An Effective Approach to Improving Organizational Performance
It originated with land surveyors who made distinctive marks—called “benchmarks”—on rocks, walls or buildings for use as reference points for their topographical surveys. Today, as adapted for business usage, the term “benchmarking” refers to the baseline used for evaluation and measurement.
The Origins of Corporate Benchmarking
Corporate benchmarking formally started only thirty years ago. In 1979, Canon introduced a midsize copier for less than $10,000. Xerox, who could not even manufacture, let alone retail, a similar machine for that price, initially assumed that Canon was deliberately under-pricing to buy market share. Over time, however, as Canon’s copier sales continued without a price increase, Xerox engineers determined that Canon’s more efficient production methods enabled them to sell profitably at these prices. As a result, Xerox decided to benchmark Canon’s processes with the objective of reducing its own costs.
From 1980 to 1985, Xerox adapted Japanese techniques that enabled the company to cut unit production costs by half and reduce inventory costs more than 60 percent. This remarkable turnaround by Xerox launched benchmarking as a popular new management movement in the United States. Intrigued by the idea of generating corporate, organizational and marketing improvement by collecting and adapting the best practices of others, many of the nation’s leading corporations soon adopted and refined benchmarking techniques. The Malcolm Baldrige National Quality Award formally acknowledged the power and universal applicability of these techniques when it mandated benchmarking for all Award entrants.
While benchmarking had its start in manufacturing and heavy industry, a properly implemented benchmarking program can provide significant benefits to financial services organizations. Benchmarking adherents believe that being “good enough” is never good enough.
The Benchmarking Process
Benchmarking has two basic elements:
1) evaluation of a company’s own processes and procedures to identify strengths and weaknesses
2) identification, analysis and adaptation of the processes and procedures of the most successful companies.
Focusing On Marketplace Needs. Successful benchmarking studies begin with clear objectives that relate directly to the needs and wants of customers and prospects. Clearly stated goals provide a “litmus test” for corporate decision-making and ensure that the process will lead to the creation of products and services that resonate in the designated target markets.
Internal Benchmarking. A company must know its own operations thoroughly if they are to serve as the baseline for future endeavors. Therefore, the next step in the benchmarking process is the systematic examination and evaluation of:
- internal processes and procedures within and between business units
- the company’s marketing approaches for products and services
- the effectiveness of its distribution channels.
One of the greatest benefits of benchmarking is that, if a company learns nothing else, it has a much greater understanding of how its business operates.
Competitive Benchmarking. The process then moves on to the systematic study of competitor and industry best practices. A major virtue of benchmarking is that it keeps organizations attuned to changes and trends in their industry sector. Incremental improvements of, say, 10% or 15% may be more than acceptable until competitors take a radically new approach. An example of such a competitive onslaught is the creation of the Cash Management Account® (CMA® account) by Merrill Lynch. Shortly following the introduction of this creatively packaged product, Merrill Lynch was amassing more demand deposits than any banking institution. The banks, on the other hand, continued to routinely strive for greater efficiencies and incremental improvements, thereby ceding their historical dominance in an area of significant profitability.
Expanding the Benchmarking Focus. The Merrill Lynch CMA illustrates that the most artful part of the benchmarking process is determining where and how to benchmark beyond the obvious direct competitors. The challenge is to identify firms that will be worthy of the resources required to obtain the needed intelligence. An early story of benchmarking illustrates the value of looking outside your industry or market sector. Early in the twentieth century, circuses traveled from town to town throughout the United States on schedules that often left very little time between performances. The German General Staff sent several of their finest to America to “shadow” the circuses. From their observations, they learned much about the complicated logistics of striking tents, packing gear, handling equipment and people, and then efficiently setting up at the next location. Although this benchmarking was not done in a military context, the lessons learned were readily adaptable to the efficient deployment of troops in World War I. This story also makes it clear that success lies in the ability to not simply adopt existing practices, but rather to adapt those practices to the specific situation at hand.
The Bottom Line
Not surprisingly, relatively few financial services organizations have embraced company-wide benchmarking programs. Benchmarking is still generally associated with its genesis in an industrial setting. However, we believe that an effective benchmarking program can make valuable contributions and trigger ongoing improvements throughout an organization. Benchmarking encourages valuable introspection and institutionalizes a measurement system. It also sensitizes the organization to change and helps it to remain alert to opportunities to make quantum rather than incremental improvements. No financial services organization can afford to miss out on these important benefits.