fig. 2).

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69 Experienced customer value

High

Quality

Low Low

Price

High

Figure 2 The value graph.

Quality stands for all the attributes of products and services that together configure the offering. Price is the sacrifice the customer must make in order to take advantage of the offering. What Veblen calls conspicuous consumption is a deviation, such as when somebody buys a status-symbol car like a Jaguar at a price far in excess of reasonable payment for performance. In this case, the price functions as a signal of quality to the rest of the world. A consequence of this is that the volume of sales does not increase if the price is reduced. Conspicuous consumption situations are fairly common nowadays, occurring in connection with all prestige brands. Fake Rolex watches made in Thailand do not encroach on the market for real Rolex watches, because they are sold to people who would never dream of paying what a genuine Rolex costs. In the case of internal deliveries between departments in the planned-economy environment that prevails within a company, the price consists of a production cost that is seldom paid directly by the receiving unit. In this case, the price does not represent a sacrifice on the buyer’s part. The quality of the delivery, however, can be judged. These are very important considerations with regard to productivity measurements in planned-economy systems, as well as in total quality management (TQM) and similar schemes aimed at monitoring efficiency in units of companies and organizations. In the application of benchmarking it is of course extremely important to get into the habit of considering both axes of the efficiency graph, i.e., value (quality in relation to price) and productivity (cost per unit). The highest price that a product or service can command is determined by the value that customers put on it. The lowest price that the supplier can charge without going broke is determined by productivity, because no company can stay in business for long if its production costs are higher than its rev-

enues. Productivity, therefore, influences the customer’s perception of value in that higher productivity makes it possible to offer a lower price and thus higher value. Quality, on the other hand, usually costs money, when we are talking about customer-perceived quality. More space between the seats in an aircraft means fewer passengers and therefore a higher cost per passenger-kilometer. In medical services, increased consultation time per patient is likewise a quality parameter that adds to the cost of providing the service. Improving quality in the other sense, i.e., reducing the frequency of rejects in production, does not normally increase costs but reduces them instead. This is done by tightening the production flow and eliminating the cost of rework by taking proactive measures (Fig. 3). The concept of efficiency is central not only to benchmarking, but also to all forms of enterprise and organization, so a full understanding of the meaning of efficiency is essential.

C. Categories of Benchmarking According to the individual situation, benchmarking can be divided into a number of categories and extremes can be contrasted with each other. Some of the more important ones are as follows: • • • • • •

Strategic and operative benchmarking Internal and external benchmarking Qualitative and quantitative benchmarking Same industry and cross-industry benchmarking Benchmarking in a leading or supporting role Benchmarking for better performance or for world-class performance

The purpose is instructional, i.e., to make the reader aware of angles that enable benchmarking to be done more effectively.

1. Strategic and Operative Benchmarking One of the great advantages of benchmarking is that the method can be applied to both strategic and operative issues. The dividing line is by no means sharp. Strategy is defined here as “action taken at the present time to ensure success in the future.” Strategy thus aims at achieving good results not only now but next year and the year after that too, though the term is sometimes loosely used of any issue that is of major importance, regardless of the time frame.

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Figure 3 Quality.

Operative management, on the other hand, has to do with all the day-to-day problems that must be solved right now to ensure that deliveries can be made to customers without a hitch. Strategy is always important, but seldom acute. Operative problems, on the other hand, may be both important and acute. (You can read more about this in Conflicts of Leadership, Bengt Karlöf, Wiley, 1996, and Strategy in Reality, Bengt Karlöf, Wiley, 1997.) A rough distinction between strategic and operative issues is made in Fig. 4. As a strategic instrument,

benchmarking can perform the function of identifying new business opportunities or seeking areas where dramatic improvements can be made. Identification of the latter is made harder in many organizations by the absence of competition, and in such cases benchmarking performs a strategic function. Probably the most widespread application of benchmarking is as an operative instrument to identify ways to improve operations. The aim of functional or process benchmarking is to seek and find good models for operative improvements. The great challenge

Figure 4 Strategic and operative efficiency.

Benchmarking of the future will be to apply benchmarking in all parts of the business that operate under plannedeconomy rules. The conclusion from this is that the principal application of benchmarking will be operative. That statement is not intended in any way to belittle the importance of the strategic angle, but because competition is endemic to business, and because competition can be regarded as an ongoing form of benchmarking, one can safely conclude that all the planned-economy parts of an organization will have a strong motive to find indicators of their efficiency through benchmarking.

2. Internal and External Benchmarking Benchmarking will be imperative in organizations that contain a number of similar production centers within themselves. Internal benchmarking means making comparisons between similar production units of the same organization or company. It may sometimes seem strange that organizations exposed to the full force of competition do not use benchmarking to the extent that one might expect. This applies, for example, to banks and airlines. Learning how to improve efficiency within one’s own company ought to come first, indeed it should be self-evident. External benchmarking raises numerous questions. Many people seem to assume that benchmarking must involve comparisons with competitors, but this is not necessarily so. Of all the projects I have worked on, only a vanishingly small minority have involved competitors. Where this has happened, the subjects of study have been processes at an early stage in the valueadded chain, like production and project engineering, which are not regarded as competitively critical. Almost all industries offer opportunities for benchmarking in which the competitive situation is not a sensitive issue. A construction firm in England, for example, may pick one in North America with which it is not in competition. A European airline may benchmark its medium-haul operations against an airline in Southeast Asia, where the degree of competition is negligible. A step-by-step procedure often follows the sequence of • Internal comparisons • Benchmarking within the same industry • Good examples outside the industry I would like to emphasize that companies should start by picking partners whose operations are as closely comparable as possible to avoid straining people’s abil-

71 ity to recognize similarities. Later you can gradually move further afield to study situations that may differ more from your own, but where even greater opportunities for improvement may be found. In many cases there is a tendency to regard internal benchmarking as simpler. This is true in some respects, but not in others. The instinct to defend one’s territory and not give anything away can be an obstacle to contacts with colleagues in other parts of the organization. A combination of internal and external benchmarking has frequently proved fruitful. This means seeking both internal and external reference points simultaneously and thus opening a wider field to the participants, giving them insights into situations other than those with which they are already familiar. Variety is valuable in itself in enhancing the instructiveness of benchmarking; the participants are stimulated and inspired by glimpses of working environments that differ somewhat from their own.

3. Qualitative and Quantitative Benchmarking The object of any organized activity is to create a value that is greater that the cost of producing it. This applies to staff work just as much as to selling and production, and it applies to all kinds of organizations regardless of mission or ownership. In some cases quality and productivity may be exceedingly difficult to measure. The personnel department of a company, regardless of what that company does, is likewise expected to produce a value greater than the cost of producing it, but in such a department it may be far from easy to answer the questions that touch on efficiency: 1. 2. 3. 4.

What do we produce and deliver? What does it cost per unit? Who evaluates what we deliver? On what criteria is the evaluation based?

A personnel department normally exists in a plannedeconomy environment, operating on money allocated by top management and lacking customers who have a free choice of supplier and pay for what they get out of their own pockets. This makes the questions hard to answer, but does not make them any the less relevant. The processes of personnel or human resource management are fairly easy to define and structure; the hard part lies in defining who the buyers of the department’s services are and what set of criteria should be used to dimension the resources allocated to the department. Qualitative benchmarking may be preferable in such cases, i.e., a description of processes and activities

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72 followed by a comparison with the way similar things are done in another organization that serves as a good example. This is usually called descriptive or qualitative benchmarking, and in many cases it is quite as effective as the quantitatively oriented kind. Qualitative benchmarking can often be supplemented by measurement of attitudes, frequency studies of typical cases, and isolation of customized production. The latter includes the making of studies and other work of a nonrepetitive nature.

4. Same Industry or Same Operation? Some of the most important questions here have already been dealt with under the heading of internal and external benchmarking. One client in the telecom business said: “The telecom industry is tarred with the monopoly brush all over the world, so we must look for examples outside the industry.” The same is true of many European companies and other structures that are largely shielded from competition. In such cases it is advisable to seek examples from other industries. Experience shows that it is this type of exercise that reveals the widest performance gaps, and thus the greatest opportunities for improvement. You can however look around in your own industry if good examples are available at a sufficient geographical remove that the awkward question of competition does not arise. European airlines can go to the United States, and firms in the building trade can undoubtedly find useful objects of comparison all over the world. Some examples of cross-industry benchmarking are shown in Table I. They include some well-known and illustrative examples of how inspiration can come from quite unexpected places. The recognition factor—how easy it is to relate what you find to your own experience—determines how far you can safely move outside your own familiar field of business.

Table I

5. Benchmarking in a Leading or Supporting Role Benchmarking can be run as an adjunct to other methods and processes of change or the methods and processes can be run as adjuncts to benchmarking. In a number of cases, business process reengineering (BPR) has been clarified and made more manageable by the addition of benchmarking. In other cases process definitions and measurement criteria may be the object of benchmarking. The same applies to Total Quality Management (TQM), just-in-time ( JIT), kaizen (continual improvement), lean production, and other approaches. The educational aspect of benchmarking helps to identify both the need for change and opportunities for improvement. The ranking order should be determined by the kind of change desired. If uncertainty prevails on that point, running an exploratory benchmarking exercise can be useful. That is usually an excellent way to find out what needs to be changed. If you go on from there to consider how and why something needs to be changed, benchmarking can provide a source of inspiration as part of a broader program of change. It may also be used as the principal instrument for improvement, preferably in conjunction with the learning that takes place when benchmarking is further developed into Benchlearning. That method takes full advantage of the institutional learning process that benchmarking can generate. This approach is particularly suitable where the object is to combine business development with skill development in parts of companies. It is, of course, impossible to predict all the situations of change that may arise, but it is always advisable to try benchmarking as a powerful educational accessory to other schemes in cases where it is not the principal instrument of change.

Examples of Cross-Industry Benchmarking Global best practices: Take a look outside your own industry Key process

Defining customer needs and customer satisfaction

Good examples Toyota (Lexus), British Airways, American Express

Dealing with customers’ orders

DHL, Microsoft

Delivery service

UPS (United Parcel Service), Electrolux, Atlas Copco

Invoicing and debt collection

American Express, Singapore Telecom

Customer support

Microsoft, Word Perfect

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Sometimes an organization must strive for world-class performance to secure its own existence and survival— as for example in the case of nuclear power station builders, international accountancy chains, or credit card operators. The rule of thumb is that the more concentrated an industry is, the more important it is to achieve world-class performance in the organization as a whole and all of its parts. There is, however, an unfortunate tendency to strive for peak performance without regard to the company’s frame of reference or the competition it faces. The aim should be to seek an optimum rather than a maximum solution, i.e., to gradually realize the potential for improvement that is achievable through effort and determination. To some extent it may be useful to discuss the worldclass aspect, especially in Europe where pressure of competition is low. Many organizations suffer from an odd combination of overconfidence and an institutional inferiority complex. One often encounters the attitude that our public service, despite lack of competition, is of course the best of its kind in the world and that there is nothing else that can be compared to it. The primary weakness of this line of reasoning is that it is probably not true, and a secondary one is that it assumes there is nothing to be learned anywhere, which is never true. The discussion, if we can manage to conduct it unencumbered by considerations of prestige, often leads to the opposite conclusion by revealing a number of imperfections that not only indicate potential areas of improvement but also betray a sense of inferiority in important respects. Low pressure of competition encourages an overconfident attitude that is often only a thin veneer in the performance-oriented world of today. Willingness to learn is obviously a good thing. Such an attitude is characteristic of successful organizations; the trouble is that the very fact of long-term success makes it very difficult to maintain. The literature on benchmarking generally recommends world-class performance as the aim. That is all very fine if you can get there, but the road may be a long one. If the shining goal of the good example is too far off, the excuse-making reflex sets in and presents a serious obstacle to the process of change. The ideal is to be able to find a few partners at different removes from your own organization; this maximizes the force for change, enabling good practice to be studied in various organizations and to serve as a source of inspiration for improving your own. Figure 5 illustrates

Performance

6. Benchmarking for Better Performance or for World-Class Performance Own conception of what is possible

Benchmarking partner

Figure 5 Inspiration from a benchmarking partner. [From Karlöf, B., and Östblom, S. (1993). Benchmarking. Chichester: Wiley.]

how the creativity of one’s own organization can translate inspiration from a partner into performance that surpasses the latter’s. In the ideal situation, this leads to a self-sustaining process of improvement, Benchlearning. When you set out to organize and mount a benchmarking project, you should consider a number of questions that may give rise to problems at the implementation stage, e.g. between consultant and client: 1. Who does the necessary research? 2. Who is the customer? 3. How many people are involved and in what capacities? 4. Who should be included in the project group? 5. What can be classed as a “good example”? 6. What experts need to be consulted in what areas (e.g., ABC analysis)? 7. What special analyses need to be made (e.g., frequency studies and time measurements)? 8. How much money is available for the project? 9. What kind of skills and experience are needed on the project team? 10. Organize a seminar on success factors and pitfalls! If you pay close attention to these questions and answer them properly, you will minimize the risk of running into difficulties along the road.

III. METHODOLOGY OF BENCHMARKING After some 10 years of learning lessons from benchmarking, I have now adopted a 10-step methodology.

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74 How the process is divided up is actually just a teaching device. An experienced benchmarker can make do with fewer steps because he or she is familiar with what is included in each of them.

1. Explanation of Method, Leadership, and Participation People with extensive experience in benchmarking tend to seriously underestimate how difficult and time consuming it is to explain the method and get people to understand it. The natural way to structure the explanation is to use the lessons related here and the structure of the method shown below: 1. A detailed explanation of the benchmarking method with time for questions and discussion 2. The concept of efficiency as a basis for diagnosis, measurement, and comparison 3. Definitions of concepts, terminology, and methods that are recognized by all members of the group 4. A survey of any special circumstances that may motivate a departure from the 10 steps presented here

2. Choosing What to Benchmark The natural place to start is with units whose efficiency is known to be below par. The units concerned may have administrative functions like finance or information technology, but they can just as easily be line functions like aircraft maintenance or luggage handling. In the telecommunications field it may be invoicing or productivity in access networks. In insurance companies it may be claims adjustment, in banks creditworthiness assessment, and so on. In every industry there are production units of a generic nature like IT as well as industry-specific processes like claims adjustment (insurance), clinical testing (pharmaceuticals), etc. Generic support processes can often be compared across industrial demarcation lines, whereas more specific processes call for a closer degree of kinship. To sum up, we are looking at a situation in which efficiency is clearly in need of improvement.

3. Business Definition and Diagnosis A considerable proportion of the time devoted to benchmarking is spent in defining the work content of the business, or in what I have called diagnosis. Put bru-

tally, the statement may sound like an extremely harsh judgment. What we are actually saying is that people have failed to define what they are doing and that they therefore do not know their jobs. Sadly, that brutal statement is corroborated by repeated and unanimous experience. Just as learning is such an important side effect of benchmarking that it contends for the title of principal effect, business definition or diagnosis is so important that it deserves to be highlighted as the special value that benchmarking often creates, even though that was not the original intention.

4. Choosing Partners Choosing a partner is naturally an essential feature of benchmarking. In a structure with multiple branches, the choice might seem to be obvious—the partners are right there in your own organization. Experience shows, unfortunately, that even if the identity of the partners is obvious, the difficulties involved in making contact and collaborating are actually greater than with an external partner. As a result of decentralization, often carried to extremes, there are a lot of people in an organization who regard definition as their own prerogative and therefore see no reason to harmonize process descriptions, measurement criteria, etc. So the partnership contact that looks so easy may turn out to be fraught with great difficulty.

5. Information Gathering and Analysis We are now ready to proceed to one of the core areas of benchmarking: the collection of information and the analysis of descriptive and numerical quantities. The descriptive quantities are things like work organization, skill development, and other areas relevant to the comparison that cannot be expressed in figures.

6. Inspiration from Cause and Effect Benchmarking indicates not only what can be improved, but also how and why. This is what we call a cause-and-effect relationship, causality or why, why, why? Even in studies that use calibrated key indicators, the important explanations of differences in performance are often overlooked. You do not have to go down to the level of detail of describing every manual operation, but you should realize that if the drivers in your partner company take care of routine checks that have to be made by skilled technicians in your own company, that goes a long way toward explaining differences in performance.

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7. Follow-Up Visit

10. Change and Learning

The follow-up visit qualifies as a separate step because it needs to be taken into account at the planning stage and in initial discussions with partners. If you fail to schedule at least one follow-up visit as part of the program, your partner may feel neglected. One or more follow-up visits are a perfectly normal feature of benchmarking. The main items on the agenda of the follow-up visit are

Change management is much more difficult and demands much more energy than is commonly supposed at the outset. Even when the message has been received, understood, and acknowledged, a tremendous amount of work still remains to be done.

1. Checking figures and measurements 2. Testing hypotheses to explain gaps 3. Identifying new explanations of why differences in performance exist 4. Discussing obstacles to improvement

8. Reengineering The word reengineering is used here to denote changes in processes or flows, activities, work organization, system structures, and division of responsibilities. Benchmarking may be supplemented by other points of reference. Two such points of reference may be well worth considering in some cases because of their great instructive value: 1. Own history (experience curve) 2. Zero-base analysis

9. Plans of Action and Presentation The reason why these two apparently disparate items have been lumped together under one head is that they are interdependent. The substance of the plan of action influences the form in which it is presented and vice versa. Planning the changes prompted by a benchmarking study is no different from any other kind of project work. The benchmarking element, however, simplifies the job of planning as well as the presentation, and the changes will be easier to implement and better supported by facts than in projects of other kinds. The plan of action covers the following principal parameters: 1. 2. 3. 4. 5. 6. 7.

Strategies and goals Studies Activities Responsibility Time Resources Results

IV. BENCHMARKING—PITFALLS, SPRINGBOARDS, AND OBSERVATIONS Leaders of business know by experience that good examples, well chosen and presented, have great educational value. They have also learned to discount the value of key indicators that nobody believes in and that only provoke the excuse-making reflex in the organizations and individuals concerned. In addition, they understand the logic of shifting the burden of proof: Nobody wants to make a fool of himself by rejecting changes when there is hard evidence to show that others have already done so and that the results have been successful. Anybody who did reject them would be insulting her own intelligence. There are, however, innumerable kinds of less blatant behavior that can detract from the effect, but there are also ways of finding shortcuts that lead much more quickly to the goal of improvement. What follows is a list—not in any particular order, but based on experience—of some of the pitfalls, springboards, and observations.

A. Pitfalls of Benchmarking 1. The Effect of Benchmarking Is Binary Thoroughness in calibrating numerical data and consistency in the descriptive parts of the analysis are essential. The requirements here are full comparability, elimination of noncomparable factors, and acknowledgment by the people concerned that the highest possible degree of comparability has in fact been achieved. If those people go through the same intellectual process that you have gone through and accept the comparability of the findings, that effectively disarms the excuse-making reflex. If, in addition, you have been really thorough about gathering data and can show that you have considered and measured all of the relevant factors, you will avoid the yawning pitfall you can otherwise fall into—the pitfall of lack of calibration, comparability, and acceptance.

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2. Beware of Distributed Costs There used to be 14 smiths for every clerk. Now there are 14 clerks for every smith. With IT as an enabler, with a shrinking proportion of direct costs and a growing proportion of overheads, it has become increasingly hard to assign cost elements to a specific operation. This difficulty can be overcome by using either ABC analysis or indicators that exclude overheads to secure acceptance of cost distribution and comparability. I have had personal experience of situations where certain cost elements were charged to a higher level of management in one unit than in another. Much to our embarrassment, this was pointed out to us when we made our presentation, and we had to go back and revise some of the material.

3. Do Not Save Everything for the Final Report One way to avoid the embarrassment of being caught out in errors of comparability is to present conclusions in the form of a preliminary report that is expected to be adjusted prior to the final presentation. This defuses the emotional charge in the analysis and enables a kinder view to be taken of any errors.

4. Do Not Be a Copycat A lot of people with no firsthand experience of benchmarking think it means copying the behavior of others. That is, of course, true to the extent that good practice is well worth following. But the real aim of benchmarking is inspiration for your own creativity, not imitation of somebody else. Benchmarking is intended to promote creativity, which can be defined as the ability to integrate existing elements of knowledge in new and innovative ways. What benchmarking does is to supply the necessary elements of knowledge.

5. Do Not Confuse Benchmarking with Key Indicators Let me recapitulate the levels of benchmarking: 1. Uncalibrated key indicators that nobody believes in and that therefore have no power to change anything 2. Calibrated key indicators unsupported by understanding of the differences in practice and motivation that explain differences in performance (why and how)

3. Calibrated key indicators supported by understanding of why and how. (This is real benchmarking, and it leads to spectacular improvements) 4. Learning added to benchmarking, which then evolves into Benchlearning The greatest danger to the future destiny and adventure of benchmarking is that it may degenerate into bean-counting with little or no calibration. So let us be quite clear about what benchmarking really means.

6. Complacency Is a Dangerous Enemy The attitude that “we know it all, know best and can do it ourselves” is a cultural foundation stone of many organizations that reject benchmarking as an instrument for their own improvement. Such organizations react vehemently with the excuse-making reflex when benchmarking is applied to them. The danger of complacency is greatest at the outset. When benchmarking is introduced in an organization with a culture of complacency, it is often dismissed with scorn. Many successful organizations have applied benchmarking too narrowly and consequently have run into structural crises. Rank Xerox, where the benchmarking method originated, had set productivity improvement targets that proved hopelessly inadequate. IBM benchmarked between its own units, but not to any significant degree outside its own organization, being overconfident in its own superiority. Uninterrupted success is an obstacle to the learning and improvement of efficiency that benchmarking can offer.

7. Benchmarking Is Not the Same Thing as Competition Analysis I have concerned myself very little with what is sometimes called competitive benchmarking. This is because benchmarking is not at all the same thing as competition analysis, which traditionally consists of charting 1. 2. 3. 4.

Market shares Financial strength Relative cost position Customer-perceived quality

These are highly interesting items of information, but they do not constitute benchmarking. If benchmarking is done with a competitor as the partner, it must be done in areas where the competitive interface is small. Some industries, the automotive industry for

Benchmarking

8. Do Not Let Your Own Administrators Take Charge of New Methods In the 1980s companies set up quality departments. These have gradually expanded their domains to include productivity aspects like BPR and, of course, benchmarking. Having projects run by your own staffers may look like a cheap way of doing it, but is seldom effective. In fact, I have never seen an in-house benchmarking project that was really successful. The resources allocated are inadequate, the project is a secondary assignment for the people in charge of it, and the method is not fully understood. It is the line management that must be motivated and act as the driving force, and it is desirable to retain outside consultants for three reasons: 1. The project must be somebody’s primary responsibility, which is never the case when the project manager is recruited internally 2. Benchmarking calls for specialized knowledge that few employees possess 3. People from inside the company are suspected of having their own corporate political agenda, which reduces their credibility So make sure that somebody has the primary responsibility. That probably means bringing in an outside consultant.

9. Benchmarking Risks Being Viewed as a Management Fad The fact that the whole field of management is a semantic mess is aggravated by the confusion caused by all the new methods that burst on the scene from time to time, only to fade away again. We once ran a poll asking a large number of respondents to draw a life-cycle curve for benchmarking as a method. This was done in relation to other approaches like BPR, TQM, lean production, reinvention of the corporation, JIT, conjoint analysis, and so on. Though the interviewees had no special preference for benchmarking, their verdict was that it would stand the test of time. Figure 6 shows the predicted life-cycle curve for benchmarking as a management technique compared

Importance of benchmarking

example, practice what they call co-opetition—a mixture of cooperation and competition. The farther back you go along the integration chain, the easier it is to collaborate. Conversely, it is very hard to collaborate at the front end where you are directly competing for customers.

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Time

Figure 6 Life cycle of benchmarking.

to those of other unnamed methods. This claim must of course be made in an article about benchmarking, but there is much independent evidence that testifies to the staying power of the method.

10. Our Banana Is the Best in the Bunch All organizations prefer to make their own inventions rather than give the credit to somebody else. A European telecom company spent about $70 million on developing its own invoicing system instead of adopting an existing system from Australia that met the same specifications. The tendency to reject good examples is thus not entirely a matter of lack of comparability in the material, but may also be attributable to the “not invented here” syndrome.

B. Springboards for Benchmarking Springboards (success factors) for benchmarking are necessarily a mirror image of the pitfalls. Let us combine the success factors with some pertinent observations that are crucial to the success of a benchmarking project.

1. Get Staff Really Involved To ensure success, the organizational units and individuals affected by the project must be given the opportunity to go through the same intellectual process as the project management. That will predispose them to accept the findings of the benchmarking study, which in turn will make it easier to take the step from thought to deed. Improvements in understanding, behavior, and results will all be accelerated if people are allowed to take an active part. So allocate a share of the resources to getting them really involved.

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2. Make Special Measurements to Acquire New Information

5. Benchmarking Is a Surrogate for Market Economy

There is never enough information in existing reporting systems. Efforts to improve efficiency nowadays are directed mainly at administrative work, and this calls for time management studies, floor traffic studies, descriptions of sales and other processes, and so on. Special measurements have double value in that they both get people involved and provide new information that is often interesting and helpful for purposes of change management. You may sometimes experience problems in persuading your partner to make the necessary measurements, but this is seldom an insurmountable obstacle. If you start with the two parameters of efficiency—quality and productivity—you can usually find innovative approaches, methods, and measurements that make a significant contribution to the project.

A user of goods or services inside a company or organization lacks the freedom of choice between suppliers that exists in a market economy. The trouble is not only that the value of an internal delivery is not measured against a price, but also that what is delivered may not in fact be necessary at all. Units of organizations often justify their existence and growth by being productive, but the value of what they produce is not assessed. Benchmarking helps you make that assessment.

3. Benchmarking Contributes to Both Gradual and Quantum-Jump Change The magnitude of the improvements that can ultimately be achieved is impossible to judge in advance. Experience shows, however, that although you can sometimes find hitherto unsuspected possibilities for making major breakthroughs, you will usually have to be patient and take many small steps that will ultimately lead to great gains in efficiency. Radical change management is often prompted by a crisis situation in which the very existence of the business is threatened. Benchmarking, on the other hand, involves a constant search for good examples to serve as models for the modest improvements that will enable you to avoid crises, i.e., to be proactive instead of reactive.

4. The Whole Conceals Inefficiencies in the Parts A commercial company is evaluated by its bottom line. Other types of organizations have their own criteria for success. But if you look at the component parts of the organization—departments like accounting, personnel, and IT or processes like sales and aftermarket—you may find a grave lack of efficiency. There may thus be a substantial potential for improvement even where the overall result appears to be good. In the future, every head of department and process owner must be prepared to answer the question: “How do you know that your operation is efficient?” Benchmarking is an unsurpassed instrument for detecting inefficiencies concealed in parts of the whole.

6. Benchmarking Encourages Performance-Oriented Behavior Relations between individuals and units in large organizations are often, alas, governed by power rather than performance. Because the actual performance of a unit is so hard to measure, managers tend to devote more attention to matters of form and irrelevant factors than to things that really contribute to the success of the company as a whole. A person may be judged by his or her style, connections, appearance, or career status for lack of ways to measure actual performance and contribution to achieving the company’s aims. It has become increasingly evident that benchmarking appeals to strongly performance-oriented people, by which I mean people who reckon success in terms of getting results. In this they differ from power-oriented and relation-oriented people, who are motivated by other considerations.

7. Proceed Step by Step What we call the cascade approach means starting with a broad, shallow comparison (low level of resolution) and then taking a closer look at those areas that appear to offer the greatest opportunities for improvement. The first step in the cascade approach is exploratory benchmarking, a study that aims at identifying the areas with the greatest potential for improvement. Such a study seldom explains the reasons for differences in performance, but it does suggest where you should start digging deeper to look for reasons. This step-by-step approach is particularly recommended in cases where there are no obvious candidates for improvement.

8. Benchmarking Encourages Learning in Decentralized Systems Organizations and companies with a multiple-branch structure and delegated profit-center responsibility

Benchmarking often lack a mechanism for system-wide learning. One petrol station does not learn from another, nor one bank branch or retail outlet from another. One of the obvious applications of benchmarking in the future will be to enable units of decentralized systems to learn from each other. This will take advantage of the organization’s accumulated knowledge—an advantage that ought to be self-evident but is often overlooked. Failure to make use of knowledge from individual units of the organization (“advantages of skull”) is astonishingly widespread.

9. Benchmarking Unites Theory and Practice When the individuals in a working group or process are made to lift their gaze from their day-to-day tasks and consider their performance objectively, they form a theory about their own work. This has proved to be of great help in motivating organizations. People like to unite theory with practice because it makes them feel motivated. That in turn leads them to put more energy into their work, which results in a win–win situation where the employer benefits from increased energy and efficiency, while the employees are happier in their work. The function of theory is to lay a foundation for good practice. Benchmarking combines the theory of what the job in hand is really about with concrete inspiration from good examples to optimize the prospects for successful change management.

10. Benchmarking Benefits the Business and the Individual Traditional training, especially in Scandinavia, focuses on the individual. People are sent off on courses to improve their qualifications. This is not always compatible with the employer’s desire for better performance and efficiency. In the worst case the individual concerned may quit and use his qualifications to get a job with a competitor. Benchmarking ensures that the business as a whole benefits from learning; knowledge becomes an asset of the organization rather than the individual. That way the skills stay in the company and the working unit even if individuals depart. This reconciles the requirements of a benevolent personnel policy with management’s need for an efficiently run business. The intellectual simplicity of the benchmarking method may be a pitfall in itself. There is a great risk of underestimating the problems. So if you are contemplating a project, use the foregoing points as a checklist to help you avoid the mistakes that others

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V. SUMMARY Benchmarking is widely known and used, and has been for a long time. The most important elements in benchmarking as of today are as follows: • A complete and correct description of the processes and activities that create value-adding performance • Correct and accepted comparison with another party—a good example • In-depth understanding of causality, that is, of the differences in work organization, skills, and so on, that explain differences in performance (In short: why, why, why?) • Reengineering of work organization and routines and development of new skills to make operations more efficient; inspiration from, not imitation of, the partner • A goal-related, result-rewarded process of change that uses benchmarking as the starting point for an institutionalized search for new examples for continuity One key factor when it comes to benchmarking is efficiency, which in its right sense is a function of value and productivity. Related to this are issues of how to define what is produced, what the cost per unit is, who are the users of the product, and by what criteria those users evaluate the product. Benchmarking can be divided into a number of categories of which some are strategic or operative benchmarking, internal or external benchmarking, and qualitative or quantitative benchmarking. Furthermore, benchmarking can be conducted within the same industry or cross-industry. Benchmarking can have a leading or supporting role and have the goal of better performance or world-class performance. From long experience of working with benchmarking, several important and not instantly obvious issues have emerged. The method is simple and appealing, but its very simplicity has proved deceptive. Some advice to potential benchmarkers is to beware of distributed costs, to get inspired instead of copying, and not to confuse benchmarking with comparison of uncalibrated key indicators or competition analysis. Benchmarking can be further developed into the method of Benchlearning, which also incorporates a continuous learning process in the organization with numerous positive side effects.

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SEE ALSO THE FOLLOWING ARTICLES Cost/Benefit Analysis • Executive Information Systems • Goal Programming • Operations Management • Project Management Techniques • Quality Information Systems • Reengineering • Resistance to Change, Managing • Total Quality Management and Quality Control

BIBLIOGRAPHY Briner, W., Geddes, M., and Hastings, C. (1990). Project leadership. New York: Van Nostrand Reinhold. Camp, R. C. (1989). Benchmarking: The search for industry best practices that lead to superior performance. Milwaukee, WI: ASQC Industry Press.

Benchmarking Edenfeldt Froment, M., Karlöf, B., and Lundgren, K. (2001). Benchlearning. Chichester: Wiley. Gordon, G., and Pressman, I. (1990). Quantitative decisionmaking for business, 2nd ed. Upper Saddle River, NJ: PrenticeHall International. Karlöf, B. (1996). Conflicts of leadership. Chichester: Wiley. Karlöf, B. (1997). Strategy in reality. Chichester: Wiley. Karlöf, B., and Östblom, S. (1993). Benchmarking—A signpost to excellence in quality and productivity. Chichester: Wiley. Peters, T. J., and Waterman, R. H., Jr. (1982). In search of excellence: Lessons from America’s best run companies. New York: Harper Collins. Spendolini, M. J. (1992). The benchmarking book. Amacom. Thompson, A. A., Jr., and Strickland, A. J., III (1990). Strategic management—Concepts and cases, 5th ed. Homewood, IL: Irwin.