BENCHMARKING BENEFITS AND DIFFICULTIES
Traditionally, control involves the comparison of actual results with an internal standard or target. The practice of setting targets using external information is known as benchmarking.
The value of external data to management accounting systems is its contribution to planning, decision-making and control.
Here are examples.
|Type of information
|• Demand estimates
• Market research
|• Sales budget
|• Demand estimates
• Market research
• Competitor research
|• Breakeven analysis
• Production costs of providing product features
• Competitor costs
|• Demand estimates
• Price variances
|• Sales variance reports
• Benchmarking for variances (see below)
Clearly, some external information, such as ‘technological’ or ‘political’ developments, does not feed into the management accounting system, even though it can be in a broader category of management information.
External information of a quantitative nature is easier to feed into the management accounting system. For example, forecasts of revenues, costs and profits derived from market research and targets based on competitors’ performance (the information having been sourced from the Internet) are easier to incorporate than qualitative information.
Benchmarking schemes enable precise comparisons to be drawn between firms. The use to which benchmarking information is put is the key to its value. Benchmarking is best for firms which have to ‘catch up’ rather than innovate.
Benchmarking. ‘The establishment, through data gathering, of targets and comparators, through whose use relative levels of performance (and particularly areas of underperformance) can be identified. By the adoption of identified best practices it is hoped that performance will improve. Types of benchmarking include the following.
- Internal benchmarking. A method of comparing one operating unit or function with another within the same industry.
- Functional benchmarking. Internal functions are compared with those of the best external practitioners of those functions, regardless of the industry they are in (also known as operational benchmarking or generic benchmarking).
- Competitive benchmarking. Information is gathered about direct competitors, through techniques such as reverse engineering.*
- Strategic benchmarking. A type of competitive benchmarking aimed at strategic action and organisational change.
* Reverse engineering is the process of buying a competitor’s product and dismantling it, in order to understand its content and configuration.
As you will see from the list of the types of benchmarking, a benchmarking exercise doesn’t necessarily have to involve the comparison of operations with those of a competitor. In fact, it might be difficult to persuade a direct competitor to part with any information which is useful for comparison purposes. Functional benchmarking, for example, does not always involve direct competitors. A railway company could be identified as the ‘best’ in terms of onboard catering, and an airline company that operates on different routes would seek opportunities to improve by sharing information and comparing their own catering operations with those of the railway company.
Exam Focus Point
There is ample information here on benchmarking to allow you to write a good essay including the stages of benchmarking and the pros and cons of using this method.
Stages of benchmarking
Organisations should begin by asking themselves the following questions.
- Is it possible and easy to obtain reliable competitor information?
- Is there any wide discrepancy between different internal divisions?
- Can similar processes be identified in non-competing environments and are these non-competing companies willing to co-operate?
- Is best practice operating in a similar environmental setting?
- Is there time to complete the study?
- It is possible to benchmark companies with similar objectives and strategies
The benchmarking exercise can then be divided into stages.
|Set objectives and determine the areas to benchmark
|Establish key performance measures
|Select organisations to study
|Measure own and others’ performance
|Design and implement improvement programme
Step 1 requires consideration of the levels of benchmarking.
|Level of benchmarking
|Examples of measures
|Quantity of resources
• Capital intensity
Quality of resources
• Qualifications of employees
• Age of machinery
• Uniqueness (e.g. patents)
|Competences in separate activities
|Sales calls per salesperson
Output per employee
|Competences in linked activities
|Analysing overall performances
Step 4 requires information. Financial information about competitors is easier to acquire than non-financial information. Information about products can be obtained from reverse engineering, product literature, media comment and trade associations. Information about processes (how an organisation deals with customers or suppliers) is more difficult to find.
Such information can be obtained from group companies or possibly non-competing organisations in the same industry (such as the train and airline companies mentioned above).
Why use benchmarking?
- Position audit. Benchmarking can assess a firm’s existing position, and provide a basis for establishing standards of performance.
- The sharing of information can be a spur to innovation.
- Its flexibility means that it can be used in both the public and private sectors and by people at different levels of responsibility.
- Cross comparisons (as opposed to comparisons with similar organisations) are more likely to expose radically different ways of doing things.
- It is an effective method of implementing change, people being involved in identifying and seeking out different ways of doing things in their own areas.
- It identifies the processes to improve.
- It helps with cost reduction.
- It improves the effectiveness of operations.
- It delivers services to a defined standard.
- It provides a focus on planning.
- It can provide early warning of competitive disadvantage.
- It should lead to a greater incidence of team working and cross-functional learning.
Disadvantages of benchmarking
- It implies there is one best way of doing business – arguably this boils down to the difference between efficiency and effectiveness. A process can be efficient but its output may not be useful. Other measures (such as amending the value chain) may be a better way of securing competitive advantage.
- The benchmark may be yesterday’s solution to tomorrow’s problem. For example, a coffee-bar/fast-food restaurant might benchmark its activities (e.g. the quality of the coffee, cleanliness and ambience) against another coffee bar, whereas the real competitor could be a grocery store selling really good coffee and ready-made meals to cook easily and eat at home.
- It is a catching-up exercise rather than the development of anything distinctive. After the benchmarking exercise, the competitor might improve performance in a different way.
- It depends on accurate information about comparator companies.
- It can be difficult to decide which activities to benchmark.
- Benchmarking schemes enable precise comparisons to be drawn between firms. The use to which benchmarking information is put is the key to its value. Benchmarking is best for firms which have to’ catch up’ rather than innovate.