Benchmarking – i.e. Comparing your business performance against certain reference points – is a popular and potentially powerful way to glean insights that can lead to improved performance. In this article, we’ll explore the various types of benchmarking and how these approaches can benefit your business.
What’s the difference between benchmarks and KPIs?
People often ask me this, and there seems to be a general assumption that benchmarks and KPIs are the same thing. But they are different.
- Benchmarks are reference points that you use to compare your performance against the performance of others. These benchmarks can be comparing processes, products or operations, and the comparisons can be against other parts of the business, external companies (such as competitors) or industry best practises. Benchmarking is commonly used to compare customer satisfaction, costs and quality.
- KPIs, on the other hand, are decision-making and monitoring tools, used to track performance in relation to strategic goals. In other words, KPIs chart whether an individual, project, team, business unit or entire company is on track to achieve its objectives. KPIs are a bit like an early warning system, flagging up where things might be heading off-course and where action might be needed.
So, when you use KPIs, you’re comparing progress in relation to a specific goal. And when you use benchmarks, you’re comparing against others. You can use benchmarking to put your own KPIs into context and to set targets for your KPIs.
Both – KPIs and benchmarks – are used to identify opportunities for improving performance, which may be where the confusion arises.
Exploring the different types of benchmarks
Broadly speaking, benchmarks break down into two core categories: internal and external. Internal benchmarking compares performance, processes and practises against other parts of the business (e.g. Different teams, business units, groups or even individuals). For example, benchmarks could be used to compare processes in one retail store with those in another store in the same chain.
External benchmarking, sometimes described as competitive benchmarking, compares business performance against other companies. Often these external companies are peers or competitors, but that’s not always the case; for example, you can use benchmarking to compare performance, processes and practises across different industries.
Three ways to use benchmarking
Benchmarking, whether internal or external, is used in three key ways. They are:
- Process benchmarking. This is all about better understanding your processes, comparing performance against internal and external benchmarks, and finding ways to optimise and improve your processes. The idea is that, by understanding how top performers complete a process, you can find ways to make your own processes more efficient, faster and more effective.
- Strategic benchmarking. This compares strategies, business approaches and business models in order to strengthen your own strategic planning and determine your strategic priorities. The idea is to understand what strategies underpin successful companies (or teams or business units) and then compare these strategies with your own to identify ways you can be more competitive.
- Performance benchmarking. This involves collecting information on how well you’re doing in terms of outcomes (which could mean anything from revenue growth to customer satisfaction) and comparing these outcomes internally or externally. This can also refer to functional performance benchmarking, such as benchmarking the performance of the HR team (using metrics like employee net promoter score or staff engagement surveys) or the marketing team (measuring net promoter score or brand awareness, for instance).
Why you might want to consider benchmarking in your organisation
Each of these different ways of benchmarking have one key goal in mind: to identify gaps in performance and uncover opportunities to improve, whether that means making processes more efficient, reducing costs, increasing profits, boosting customer satisfaction, or whatever. Ultimately, what drives companies to benchmark is the need (or want) for improvement.
So whether you want to simply compare your internal performance, catch up to a competitor, better understand and track your peers, or become a market-leader in your industry, benchmarking can be an incredibly useful tool.
However, benchmarking is not a magic bullet for improving performance – it’s a part of the solution, not the complete solution. The complete solution requires you to set clear strategic goals, identify your critical business questions, design KPIs that help you answer those questions and track performance against your goals, and compare performance using benchmarking.
I certainly wouldn’t advise a company to focus all their attention on benchmarking at the expense of tailored, carefully designed KPIs. But, when viewed as part of the complete performance management picture, benchmarking provides a useful way to glean valuable performance-boosting insights.
Where to go from here
If you would like to know more about KPIs and performance management, cheque out my articles on:
Or browse the KPI Library to find the metrics that matter most to you.