Benchmarking: One of your CEO’s favorite tools

Companies around the world catch on

Re-engineering, total quality management, mission statements, pay for performance, core competencies: Which of these management fads will your administration latch onto next? If your CEO is anything like those of a majority of companies in a recent Bain & Co. survey on management tools, he or she is likely to put benchmarking at the top of the list.

And that’s good news for you, since you’re already engaged in benchmarking. You and 86% of the 818 companies that responded in 1997 to the international consulting firm’s survey are riding the wave of benchmarking’s rising popularity as a management tool. Benchmarking was eclipsed in popularity only by strategic planning (90%) and mission and vision statements (87%).

More good news: Benchmarking is unlikely to end up at the bottom of next year’s trash heap, says Darrell Rigby, a director with Bain & Co. who prepares the Boston-based firm’s annual Management Tools and Techniques survey. While some previously hot tools such as total quality management, re-engineering, and activity-based costing have cooled off in the five years since Bain & Co. began the survey, benchmarking has continued to gain users. In fact, it’s the only tool that hasn’t even dipped once. (See graph, above.)

"Benchmarking is a pretty straightforward tool that almost anyone in the organization can apply to their function or business unit. Like exercise, even a little bit can be good for you," Rigby says.

Other management tools, such as total quality management and re-engineering, can be quite costly and are only beneficial if you stick with them for the long haul, he says. There’s no such thing as doing a little bit of total quality management; it’s too complicated and too expensive.

"That’s in sharp contrast with benchmarking, where the cost is relatively low and the benefits are high," he says. "Just getting outside of your insulated world, looking at what other people are doing, asking questions, challenging some of the fundamental assumptions about your business model, and encouraging fresh thinking is helpful even if you’re doing a little bit of it."

An important point to remember about all management tools, Rigby says, is that they’re not silver bullets. The average satisfaction score for all tools in the survey is a "B," and 77% of respondents say that tools promise more than they deliver. Eighty-six percent believe that tools must be customized for individual companies, and 95% say top-down support is required to succeed. Bain & Co. says there is no correlation between financial success and the numbers or types of tools used, but there is a correlation between financial success and the ways tools are used.

To make a benchmarking effort succeed, Rigby offers the following tips:

You must make credible comparisons.

Get past the accounting differences and understand the processes well enough that you can show a fair comparison. "Until you get to that, people will spend all of their time criticizing the comparison and saying it’s not applicable to our business."

People have to really want to learn.

"The most successful benchmarking I’ve seen has been led by people who really want to re-examine their own processes and ask whether there are different ways that might be better," he says. "Whenever a corporate planning department comes out with an edict that says you will show us benchmarks vs. these companies, anyone who wants to disguise the data or use them to support only good news can find ways to do that. They can use benchmarking to confirm what they’ve always said in the past: There’s no room for improvement."

Look at all different kinds of companies.

Most successful efforts are between companies that aren’t direct competitors. Recognize that different businesses will pursue different strategies. Some will build competitive advantages around quality and consistency; others around low-cost position or customization. Each business model will require different processes and approaches to success. "You have to understand the company’s strategy, its integrated systems for achieving that strategy, and then the individual components so that you learn the right lessons."

Get one or two companies to agree to trade information with you so there’s a benefit for everyone involved.

"It’s difficult to get the information from the outside, but if you share it, you’ll both learn something," Rigby says. "Some of the best efforts I’ve seen have come from someone calling a friend in another company." Keep the group small. The bigger the group, the less willing people are to talk.

Of course, there’s always a downside. "Tools should come with warning labels," Rigby says. "The full effects of using a particular tool, including its side effects, must be understood before adopting it." Take downsizing, for example, a tool that has been used to improve short-term profitability. Its side effects include lower morale, loss of innovation, declining trust, lack of teamwork, and questionable long-term shareholder value. So what are the side effects of benchmarking?

Companies that are overly enamored of benchmarking sometimes find themselves playing catch-up, Rigby says. "They shoot for where their competitors are now and miss where they will be by the time they themselves get there. The truth is, you can’t succeed by doing the same thing everyone else is doing. That approach is doomed to mediocrity." Rigby says you have to find ways to meet customer needs better than the competition, and unless you’re finding unique ways to do that, there’s no way you’ll be able to deliver superior performance. Benchmarking has to be the start, not the end, of any successful strategizing process.

Another major error is taking individual components out of the context of the overall system that makes that component work. "You have to realize that business models are composed of integrated processes that depend on other processes to be successful," Rigby says. "If you try to lift out any single component, you’re not going to see the same effect in a different business model."

You have to benchmark both results and processes. "People have a tendency to do one or the other," he says. "Until you’ve benchmarked the processes to understand not just the what, but the how, you’re not likely to lead to any implementable action steps."

The main thing to remember with benchmarking is that it’s largely a spark for creativity, Rigby says. "It’s never going to provide the answer all by itself. It’s a good way to provoke creative thinking, and like all creative thinking, some of it will be helpful and some of it will be outside the bounds of what you can implement."

For more information on the Management Tools and Techniques survey, contact Bain & Co., Two Copley Place, Boston, MA 02116. Telephone: (617) 572-2000. Darrell Rigby can be reached through e-mail at darrell.rigby@bain.com.