Benchmarking is a technique that uses quantitative or qualitative data to make comparisons between different organisations or various sections of organisations. Benchmarking is usually treated as a continuous process in which organisations periodically measure, challenge, and improve their practices.
A term now often used to describe performance assessment is benchmarking, which seeks to assess the competencies of an organisation against “best in class” wherever that is to be found. Often this is taken to mean only measures of output performance which can be defined in quantitative term (comparison of financial performance, key financial ratio and another measure of output such as market share, production throughput). However, there is also a more qualitative less tangible feature of performance which results in quality or satisfaction such as attitude towards customers. Assessment of these features is more difficult, and it can only be done by direct observation or surveying user. Benchmarking should include a quantitative and qualitative measure of performance, and its emphasis should be on continuous quality improvement. There are two kinds of Benchmarking – Internal Benchmarking and External Benchmarking.
Most organisations monitor their performance to identify the change in the major business activities over time. This may mean looking at the performance of the organisation as a whole or comparing the performance of tough individual teams or business unit with each other. Performance monitoring is a continuous process. Those with interest in an organisation’s business (shareholder, analyst, management, etc.) will wish to compare result over time to reveal trends in business performance. This is the only way to discern whether performance is in line with expectations. Management will be interested in far more than overall organisational performance. The manager will assess the performance of individual activities involved not just a business unit. Part of this process will include regular analysis of performance against target e.g. financial performance budget, sales and production achievement against a target.
This involves comparing performance with that of other organisations. Organisations need to decide:
- What activities or other dimensions of the organisation should be compared with others?
- Who should the other organisations be?
How can information on other organizations be obtained? In reality, external benchmarking can be time-consuming and be hampered by the difficulty of obtaining relevant information.Nevertheless, most organisations will wish to assess their performance relatives to the industry norm. They could do this regarding industry averages or the time performance of best performing organisation. However, a danger in relying solely on industry norm analysis is that industry may itself perform poorly. Obviously, the scope of cross-industry comparison will be more limited but could relate, for example, the employee cost or to research and development expenditure.
Perhaps a good illustration of how to conduct benchmarking exercise comes from Xerox Company. It has following ten steps which are to be followed according to the sequence in which they are presented:
- Identify what is to be benchmarked.
- Identify comparable companies.
- Determine data collection methods and collect data.
- Determine current performance levels.
- Project future performance levels.
- Communicate benchmark results and gain acceptance.
- Establish functional goals.
- Develop action plans.
- Implement action plans and monitor progress.
- Recalibrate benchmarks.
Like general benchmarking, HR benchmarking is extremely important. When information on HR performance has been gathered, it must be compared to a standard, which is a model or measure against which something is compared to determine its performance level. For example, it is meaningless to know that organisational turnover rate is 75% if the turnover rates at comparable organisations are unknown. HR benchmarking compares specific measures of performance against data on those measures in other “best practices” organisations. HR professionals interested in benchmarking try to locate organisations that do certain activities particularly well and thus become the “benchmarks.” HR Benchmarking is useful for following reasons:
- An organisation can identify how its HR practices compare with the best practices.
- It helps organisations learn what type of HR practices work and they can be successfully implemented.
- They provide a basis for reviewing existing HR practices and developing new practices.
- They also help managers to establish a strategy and set priorities for HR practices.
Some of the common benchmarked performance measures in HR management are:
- Total compensation as a percentage of net income before taxes
- Percent of management positions filled internally
- Benefits as a percentage of payroll cost
Managers need to consider several things when benchmarking. Managers must gather information about internal processes to serve as a comparison for best practices. It is also important to identify the purpose of benchmarking and the practice to be benchmarked, and as with most quality approaches, upper-level management needs to be committed to the project. Both qualitative and quantitative data should be collected because descriptions of programmes and how they operate are as valuable as knowing how best practices contributed to the bottom line.
Managers should be careful to gather data from the companies both within and outside their industry to ensure the broadest information possible.
Benchmarking may limit a company’s performance if the goal is only to learn and copy what competitors have done and not to consider various options to improve their process. It is also important not to view HR practices in isolation from each other. For example, examining recruitment practices also requires consideration on company’s emphasis on the use of the company’s staffing strategy.
Finally, benchmarking is one part of an improvement process. As a result, use of the information gathered from benchmarking needs to be considered in the broader framework of organisational change.