Benchmarking is comparing a company’s information or performance against another to improve achieving objectives. Owners and managers decide which parts to compare, while employees complete most of the work. Financial ratios are used to compare financials, and goals and objectives can be set for improvement. However, comparing data without correlation can lead to unattainable goals.
Benchmarking analysis is the process of comparing the information or performance of one company against another. This activity is quite common among businesses, especially public companies. There are many different analysis methods. For example, a company may compare its financial performance, product quality, manufacturing processes, or marketing campaigns against industry standards. Its purpose is to help a company improve in achieving its objectives by comparing it with more successful companies.
Owners and managers are the most important people in the benchmarking process. These people have to decide which parts of the company they should compare against external standards. They implement processes where the comparison occurs in a timely manner. Other people or employees typically complete most of the work. Often copious amounts of information are needed to conduct benchmarking, especially when multiple parts of a company are under scrutiny.
A common example of benchmarking is comparing a company’s financials with data from a leading competitor or the industry standard. Financial ratios are the most important tools for conducting this analysis. The use of financial ratios eliminates any differences in accounting methods or preparation of financial statements. Once completed, the financial report metrics present comparable data for ease of analysis. For example, accountants can compare inventory turnover without taking into account the specific types of inventory that each company sells in the marketplace.
Goals and objectives can be a reason a company engages in benchmarking. If a company wants improvements in some areas of operation, it collects data on operations performance. Hence, business analysts find the industry standard or leader for this specific process. By comparing data from the two companies, owners and executives can set goals for how to improve internal operations to meet or exceed these external guidelines. The company and its employees then work to improve operations until subsequent analysis indicates that the new goal has been met.
Benchmarking analysis is not always a foolproof process. Comparing data without correlation can result in unattainable goals or objectives. Also, creating internal benchmarks that have no industry comparable data can be time consuming as the data is useless on its own. Owners and managers may be unable to make suggestions for improving operations by reducing costs or increasing efficiency, two common goals of benchmarking.
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