A common question I hear regularly in my workshops and when working with clients is: Aren’t benchmarks and KPIs the same thing? The answer is simple: They are not. Benchmarks are reference points to compare your performance with that of others. KPIs help you chart your progress against your company’s strategic goals. But let’s look into this in a bit more detail.
What is a benchmark?
When you compare your performance or processes with other entities including competitors, other companies or industry best practices, it’s called benchmarking. Therefore, a benchmark is a reference point that allows you to compare your own levels of performance with the performance levels of others.
Although you can benchmark any business approach, product or process, it’s commonly deployed to compare:
- customer satisfaction,
- costs,
- quality and
- how much time things take to complete.
Rather than comparing your progress toward a strategic goal, as is the case with key performance indicators, when you benchmark you compare yourself with others with the intent to improve processes and technologies. Ultimately, when you uncover opportunities for improvement through benchmarking, you can reduce costs and time and increase profits and customer satisfaction.
What motivates companies to benchmark?
The most common reason to compare your performance with other entities is to identify opportunities for improvement. Another benefit to benchmarks is that it can help you assess your competitors and monitor their performance and approaches to business.
Ultimately, whether an organisation wants to benchmark because internally they feel they can improve, they want to close a gap with a competitor or they are interested in becoming best-in-class, the driver to benchmarking is improvement.
What are the different types of benchmarks?
The most common perception is that benchmarking involves comparing your organisation against another organisation with a similar business; however, that’s just one type of benchmarking called competitive benchmarking.
Here are the different types of benchmarks:
Internal: This benchmark compares processes within a company to a similar process within the same company such as between different stores in a retail chain or between two warehouses within the same company to ultimately develop best practices.
Competitive: This benchmark tactic looks directly at your competitors to not only improve your internal operations but also understand your competitors better.
Functional: This is benchmarking where you compare similar practices but it could be in different companies or industries. This could be an educational institution comparing the collections process with that of a corporate business—same function, just different companies and industries.
Generic: The goal with generic benchmarking is to identify excellent work processes that don’t need to be in the same industry or job function.
Benchmarking in practice
Benchmarking data is often available for purchase, but many companies also design their own project to acquire the data. For those that do, they must define the subject, process and measurements they want to benchmark.
Then, they must collect data on the benchmark and the corresponding data from their own organisation. The data sets must be compared and analysed to identify differences. Once there is a clear understanding of what the differences are, an improvement plan can be crafted and communicated.
What’s a key performance indicator (KPI)?
While a benchmark has a company comparing its processes, products and operations with other entities, a key performance indicator (KPI) measures how well an individual, business unit, project and company performs against their strategic goals.
Company executives and managers use KPIs to understand where they are in relation to their goals and to help them adjust if it looks like they are off course to meeting their objectives.
KPIs serve as monitoring and decision-making tools that help answer your organisation’s key performance questions.
For more information on KPIs you can:
- read ‘What are Key Performance Indicators (KPI)?’,
- check out this KPI template and
- explore the 10 biggest mistakes companies make with KPIs.
Relationship between benchmarking and KPIs
Any meaningful KPI needs to indicate levels of performance and therefore requires targets or thresholds to put results into context and show if performance is on track or not. This is where benchmarking comes in because benchmarks can help to establish the appropriate targets and performance thresholds.
For example, a company might have a goal of improving customer service. To measure how well it is performing the company decides to track the Net Promoter Score (NPS), which is a measure based on the question ‘How likely are you to recommend our service / product to a friend?’. In order to set the right target and put their own performance results into perspective the company collects benchmarks of NPS scores of their competitors as well as the industry they are working in. There are a number of websites that offer reference NPS scores like this one.
Benchmarking is a powerful management tool for companies to build winning plans and strategies as well as to continuously improve. Successful organisations are those that don’t just look internally for improvement, but get inspired by benchmarking themselves against others, their competitors and who also learn from best business practices no matter where they come from.
