Benchmarking In Business

Benchmarking Overview

Supply chain operations within an organization should be constantly reviewed to identify where improvements can be made or deficiencies eliminated. One method to help do this is to perform a series of benchmarking tests on their supply chain processes. Benchmarking or goal setting allows a company to assess the opportunities they may have for improving a number of areas in their supply chain including productivity, inventory accuracy, shipping accuracy, storage density and bin-to-bin time. The benchmarking process can provide a company some estimate of the benefits achieved by the implementation of any improvements.

History of Benchmarking

Benchmarking is the process whereby an assessment of an act or performance is measured by some means, whether this is by a measurement of time, value or quantity. For example, an assessment of moving items from one storage location to another can be measured by time for a single movement or by quantity if the performance is over a set period. A benchmarking project will gather the assessments and develop a plan of action to improve the process that was assessed. The popularity of benchmarking was spearheaded by the Xerox corporation in the 1980’s and is now used in corporations throughout the world.

Types of Benchmarking

Three types of benchmarking can be identified; internal which is focused on the processes of a single company, external which examines processes outside of a company’s direct industry and competitive, which examines processes at firms within the same industry.

Internal Benchmarking

The internal benchmarking process allows a company with a number of facilities that operate the same supply chain processes to compare and contrast the ways in which the process is performed in those facilities. For example if a company operates five distribution centers in the US and Canada, the benchmarking process can examine a number of operations that take place at each of the distribution centers and compare how they are performed and what improvements can be made by comparing the results of the benchmarking. If a company benchmarks the processes around inventory accuracy, shipping accuracy and storage density, the results of the assessments of the facilities can help a company to improve on those processes at all of the facilities.

External Benchmarking

For companies that have performed internal benchmarking and want to investigate new ways in which to improve performance of their internal processes, external benchmarking can produce significant improvements. Many companies believe that their processes are as efficient as possible, but quite often, the efficiencies are limited by the knowledge within the company. The external benchmarking process takes a company outside of its own industry and exposes them to different methods and procedures. For example, a manufacturer and distributor of electrical components have internally benchmarked their warehouses for a number of years and have exhausted ideas on improving efficiencies. They approached a very successful retail company to visit their central warehouse and benchmark the processes that occur there to compare to their own warehouse processes. The external benchmarking allowed the manufacturer of the electrical components to assess the processes seen in the retailer’s warehouse and develop an improvement plan for their own facilities based on the results.

Competitive Benchmarking

For companies that are not performing as well as their competitors they may want to identify the reasons why their processes are not as efficient. Consulting and research firms can perform competitive benchmarking studies for companies that will identify the strengths and weaknesses of their processes based on those of their competitors. The company can then produce improvement plans based on the results of the competitive benchmarking.

Components of Benchmarking

There are a number of components to a benchmarking study. Not every benchmarking project will incorporate these components, but a combination of these can be used.

• Financial benchmarking – This involves a financial analysis of the operations that are assessed. For example, a company can compare the cost of storing a component in each of its warehouses.
• Performance benchmarking – This can compare the efficiency of performing a task in one company location to another, or to a competitor’s.
• Product benchmarking – This method compares the product of one company against another, or comparing between facilities in the same company.
• Strategic benchmarking – This method observes how other companies compete. This can be within the same industry or outside of the companies industry.
• Functional benchmarking – This is considered to be traditional benchmarking where a company will benchmark a single process at a location or a number of locations to identify where efficiencies can be made.

Competency Benchmarking for Recruitment and Beyond

Talent is the most under-managed corporate asset of the past two decades. Fortunately for businesses that invest in organizational development, advancements in assessment and evidence-based action plans manage talent in ways never before possible
The Task...
In The War for Talent, McKinsey and Company³ declared that "talent is the most under-managed corporate asset of the past two decades." It is astonishing this shortcoming persists since these authors further noted that "talent driven companies of the Fortune 500 experienced nearly 82% greater profit than their competitor." Fortunately for organizations that wisely invest in organizational development, modern advancements in online assessment and evidence-based action plans can facilitate talent management in a way not possible in recent decades².
A review of a recent initiative by Papa Gino's illustrates how competency benchmarking using standardized assessment can easily and substantially enhance talent management. In particular, its Human Resources Department desired competency maps of General Managers (GMs) who were high performers, as defined by the company's annual performance evaluation metrics. HR selected groups of the top and bottom scorers on the employee evaluation and then compared the groups' scoring patterns on the 20|20 Skills™ assessment. This pilot exercise allowed Papa Gino's to conduct an internal validation of their newly launched 20|20 Skills™ assessment program and simultaneously begin to understand the skill sets that characterize high performers in its unique corporate culture.
Findings and Benefits...
Papa Gino's achieved two key outcomes from its pilot benchmarking exercise. First, in the short-term, the company gained an evidence-based formula for identifying candidates with strong potential for being high performers in its culture. Consistent with the wealth of research on competencies that predict performance in the service industry, an Analysis of Variance (ANOVA) found that mean scores across all ten competencies on the 20|20 Skills™ assessment significantly (F 1,51 = 6.275, p .02) distinguished high and low performing GMs within the Papa Gino's culture. As shown in the Appendix, univariate F-tests on the individual subscales revealed that three competencies showed particular significance: Transformational Leadership, Group Process (team building) and Applied Problem-Solving. From a selection perspective, HR now pays closer attention to candidate's who have strong scores on all three variables.
Second, in the long-term, the company also discovered ways to bolster their selection and development approaches. The same basic formula for identifying high performers also can be used to guide coaching and training programs and succession planning. For instance, Creativity scores were nearly identical for the high and low performing groups. Moreover, the group of low performing GMs actually had higher scores on Ethical Awareness. These two findings could indicate an opportunity for Papa Gino's to increase employee performance by selecting GM candidates with stronger Creativity and Ethical Awareness scores than those of current incumbents. Likewise, the low and high performing GMs might well improve their work performance with targeted training or coaching related to Creativity and Ethical Awareness.
That said, Industrial and Organizational Psychology experts would point out an alternative interpretation. For example, in some workplace cultures patterns of high and low scores on specific competencies might be the recipe for success. In Papa Gino's case, GM's at the restaurant level may be successful because they are strong at executing established company initiatives. Thus, Creativity is a competency that could be more relevant to higher level positions than GM's. Further, exceptionally high Ethical Awareness scores at Papa Gino's may be an example of "too much of a good thing" and subsequently lead to rigid, "black-and-white" thinking. Thus, the effectiveness of Papa Gino's top GMs could stem in part from an ability to perceive the world as "gray" and therefore make better decisions because various relevant factors are sought before final decisions are made. In other words, the benchmark data might be informing HR to find GM candidates who are "situationalists."
Modern assessments provide detail in data that is not possible with traditional assessments, and this allows HR professionals to extract better and clearer insights from benchmark data. As for the resolution to the issues of Creativity and Ethical Awareness in GMs at Papa Gino's, the HR department is keeping that a proprietary secret. After all, successful companies do not advertise their specific secrets and strategies for success!
Benchmarking Your Organization: Important Points...
Whatever the size or nature of your organization, the ideal is to move your business from one of "excellence to significance." Reaching this goal involves understanding that talent is the foundation of business success in the service industry. The example of Papa Gino's demonstrates that benchmarking can be done beneficially without implementing large and costly projects. And the results have wide-reaching HR applications that impact work performance and ultimately the organization's bottom line. To that end, below we give helpful guidelines to maximize the effectiveness of your benchmarking:

• Select an assessment that was designed and validated to be relevant to the service industry, and only choose instruments that conform to the Standards for Educational and Psychological Testing¹ and the Uniform Guidelines on Employee Selection Procedures (UniformGuidelines.com). In this way organizations can trust that the results are unbiased with respect to the demographics of test takers. This helps to guard against issues of bias and adverse impact as required by the Equal Employment Opportunity Commission (EEOC).
  
  
• Benchmark employees on skills, not personality traits. Skills are applied constructs, while personality traits are often abstract. Examples of such skills for most job categories are available for free at the US Department of Labor's "O*Net Online" at: http://online.onetcenter.org/. This resource exemplifies that personality traits are not synonymous with skills or competencies. Further, members of the Society for Industrial and Organizational Psychology recently published a new study⁴ showing that personality measures are generally poor predictors of work performance. As such, organizations that use such tools are arguably at legal risk, e.g., non-compliance with EEOC Title VII discrimination standards.
  
  
• Large sample sizes are not necessary to conduct valid benchmarking exercises. For example, the 20|20 Skills™ assessment is highly reliable, and it will therefore detect significant differences based on relatively few test cases. Additionally, its items have previously been calibrated on large samples. Accordingly, the feedback and "Action Plans" it generates are reliable and valid at the individual and group levels.
  
  
• Consult with Industrial and Organizational Psychology professionals when interpreting and applying benchmark data. And always include a professional with strong expertise in the use and interpretation of the assessment used for benchmarking.

Successful organizations are constantly proactive in the war for talent. A standardized skills assessment with industry-specific content and unbiased scores is one of the most efficient, reliable and effective weapons at your disposal. As an example, independent research indicates that the anticipated first-year, average ROI for organizations using 20|20 Skills™ is about $74,500 for each new management hire. This assumes that the value of "high performance" is $100,000, with a 2:1 selection ratio and tenure of five years. Impressive ROIs are also documented for line and middle management hires.
Also, we have repeatedly found that even a modest follow-up or benchmarking study is well worth the effort and relatively small costs involved. Such studies often reveal the particular strengths and weaknesses of your current HR practices, while pointing to new areas of human behavior and performance that will be valuable when hiring new personnel and managing your current talent. The value of assessment and benchmarking clearly transcends recruitment. Together, they are investments that provide a strong competitive edge by driving your most valuable asset - human capital.
References

1. American Educational Research Association, American Psychological Association, & National Council on Measurement (1999/2002). Standards for educational and psychological testing. Washington, DC: Author.
   
   
2. Houran, J., & Lange, R. (2006). State-of-the-art in measurement in human resource assessment. HVS Journal. 28th Annual NYU Hospitality Industry Investment Conference, New York, NY, June 4-6.
   
   
3. Michaels, E., Handfield-Jones, H., & Axelrod, B. (2001). The war for talent. Boston, MA: Harvard Business School Press.
   
   
4. Morgeson, F. P., Campion, M. A., Dipboye, R. L., Hollenbeck, J. R., Murphy, K., & Schmitt, N. (2007). Reconsidering the use of personality tests in personnel selection contexts. Personnel Psychology, 60, 683-729.

Appendix: Descriptive and F statistics for Papa Gino's Benchmarking Exercise (n = 53)

Benchmarking For Success

There are only three ways to become more successful -
1) Do more right.
2) Make fewer repetitive mistakes or poor decisions.
3) Do both.
There is a surefire way to ensure your continued future success and that is to develop a variety of benchmarks along your life path. Keep in mind that each of these benchmarks can be a very positive process for the person who routinely examines their life decisions and actions. However, the problem is most people don't. The vast majority of people just truck along not connecting today's issues, challenges or problems with yesterday's poor judgment, choices or behaviors.
If it isn't measured, it isn't happening. Establishing benchmarks in your life will guide you consistently toward your goals and desired life outcomes. Benchmarks can give you a number of critical advantages as you move from one day to the next on your journey. Just a few of these are:
1. Accountability.
2. Re-commitment.
3. Re-evaluation.
4. Proper direction.
5. A measuring device.
6. Renewed belief.
7. Growing passion.
8. Integrity of purpose.
9. A warning sign.
Lofty benefits? Maybe, but essential if you want to achieve any measure of continued future success while enjoying the success you achieve?
A benchmark can be analogous to the road signs you will see while driving on a long distance vacation to a part of the country you have never been too previously. They can be warning signals that something is amiss or that if you are not careful you may get lost. If you are not vigilant, you may never make it to your destination. Or you may many spend extra wasted hours looking for the right highway.
Here are a few benchmarks to consider as you continue your career, financial circumstances, relationships and life in general 2006.
1. What are you going to do differently this year to accelerate your progress?
2. What measurement guidelines do you have in place to ensure you are heading in the right direction?
3. What records do you need to keep to ensure you stay on track?
4. To whom can you give permission - to hold you accountable?
5. Do you have a plan B if plan A doesn't seem to be working?
6. Are you going to spend regular programmed time in reflection and re-evaluation?
7. Do you know where you want to go and WHY?
8. Do you know what you will do when you get there?
9. Have you a continued personal and career development plan in place for the year.
10. Have you a stack of books on your desk that you want to read or re-read this year?
11. Do you know which skills you want or need to improve?
12. Do you have a plan for improving your network of advocates and people who can help you succeed?
13. Do you have a strategy for expanding your interests and abilities in general?
14. Have you started your personal journal yet? Or are you writing in it every day?
15. Do you have a specific financial wealth plan in place? Are you following it?
I suggest you ponder some of the questions that you feel relate specifically to you and your life. Why not see if you can come up with a few more questions to ask yourself.
I believe that regularly measuring activity and learning which activities generate the greatest degree of success with the least amount of pain and stress is one of the best ways to ensure that the time and effort you put into your career, business or life will yield outstanding positive outcomes. Creating benchmarks or points of reference is one of the best ways to accomplish this.

Personal Benchmarking

Benchmarking is defined as comparing activities and situations for improving processes. It has been used successfully in business for many years. A typical situation would be for a restaurant that is having problems in delivering food in a timely manner to visit a competitor to see what that competitor is doing well.
Often leaders will visit companies in other industries to learn innovative solutions. It is common for hospital executives to observe hotels in order learn about superior customer service.

Applying Benchmarking to Personal Goals

Recently there have been a number of books and articles applying the words of people unrelated to business to business issues. The leadership principles of people from Sun Tzu to Jesus Christ have been modified to relate to business topics. It is possible to work in the opposite direction.
Business can be defined as the creation of a product or service in order to generate profits. The product is the means, money is the end. In personal life, money can be important, but it is likely the means to an end, and happiness is the real goal.

n order to achieve happiness, is the goal to be the biggest? In the same way that not every business wants to be McDonald’s, not everyone wants to be Donald Trump or Paris Hilton. Happiness is different for each individual.
In business benchmarking, the goal is not to become the other company, but to emulate the best things they do in order to improve. An appropriate benchmark for an person is not simply to become Derek Jeter, today’s biggest rap star or Pope John Paul II, but to find out what makes them special and incorporate those actions in their lives.

Steps to Successful Benchmarking

• As companies do, select a person or group to benchmark against. The person should be successful, at least in some area that you wish to mimic. It is also possible to observe those who are unsuccessful, in order to see what to avoid. Benchmarks do not have to be famous. There may be successful people in your life that you wish to be like.
• Focus on the actions the benchmark takes. Does the person have a tremendous work ethic? Copy it. Is the person extremely good with other people, have many friends and acquaintances? Mimic them.
• Read about the person, if possible. Famous people write, or have books written about them. Study their influences, and look for character traits that enabled them to be successful.

The Key to Successful Benchmarking

In summary, the goal in benchmarking is improvement, and improvement needs to be incremental, one step at a time. Feel free to select traits of many different people. Businesses never stop working to improve, and people can adopt the same attitude of continuous improvement.

Benchmarking Talent

Boards and their companies spend millions of dollars annually on independent CEO compensation advice. Among other things, they want to know the going rate in their industry, other industries, and companies of similar size. They want to know what mix of incentives and rewards are being offered in the market, and they want to be able to justify their decisions. In short, they want benchmarks against which they can measure their own compensation practices.
Yet when it comes to CEO succession planning—that is, deciding whom to pay, not just how much—many of these same boards decline to invest in benchmarking internal CEO candidates against external talent. That is shortsighted. A board that forgoes benchmarking is, in effect, conducting succession with blinders on, unable to see or judge talent that is not immediately in front of them.
To understand its personnel needs, a basketball team wouldn't measure the height or shooting accuracy of just its own players. It would want to know how they stacked up against the competition, and how much difference these attributes would matter, given the current make-up of the league. Similarly, companies benchmark many of their key processes against world-class standouts—their supply chains against Wal-Mart and other leaders, their manufacturing processes against the likes of Toyota, their customer service against companies like Nordstrom's. Boards, in particular, don't operate in a vacuum when they're evaluating company strategy. In fact, it makes no sense to talk about strategy without looking outward. Perspectives on CEO talent shouldn't be limited, either.
Nevertheless, even some of the world's largest corporations forgo external benchmarking of CEO talent. Perhaps the closest they come to it occurs when they are faced with an unplanned succession—the CEO unexpectedly departs, dies, or must be abruptly removed. In those circumstances, if there is no internal heir-apparent already in place, companies will often install an interim CEO while they search externally for a permanent chief executive. Although this executive search resembles benchmarking taken to its logical conclusion, the two should not be confused.
CEO benchmarking is a process through which the board is continually assessing internal and external candidates against company-specific challenges such as organic growth, growth through acquisition, turnaround, and the many other possible strategic and operational issues that the future CEO will likely face. Because these challenges are constantly evolving, benchmarking is an ongoing process that should be in place through planned and unplanned CEO successions alike.
Resistance and Its Consequences
Board resistance to CEO talent benchmarking springs from a number of sources and specific objections, but the ultimate source may be found in what is called "paradigm blindness." We've heard for decades about the phenomenon of the "paradigm shift," but little about the inability to see alternatives because of the norms and unacknowledged assumptions in which we unquestioningly operate. Paradigm blindness is the propensity to do things a certain way because we have always done them that way. So it is with much CEO succession planning: we don't benchmark external CEO talent because we have never benchmarked external CEO talent.
The consequences of such blindness can be enormous in terms of value left on the table or value destroyed as a result of choosing a less-than-the-best available candidate for the top leadership position. Jim Collins, who Fortune called the "most influential management thinker alive," has demonstrated that having the right leader at the top is the foundational condition for creating lasting greatness. Likewise, in one of the best studies quantifying the impact of CEO decisions on company value, Harvard professors Noam Wasserman, Bharat Anand, and Nitin Nohria show that the leadership effect is probably the most important controllable source of company value. In some markets, the leadership effect can account for up to 40 percent of the variance in performance or value. For a large U.S. company, the CEO decision has a potential impact on value worth billions of dollars.

Benchmarking Definition

Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time, and cost. Improvements from learning mean doing things better, faster, and cheaper.

Benchmarking involves management identifying the best firms in their industry, or any other industry where similar processes exist, and comparing the results and processes of those studied (the "targets") to one's own results and processes to learn how well the targets perform and, more importantly, how they do it.

The term benchmarking was first used by cobblers to measure people's feet for shoes. They would place someone's foot on a "bench" and mark it out to make the pattern for the shoes. Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.

Also referred to as "best practice benchmarking" or "process benchmarking", it is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice companies' processes, usually within a peer group defined for the purposes of comparison. This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to improve their practices.

Contents [hide] 1 Benefits and use 2 Collaborative benchmarking 3 Procedure 4 Costs 5 Technical Benchmarking/Product Benchmarking 6 Types 7 Metric Benchmarking 8 See also 9 References

[edit] Benefits and use

In 2008, a comprehensive survey on benchmarking was commissioned by The Global Benchmarking Network, a network of benchmarking centers representing 22 countries. Over 450 organizations responded from over 40 countries. The results showed that:

1. Mission and Vision Statements and Customer (Client) Surveys are the most used (by 77% of organisations) of 20 improvement tools, followed by SWOT analysis(72%), and Informal Benchmarking (68%). Performance Benchmarking was used by (49%) and Best Practice Benchmarking by (39%).
2. The tools that are likely to increase in popularity the most over the next three years are Performance Benchmarking, Informal Benchmarking, SWOT, and Best Practice Benchmarking. Over 60% of organizations that are not currently using these tools indicated they are likely to use them in the next three years.

[edit] Collaborative benchmarking

Benchmarking, was originally invented as a formal process by Rank Xerox, is usually carried out by individual companies. Sometimes it may be carried out collaboratively by groups of companies (e.g. subsidiaries of a multinational in different countries). One example is that of the Dutch municipally-owned water supply companies, which have carried out a voluntary collaborative benchmarking process since 1997 through their industry association. Another example is the UK construction industry which has carried out benchmarking since the late 1990s again through its industry association and with financial support from the UK Government.

[edit] Procedure

There is no single benchmarking process that has been universally adopted. The wide appeal and acceptance of benchmarking has led to various benchmarking methodologies emerging. The seminal book on benchmarking is Boxwell's Benchmarking for Competitive Advantage published by McGraw-Hill in 1994.^[1] It has withstood the test of time and is still a relevant read. The first book on benchmarking, written and published by Kaiser Associates,^[2] is a practical guide and offers a 7-step approach. Robert Camp (who wrote one of the earliest books on benchmarking in 1989)^[3] developed a 12-stage approach to benchmarking.

The 12 stage methodology consisted of 1. Select subject ahead 2. Define the process 3. Identify potential partners 4. Identify data sources 5. Collect data and select partners 6. Determine the gap 7. Establish process differences 8. Target future performance 9. Communicate 10. Adjust goal 11. Implement 12. Review/recalibrate.

The following is an example of a typical benchmarking methodology:

1. Identify your problem areas - Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, re-engineering analysis, process mapping, quality control variance reports, or financial ratio analysis. Before embarking on comparison with other organizations it is essential that you know your own organization's function, processes; base lining performance provides a point against which improvement effort can be measured.
2. Identify other industries that have similar processes - For instance if one were interested in improving hand offs in addiction treatment he/she would try to identify other fields that also have hand off challenges. These could include air traffic control, cell phone switching between towers, transfer of patients from surgery to recovery rooms.
3. Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.
4. Survey companies for measures and practices - Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked to protect confidential data by neutral associations and consultants.
5. Visit the "best practice" companies to identify leading edge practices - Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group.
6. Implement new and improved business practices - Take the leading edge practices and develop implementation plans which include identification of specific opportunities, funding the project and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.

[edit] Costs

The three main types of costs in benchmarking are:

• Visit Costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labor time.
• Time Costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.
• Benchmarking Database Costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice now.

The cost of benchmarking can substantially be reduced through utilizing the many internet resources that have sprung up over the last few years. These aim to capture benchmarks and best practices from organizations, business sectors and countries to make the benchmarking process much quicker and cheaper.

[edit] Technical Benchmarking/Product Benchmarking

The technique initially used to compare existing corporate strategies with a view to achieving the best possible performance in new situations (see above), has recently been extended to the comparison of technical products. This process is usually referred to as "Technical Benchmarking" or "Product Benchmarking". Its use is particularly well developed within the automotive industry ("Automotive Benchmarking"), where it is vital to design products that match precise user expectations, at minimum possible cost, by applying the best technologies available worldwide. Many data are obtained by fully disassembling existing cars and their systems. Such analyses were initially carried out in-house by car makers and their suppliers. However, as they are expensive, they are increasingly outsourced to companies specialized in this area. Indeed, outsourcing has enabled a drastic decrease in costs for each company (by cost sharing) and the development of very efficient tools (standards, software).

[edit] Types

• Process benchmarking - the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration.
• Financial benchmarking - performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity.
• Benchmarking from an investor perspective- extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor.
• Performance benchmarking - allows the initiator firm to assess their competitive position by comparing products and services with those of target firms.
• Product benchmarking - the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.
• Strategic benchmarking - involves observing how others compete. This type is usually not industry specific, meaning it is best to look at other industries.
• Functional benchmarking - a company will focus its benchmarking on a single function to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison.
• Best-in-class benchmarking - involves studying the leading competitor or the company that best carries out a specific function.
• Operational benchmarking - embraces everything from staffing and productivity to office flow and analysis of procedures performed.^[4]
• Energy benchmarking - developing an accurate model of a building's energy consumption with the purpose of measuring reductions in usage.

[edit] Metric Benchmarking

Another approach to making comparisons involves using more aggregative cost or production information to identify strong and weak performing units. The two most common forms of quantitative analysis used in metric benchmarking are data envelope analysis (DEA) and regression analysis. DEA estimates the cost level an efficient firm should be able to achieve in a particular market. In infrastructure regulation, DEA can be used to reward companies/operators whose costs are near the efficient frontier with additional profits. Regression analysis estimates what the average firm should be able to achieve. With regression analysis firms that performed better than average can be rewarded while firms that performed worse than average can be penalized. Such benchmarking studies are used to create yardstick comparisons, allowing outsiders to evaluate the performance of operators in an industry. A variety of advanced statistical techniques, including stochastic frontier analysis, have been utilized to identify high performers and weak performers in a number of industries, including applications to schools, hospitals, water utilities, and electric utilities.^[5]

One of the biggest challenges for Metric Benchmarking is the variety of metric definitions used by different companies and/or divisions. Metrics definitions may also change over time within the same organization due to changes in leadership and priorities. The most useful comparisons can be made when metrics definitions are common between compared units and do not change over time so improvements can be verified.