Benchmarking: compare your business with the industry and turn gaps into goals

A car repair garage looks up the figures for its industry and sees that its staff costs are well above average. When a technician leaves, the owner does not fill the vacancy. Six months later staff costs match the industry, but customers wait two weeks for an appointment and two fleet customers have moved to a competitor. The garage closed the gap and lost the part of its service that customers were paying for.

That is how benchmarking usually goes wrong. In Bain & Company's survey of management tools, benchmarking was the third most used tool, with a satisfaction score below the average (source: Bain & Company, April 2018). The problem is rarely the comparison but what comes after it: explaining the gap, deciding whether it is a weakness or a choice, and setting a target that does not damage what makes you good.

What is benchmarking, and which type fits your question?

Bain describes benchmarking as improving performance by identifying and applying the best demonstrated practices. In practice you compare your results, costs or ways of working with other organisations and draw conclusions you can act on. The type depends on the question.

Where benchmarking comes from: Xerox and the surveyor

In January 1987, Harvard Business Review published "How to Measure Yourself Against the Best" by Frances Tucker, Seymour Zivan and Robert Camp, drawing on the benchmarking work at Xerox, where Zivan ran logistics and distribution. The authors observed that comparisons with other units of your own company often reinforce complacency or produce "not invented here" excuses, while comparisons with outsiders bring the best practices into view. The word itself, they explained, comes from land surveying, where elevations are compared against a fixed mark.

Two lessons follow. The bar is set by the best, not the average. And a benchmark is a reference point, not a destination.

How to benchmark your business in six steps

1. 01

   Start from the decision

   What do you want to decide or improve? Choose five to ten measures that bear on that question, not every ratio you can find.

2. 02

   Choose the comparison group

   Same industry, similar size, similar customers. For costs and margins, the industry figures for your sector are the starting point; for practices, look for the best, also outside your industry.

3. 03

   Make the figures comparable

   Same definitions and the same year, corrected for legal form, the owner's pay, owned or rented premises and one-off items.

4. 04

   Translate gaps into money

   Multiply each difference in percentage points by your revenue, then judge each line: a weakness, a strength or a deliberate choice.

5. 05

   Set targets

   Each target gets an owner, a deadline and a guardrail measure that shows if it damages something else.

6. 06

   Track and repeat

   Put the targets on your KPI dashboard and repeat the comparison when new industry figures appear.

For what customers choose you on, aim at the best; for costs and profitability, start with the industry.

Gap analysis: a joinery workshop against its industry

Holm Joinery is a fictitious workshop with 18 staff and revenue of €2,400,000. It designs, builds and fits kitchens and interiors for private clients and housing developers. The owner sets its cost structure next to the industry average.

Fictitious Firmfocus example. The industry column is illustrative; look up the real averages for your own sector. Amount in euros = gap in percentage points x revenue of €2,400,000. The logic works in any currency.

For each line, ask four questions. Is the gap real, or a matter of definitions? What causes it? Do customers pay for it? And what would closing it bring in?

• Materials, a weakness: weekly checks showed that about one board in seven ends up as offcut, because cutting plans are drawn by hand and boards are bought in small lots at list price. Nesting software and one framework supplier tackle both causes.
• Staff costs, a deliberate choice: Holm employs two designers who design every kitchen on screen together with the client. That costs more than the industry spends, but since they started, more quotes turn into orders and clients accept higher prices. Customers pay for this gap.
• Premises, a temporary strength: the workshop is rented from the founder's family below the market rate. A successor or buyer would pay market rent, so the advantage is not real profitability, and for now it hides part of the materials problem.

The picture changes completely. Most of the €84,000 gap comes from a choice that pays for itself, a fixable weakness costs up to €60,000 a year, and the rent advantage of €36,000 is borrowed rather than earned.

From gap to target

George Doran's SMART criteria (Management Review, 1981) help turn a gap into a target you can check. In Doran's original version the letters stood for specific, measurable, assignable, realistic and time-related. Assignable is the one most often missing.

Fictitious Firmfocus example. Closing 1.5 points on materials is worth €36,000 a year at current revenue.

The materials target is set at what Holm can reach, not automatically at the industry average. Ordóñez and colleagues at Harvard Business School warn that goals narrow attention and can invite unwanted behaviour, such as buying cheaper boards that clients notice. The guardrail prevents that. The weekly offcut percentage is the leading indicator: it moves weeks before the quarterly cost ratio does, which is why it belongs on the dashboard.

Pitfalls in benchmarking

• Apples and oranges: a company that pays its owner a salary books it as staff costs; a sole trader does not, so its margin looks higher.
• The wrong comparison group: a broad group, such as all food and drink businesses instead of restaurants, makes you look better or worse than you are.
• Only the average: the average includes loss-makers. Where you compete, the reference is the best in class.
• Costs without value: a high cost line may be exactly why customers buy from you, as the garage at the top of this page found out.
• Copying instead of choosing: Michael Porter warns that operational effectiveness is not strategy, and that the more companies benchmark, the more alike they become. Benchmark to get better at what you have chosen.

Small business or larger organisation

Benchmarking starts in the internal analysis and the financial analysis for strategy, and ends in execution: targets on the dashboard and, when a gap calls for a different way of working, a plan for change management. The other execution topics are in execution and control, with every topic under Strategy.