The Hidden Perils Of Benchmarking And How To Avoid Them

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Leaderonomics

25-02-2015

4 min read

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Every business competes. Companies use benchmarking, by comparing key performance metrics, as a way to determine where they stand competitively and to identify ways they can improve. It is widely practised and enthusiastically embraced. But does it deliver, and is the emphasis well placed?

It’s not the concept but it’s in the application where problems arise

Benchmarking and its close cousin emulating best practice are hard to execute. Consider this. Companies have difficulty in benchmarking and transplanting best practice within different parts of their own company.

Large companies, for example, have different employee attrition rates between departments and geographies since they cannot successfully migrate what works in one part of the business to another. When benchmarks can vary quite dramatically internally, how can companies hope to transplant best practice across companies?

One common flaw is that the outside view of what causes success is incomplete and often inaccurate

Why? Context, culture and hidden internal interactions create the outcomes that are visible. The internal logic and processes are not only difficult to discern but the way they interact with each other is often impossible to replicate. Companies falsely assume that the little bit that is visible from the outside is the key to success and they miss the fact that it is 80% of the iceberg that you don’t see which is most important.

You can never predict how exactly a given set of practices that work in one company will work in another

Companies copy the organisation structure of others only to find that how the structure works cannot be easily replicated. They hire personnel from competitors only to find that those individuals were successful because of the system within which they operated and are unable to deliver the promised best practice.

Dressing casually and informally and changing office configurations are often inaccurately seen as a way to spark innovation.

The key to successful benchmarking is to understand and emulate how others think. And this is very difficult to do. Aspiring to the “what” is fine but you have to find your own “how”.

Sometimes the choice of benchmark itself is flawed

One fairly common fatal attraction is to look at a particular aspect of the business, such as customer experience, and look outside the industry to find a particular company to emulate.

One bank aspires that the customer experience at its branches should be similar to an Apple store. The aim of exceptional customer service is laudable. But jumping to an unrelated industry is exceptionally perilous. Enormous time and corporate resources are wasted on these futile but alluring endeavours.

Presented as innovative and out-of-the-box thinking, it fails to recognise the vastly different ecosystems, products, customer behaviour and internal processes. How all of these interact with each other is almost impossible to determine, let alone reproduce. Both these flaws put stress and pressure on the organisation, not to mention waste resources. Mindless imitation is not benchmarking.

Another issue is the implicit assumption that the word is standing still. The company that you are benchmarking to is evolving and changing too. When and if a company arrives at the destination it is it aiming for, it finds that the competitor has moved to a different or higher ground.

Benchmarking can be useful if done correctly

Focusing on individual processes and metrics should not be the central focus. For example, turnaround time and approvals in a bank or fulfillment time in an online business, while important to get right, should not become a substitute for the overall value proposition. The big fantasy is that improving each process, i.e. improving each part will make the whole better.

What this crucially misses is that it is the interaction between the parts of the organisation that makes the whole organisation better. What matters to most stakeholders be it customers, employees or shareholders are a range of things. It is this total experience or value proposition that is important, not the efficiency of each discrete process. Missing the forest for the trees is one of the key perils of benchmarking.

When you applied for a mortgage loan, wasn’t the only thing that mattered was how quickly you got approved? Turnaround time, because it can be measured, is a big focus at many banks.

However, other things matter too. For example, how much information was requested when the application was made, how much loan-to-value was approved, how long did the whole process of closing take, how helpful was the relationship manager, how responsive was the bank post-closing to queries, how good are the online banking facilities and of course how competitive were the rates. If a particular bank is good across many dimensions, the overall value proposition can be superior to a bank which excels in one dimension such as approval turnaround time but does not do the other things well.

In large professionally managed companies where perception often trumps reality and where managers are playing to an internal gallery for recognition to move onto the next big role, there is a premium on being seen as an original thinker, someone with big ideas and here benchmarking finds fertile ground. By the time the futility of most benchmarking and best practice adoption exercises is evident, people have moved on to bigger things.

Concluding thoughts

That is nothing wrong with looking for inspiration outside. But the focus needs to be correct and the pitfalls need to be avoided. Copying others or aspiring to be simply as good as somebody else is hardly innovative or a big leap forward. Creating your own uniqueness is a sign of innovation.

What works better is a focus on continuous improvement. Creating new value propositions is time and money well spent, though not easy. CEOs (chief executive officers) and boards need to realise that at the heart of every successful and sustainable strategy is uniqueness, not sameness.

The author is a senior advisor to two leading management consulting firms. Until recently he was the longest-serving CEO of Citibank in Malaysia. He is also the President of the American Malaysian Chamber of Commerce. To engage the author for speaking engagements or for consulting support, email training@leaderonomics.com

 
This article was previously published in Business Times Singapore.

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