Business leaders often feel their control on their business is slipping. They put in place processes and measures designed to help them manage the organization, yet they continue struggling to maintain competitive advantage. The key reason is that processes and measures sit in a vacuum unless, through benchmarking, they directly compare the company's performance with what competitors are doing. Without a clear view of how it compares with external entities, an organization may suffer from tunnel vision and thereby lose focus on the measures that matter most to its customers and stakeholders.

For example, one of our clients, who leads a major oil and gas company's call center operations, told us at the end of 2007 that he was struggling to regain control of his organization. Most of the leaders and employees in the organization believed they were delivering value; however, our client was receiving alarming reports from customers and other stakeholders about a decline in service quality.

One of the key reasons for the disconnect between the organization and its stakeholders was that the organization's goals and targets were inward-looking. Metrics that managers tracked regularly did not take into account the performance expectations of the market; the company was not benchmarking its performance against metrics that were commonly accepted in the industry. For instance, the first-tier call center was assessed only in terms of employees' speed in answering calls. Managers had no indication of the speed and quality of the resolution of the problem that led to the call. Even if the organization's scorecard showed positive performance, that did not mean the call center was adequately addressing the issues customers deemed important. Customers might prefer to have calls answered quickly, but the more important question to them was “How well was my problem resolved?”

The leader of this call center asked us to review the group's performance management framework. Our analysis highlighted gaps and overlaps in benchmarking metrics, and led us to the conclusion that the focus of the organization's metrics was too myopic to reflect the call center's performance in the areas that were most important to stakeholders. The company revamped its performance management framework to emphasize benchmarking of resolution-focused metrics for its first-tier call center, rather than simple measurement of the speed at which employees answered the phone.

How Benchmarking Helps Managers Regain Control

For managers facing situations like that of our call-center client, a value-based performance management framework can help assess the health of the organization. What makes these frameworks different from most performance management frameworks is their focus on the value the company delivers to shareholders, customers, and other stakeholders. The methodology stems from a financial valuation technique known as value-driver analysis. The key benefit of this technique is that it provides a set of performance indicators that are mutually exclusive and collectively exhaustive. An additional benefit is that value-driver analysis limits to the bare minimum the number of metrics a company uses.

The sidebar Selecting the Right Metrics describes the process of choosing performance measures in a value-based performance management framework. One key consideration in the selection of metrics should be whether benchmark data is available. Various definitions exist, but benchmarking is generally understood to be the process of comparing the performance of one organization against that of one or more other organizations. This is not to say that a company cannot have any metrics which it doesn't benchmark against other organizations (or against other divisions or functions within the company), but a company deciding between two comparable metrics should consider whether benchmark data is available for either. In a value-based performance management framework, performance benchmarks are the true catalysts for change. They provide a non-negotiable view of what an organization needs to change in order to become more competitive.

As a company moves through the process of selecting metrics, performance managers must determine where they will acquire the external data with which they'll compare their organization. The right answer depends on the company's industry. Benchmarking based on the Balanced Scorecard metrics is quite common, but corporate performance benchmarks must match the industry's value drivers. For instance, it would not make sense for an asset-intensive business to use the same performance metrics that are appropriate for a professional services firm with relatively small capital investments. It usually makes sense for a business to benchmark itself against best-in-class performers within its industry. At the same time, the comparison of an organization's performance against that of its peers in the market can help it determine the level of performance common in its competitive environment.

Regardless of which metrics a company uses and where it acquires comparative data, the end result of a benchmarking process is to list performance gaps between the company doing the benchmarking and the organization or organizations against which it's comparing itself. These gaps then translate into a set of revised business targets or a business case for making changes to improve performance. Benchmark data in areas such as cost, quality, and productivity often helps define performance improvement initiatives.

Benchmarking can also be helpful in sourcing, or outsourcing, decisions. In particular, benchmark data can indicate whether pricing and service levels of an outsourcing contract are reasonable in the context of the market. A best practice in writing sourcing contracts is to mandate benchmarking at regular intervals, then to adjust pricing in the contract if the benchmark data supports a change. For example, a large pharmaceutical company we work with recently renegotiated its contract with a vendor that manages technology for the pharmaceutical company's sales force nationwide; the new contract includes a benchmarking clause. Data collection on sourcing contracts can be done via specialized data providers or via a request for proposal (RFP), especially if the contract is due to expire. This type of benchmarking can also help settle pricing disputes because it provides independent and objective comparisons.

Performance benchmarking may be a one-off event. However, a company is most likely to achieve lasting results if it integrates benchmarking activities within its permanent performance management framework. Among other benefits, regular benchmarking helps an organization ensure that its metrics remain absolutely relevant within its industry and market. The appropriate frequency of a benchmarking process varies depending on four factors: the industry, the type of metrics being compared, how the organization uses the benchmark data, and the cost of obtaining that data. In an ideal world, senior management might like to benchmark customer satisfaction daily, but the internal cost of doing so would be prohibitive and external data is highly unlikely to be updated that frequently.