2. Benchmarking – A Performance Management Tool
2.1. Performance Measurement and Management (PMM)
According to the Oxford English Dictionary Performance is “the extent to which an investment is profitable, especially in relation to other commodities”. This definition mainly focusses on the business area whereas performance is an important topic in every environment. Both individuals and organizations are driven by the urge of improvement – the optimization of their performance. To develop strategies on how to achieve advancement it is important to analyze a particular process in order to define concrete parameters influencing the performance. Measuring performance by monitoring the determined variables detailed process insights can be gained. To ensure the comparability of the results it is obligatory to determine measurements that are consistent over time. Performance Measurement is a fundamental instrument focused on the collection and provision of key figures. Whereas Performance Management uses the results to establish better practices and improve decision evaluation. It enables to cope with changing markets, ensures a competitive position in by improving business performance Performance Management is a key aspect of management accounting and involves the following:
1. Determination of the organizational structure
In this step one should decide to adopt a functional or divisional structure. While a functional structure is characterized by an organizations’ reporting relationship according to its functional structure, organizational functions classified into divisions (e.g. focused factories) are part of a divisional structure. Furthermore the level of decentralization, meaning the allocation of the management’s decision making, is crucial.
2. Responsibility assignment
A manager’s divisional responsibility for costs, revenues and investments is to be clarified. It is relevant whether the manager is liable for the outcome or just acts as a control function.
3. System of performance measures and targets
The achievement of a company’s strategic objectives can be described by its Critical Success Factors (CSFs). For each CSF several Key Performance Indicators (KPIs) should be established. Measuring the actual performance against the KPI states the attainment of the corresponding CSF.
4. Reviewing performance and define actions
In companies the KPIs differ from organization to organization. Where Human Resources is interested in figures such as the retention of talent indicating the job stability of a company Marketing focuses on how much the latest marketing campaign influenced the revenue. Given the rising cost pressure especially in the pharmaceutical market many companies are forced to trim their costs. Cost-cutting will allow them to make the necessary investments and support reaching the earnings target. Already in 2013 Bain’s Management Tools ; Trends survey interviewing 1,208 global executives informs about their increasing urge for cost cutting. The authors Darrell Rigby and Barbara Bilodeau point out the number of survey respondents prioritizing cost-cutting more than doubled in comparison to 2012. Therefore Finance and Controlling being responsible to govern all costs and provide financial information for internal steering purposes plays a key role in today’s business transformation. Across multiple companies Finance organizations have been found to spend too much time with gathering financial data from various systems instead of value adding analysis. However, the Finance Effectiveness Benchmarking Report from PwC shows that top performing businesses spend about 20 per cent more time on analysis.
2.2. Performance Management tools
PMM offers several tools (e.g. systems, applications and methodologies) allowing organizations to measure, report and manage progress at both individual and corporate level.
Innovative technologies accompanied by a digital transformation result in managers embracing digital tools like Advanced Analytics and the Internet of Things. The outcome of the most recent Management Tools & Trends survey illustrated in Figure x displays that the top ten tools have varied over time.
Figure x: The top 10 management tools over time
The answers of 1,268 managers participating in the survey of 2017 and the interviewees of 16 surveys over the past 25 years portray divers business cycles and changing theories of management affects. Besides the ever changing popularity of individual tools and trends four tools have consistently remained since 1993. Ein – zwei Sätze zu unten aufgeführter Tabelle. These frontrunners are illustrated in the following, whereby Benchmarking still being the most popular tool is exemplified separately.
Benchmarking 46%* 3.94
Customer Satisfaction Systems 38%* 4.03
Total Quality Management 34%* 4.09*
Mission and Vision Statements 32% 4.00
*Significantly above the overall mean (usage=30%, satisfaction=3.99)
Table 1: Usage and satisfaction rates of management tools in 2017
Benchmark vs. Balanced Scorecard
2.3.1. Background and history
Benchmarking in general refers to the process of comparing a company’s performance to others with the aim of identifying best practices and adopting them for superior performance and a competitive advantage (Camp 1989, 14; Watson, 1993). Zairi (2001) postulates the notion that benchmarks are performance measures set by best-in-class entities as a standard of excellence serving as a reference point for comparison. Benchmarking as a management tool is described as improving performance through the identification and application of best documented practices (Bogetoft 2012, 1). However, as most of the definitions of benchmarking are based on Robert Camp’s proposal, this will be the main definition referenced to hereafter in this thesis.
Although the idea of benchmarking is not a novelty in itself, the practice of benchmarking as management tool was introduced to a broader audience in the 1970s through the case of American-based printer company Xerox, which came under pressure due to increased competition from Japanese manufacturers (Zairi & Leonard, 1994, 24; Camp, 1989). This marks the phase of competitive benchmarking, followed by process benchmarking, strategic benchmarking and global benchmarking (Watson, 1993). Other chronologies follow a separation into product focused, process focused and strategy-focused benchmarking periods (Anand & Kodali, 2008; Gräuler & Teuteberg, 2013; Legner, 1999). In recent years benchmarking has consistently ranked as one of the most popular management tools, with 67% to 82% of companies reportedly making use of benchmarks (Bogetoft, 2012, 1).
2.3.2. Types of benchmarks
Benchmarking as a tool can be used in a multitude of ways, hence it can be classified across varying dimensions, even though a homogenous theoretical determination does not exist as of now (Moriarty and Smallman, 2009). Camp (1989) offers a classification of benchmarking based on the comparator or benchmarking partner: Internal benchmarking and external benchmarking. In this context internal benchmarking refers to the comparison of similar organization units within a company, e.g. the comparison of different production sites to foster the application of company-wide standards and practices. On the other hand external benchmarks focus on the comparison of a company to another company. External benchmarks can be further categorized based on the intent of the benchmark (Carpinetti and Melo, 2002). Competitive benchmarking entails a comparison of companies from the same industry, while functional benchmarking focuses on similar organizational functions such as logistics across different industries. An additional component titled best-practice benchmarking is proposed by Codling (1995). The external competitor can either be from the same industry (as it was the case for Xerox’s external benchmark with its Japanese competitors) or from a different industry, depending on the intent of the benchmark. Notably, Xerox famously initiated an external benchmark with outdoor retail company LL Bean in order to gain insights from their warehouse procedures (Bogan and English, 1994, 24).
A further classification of benchmarks is offered by Carpinetti and Melo (2002) and formulates the differentiation into the object at heart of the benchmark. This can either be a product, process or a strategic benchmark. Similarly, Bogan and English (1994) subsume benchmarks into the groups of performance, process and strategic benchmarks. In this context, performance is focused on measures such as quality or cost, while process benchmarks mainly focus on time measurements. Strategic benchmarks follow a broader context and compare a company’s strategy and alignment to that of a competitor.
2.3.3. Benchmarking Process
While there exist multiple models for the benchmarking process, a majority of processes is based on the initial model of Robert Camp, which is described in further detail in the following. Camp (1989) development a 5-phase model consisting of planning, analysis, integration, action and maturity.
The planning phase entails the primary question – i.e. what is the core subject of the benchmark. Based on this decision and the nature of the benchmark potential peers are identified, with which the company is striving for a comparison. These can be from within the company’s industry (competitive benchmark) or from an entirely different industry (functional or best-practice benchmark). Consecutively the method for data collection is selected and the defined data is gathered. According to the gathered data and the comparison to the company’s own performance in the areas relevant to the benchmark the current performance gap to the best-practice peer out of the sample should be assessed and the own future performance projected according to the defined gap. In the integration phase the findings of the previous analysis should be communicated, with the intention to gain acceptance internally. Henceforth internal goals should be defined including action plans on how to reach those goals. Implementation of actions is the central piece of the action-phase. In order to capitalize on the efforts of the benchmark a monitoring of the progress is imperative. As this process is iterative, the benchmark should be recalibrated until maturity is reached (final phase), wherein best practices are fully integrated into the company’s processes and thus a competitive advantage is secured.
Further process models as described by Bogan and English (1994, 82 pp) range from Motorola’s five step process to nine-step models used at AT&T. Stephen Drew (1997) defines a five-step approach to benchmarking, consisting of the phases (1) determine what to benchmark, (2) form a benchmarking team, (3) identify benchmark partners, (4) collect and analyze benchmark information and (5) take action.
A study of various benchmarking models carried out by Anand and Kodali in 2008 postulated the categorization into academic/research-based models, consultant/expert-based models and organization-based models. Research-based models focus on a conceptual and theoretical approach to benchmarking, with the caveat that these models may not yet have been implemented and validated in a practical context. On the other hand consultant/expert-based models are mainly characterized by personal experience as consultant to companies derived from within benchmarking projects. Therefore these models are, especially in contrast to the academic models, rather designed towards practical usage. The third category, organization-based models are mainly focused on the respective organization and thus highly heterogeneous.
2.3.4. Benefits and risks of Benchmarking
Based on the previous chapters it can be concluded that, while being elusive in terms of a unified academic definition and homogenous model, benchmarking is and has been one of the most popular management tools of the last decade. Therefore it is well worth to assess benefits, but also potential risks a company could encounter on their quest to achieving superior performance through the use of benchmarking.
Across several studies a link between previous benchmarking and improved performance of the business has been found. Voss et al. (1997) conclude that benchmarking shows a strong correlation to an increased operational and business performance. Furthermore according to them the use of benchmarking fosters a deeper understanding of a company’s strengths and weaknesses compared to their peers which in turn indirectly improves performance. In addition they claim that benchmarking leads to setting more challenging goals, thus further strengthening performance. A study by Ulusoy and Ikiz (2001) shows similar results, with companies applying best practices learned through benchmarking achieving better performance results than their peers. Further research shows the lack of best practice adaptations in companies operating below peer performance (van Landeghem and Persoons, 2001) or increased business performance due to benchmarking in the construction industry (Sommerville and Robertson, 2000). This exemplifies a general agreement in academia concerning the benefits of benchmarking.
However, the practice of benchmarking can be associated with a certain number of risks.