Benchmarking is a well -known and oft-used technique in large corporations, but relatively few smaller companies take advantage of this valuable business tool. Many SMEs think it is too difficult, too expensive or not worth the effort. This is a missed opportunity as SMEs often benefit more from benchmarking than their larger counterparts.
Benchmarking is a technique for comparing various aspects of your business (such as financial results, input costs or process outputs) with those of other businesses, ideally of a similar size or in the same industry. Performance benchmarking is one of the best ways to see how your business compares with best practice and therefore understand your relative strengths and weaknesses. Best practice refers to a process or methodology that delivers better results and is consequently the target benchmark to aspire to. There is a whole industry of management and process consultants who can provide benchmarking tools and/or advice on best practice. And because there are many benchmarking consultants, competition keeps prices keen – although you need to be careful in selecting the right advisor.
The advantages of benchmarking are clear: it provides quantifiable targets for business improvement; allows progress to be measured; and provides estimates of the benefits that should be realised (so the most valuable improvements can be prioritised) – all of which should enhance competitiveness and improve returns. Benchmarking also tends to have a positive impact on business culture: by opening minds to new ideas, it sets your company further on the path of continuous improvement that leads to a learning, and therefore healthy organisation (See our previous blog on the key indicators of business health).
SMEs have relatively more to gain from benchmarking than larger organisations: many don’t have the embedded systems and processes for continuous improvement and first steps in this direction often deliver large benefits; SMEs can usually set clearer objectives and targets more complex businesses; and, if their peers aren’t doing much benchmarking, the competitive advantages are likely to be more significant. (If all the competitors in an industry achieve best practice, doesn’t that make best practice is just average?)
However, there are some disadvantages: benchmarks need to be relevant, and therefore be derived from a similar peer-group – if not, inappropriate practices may be proposed or unrealistic targets set; benchmarking has a tendency to become an end in itself, and not a means to business improvement; and, probably most importantly, benchmarking and related business improvements tend to focus on specifics but need to be managed holistically – otherwise, the business can become lop-sided with a few best practices constrained by many mediocre processes.
SMEs should worry less about this last point than larger, more complex, organisations. Having a single line of business makes concurrent management of the specifics and the whole a lot easier. The second reservation is also less of a problem for SMEs, where the risk of building a bureaucracy is lower.
SMEs do, however, suffer from a lack of relevant and comparable benchmarks. Not because there are few comparable companies (there are usually many) but because the population of SMEs as a whole is less engaged in benchmarking. This can be overcome by starting with benchmarks that are readily available for your relevant peer-group (such as financial benchmarks) or by carefully selecting a benchmarking advisor who has access to a relevant data set.
Indeed, for SMEs who are new to benchmarking, it is often advisable to start with high-level benchmarks and then to drill down into more detailed and specific measures when you become familiar with the benchmarking process. Our business health checks also provide an entry point by benchmarking all key areas of the business against comparable organisations and presenting the results in a balanced scorecard format.
SMEs shouldn’t miss out on the opportunities afforded by benchmarking. It’s a cost-effective way of prioritising what and how to improve in your business. And SMEs often generate proportionally greater benefits from benchmarking than large corporations do.