Achieving an apples-to-apples comparison is possible if an organization normalizes measures. Data normalization, said Gardner, is really about putting data on a common basis (e.g., per unit), which mitigates issues of organizational scale and supports inferences about relative performance. Also, for benchmarking purposes, it is necessary to use standardize units among organizations. For example, if an organization is measuring cost per recruit, then a recruit must defined consistently among the organizations involved in the benchmarking. In addition, the number of recruits must clearly be linked to total recruiting expenditures to provide meaningful information about cost management.
To further illustrate the concept of normalization, assume an organization wants to benchmark its operating costs against a much larger and best-in-class organization like Wal-Mart. Because of its size and the nature of its business, Wal-Mart probably has operating costs higher than any organization in the United States.
"To obtain a meaningful comparison," said Gardner, "you would have to develop a cost character analysis on a unit basis, such as employee costs per desktop produced." This kind of reporting, said Gardner, helps organizations engage in meaningful benchmarking with industry leaders to see how they compare.
Making Sense of Data
A second benchmarking challenge is related to what Taylor called the magic number theory. Organizations often put too much faith in reaching a metric goal and fail to identify the root cause of performance gaps.
"A lot of times," said Taylor, "companies focus on an improvement number that is either irrelevant or unrealistic."
Moreover, even if a benchmark target is realized, it does not always translate into success. "I've worked with a number of companies that reached a metric goal and still wondered why they are not doing better than their competitors," said Taylor.
To illustrate this point, suppose Company X is interested in benchmarking its average cost per customer. After conducting some basic research, it is determined that the average cost per customer across the industry is $350. Company X's cost per customer is around $500. This would indicate a performance gap of $150. In many cases, Company X would strive to reduce its cost to the industry average.
There can be two problems with this approach. First, as previously mentioned, organizations vary by size and geography, and industry standards do not account for these variations. In addition, the industry standard may not reflect true best-in-class performance. "Without additional benchmarking outside the industry, an organization has no way of knowing if best-practice peer organizations are actually top performers for a given business process," said Gardner.
According to Taylor, "Even if it is widely accepted that an industry standard is the 'gold standard,' it may not make sense for your company." Internal or external factors that are unique to a business or a regulatory environment, for instance, may make it impossible for an organization to achieve an industry benchmark.
It is important to get it right, however, because benchmarking the wrong thing can lead to a false sense of security, said Taylor. "If you base your goals on an industry average and on the whole the industry is not doing well, then your company is basically heading in the same direction."
Secondly, it may not always make business sense for an organization to drastically reduce costs. "In this scenario," said Gardner, "the organization assumes that simply reducing costs per customer will have an impact on overall business performance. Yet an organization needs to spend time understanding why there is a performance gap." A host of issues that relate to technology and training, for example, may be impacting cost per customer. This cost may result in higher customer satisfaction, which could lead to greater profitability in the long-run. Failure to uncover the root cause could have far-reaching implications to other areas of the business, which could be more costly in the long term.
Taylor said that business improvement efforts, when done correctly, can have a powerful impact. A large Australian-based juice manufacturer, for example, was able to realize roughly $5 million in savings. By aligning business and IT strategies, including expanding and refining what it was measuring, the company was able to focus on the big cost drivers in its business for dramatic and sustained business improvement, said Taylor.
Benchmark What You Can Control
"It is important to measure what you can control," said Taylor. "For example, [although] costs can be an important factor in any organization, you need to make sure that you are in fact measuring things that are within your ability to change."