How to Benchmark your Small Business
All you need to know about comparing your business processes to your competitors to achieve greater efficiency
Benchmarking is the act of comparing your business activities and processes to that of your competitors and rivals.
While it can be one of the simplest ways to improve your own business, many small business owners overlook the process altogether.
Whilst you may well think of yourself as an innovative, dynamic young business shaking up an aging industry, benchmarking can hold benefits for even the most pioneering of companies; industry practices exist for a reason, and you can often learn a lot from your competitors.
This guide covers all you need to know about effective benchmarking as a business, from where to start to how to put the results into practice.
What benchmarking opportunities exist for my business?
Benchmarking is a broad term, and the potential comparisons you can make with other businesses are almost limitless.
A good place to start is normally to compare your costs or overheads to that of your competitors such as your salaries, utility bills or rent.
If you find you are paying too much or too little in any of these areas, it is often the root cause of other problems within your business.
However, much of business benchmarking is a little more sophisticated than this – focusing on the comparison of what are known as ‘key performance indicators’. Things like sales per employee, gross profit margins, levels of wastage which can be a little harder to work out than the basics.
While things like sales or profit are numerical facts, you can also look to get information on more subjective matters such as the company image, effectiveness of training activities and levels of customer satisfaction.
Business often find benchmarking particularly useful when comparing the internal processes of a company, which involves in-depth analysis of how other companies in the same industry carry out the same tasks.
For example, if you owned an online retail business and wanted to benchmark your rivals you could aim to find out what e-commerce software they use, where they source their goods or what courier they use.
As a business, you can also use benchmarking to compare your company strategy and future objectives with others. This might include where you see your company in five years’ time, where you are going to focus your resources or what professional standards you work to.
How do I plan a benchmarking process?
The first step is to figure out who will carry out the process.
Try and put together a specialist project team from different parts of your business, and make sure you select people senior enough to implement changes and convince any other members of the company that the time is right to do so.
Generally, teams of six or less will find it easier to reach an agreement, and you should ensure your team is up to speed by providing any necessary training so they understand the benchmarking process.
When setting your benchmarking objectives, think big – focus on the key areas of your business first and foremost. Identify what business activity you want to benchmark, and the main ‘performance indicators’ you wish to compare.
Benchmarking models or consultants can be invaluable in helping you with this process.
Remember that benchmarking can be an uncomfortable process, as it can identify areas of weakness, bad practice or poor culture in your business.
Benchmarking will also work best if you know your own business well; for example, if you prefer highly centralised management control, it wouldn’t work to introduce measures which work in more egalitarian businesses.
How do I find which businesses to benchmark against?
Most benchmarking is conducted externally, comparing your processes to that of other businesses.
Whilst you can conduct an internal benchmark – between two retail sites or departments, for example – it is unlikely to lead to any earth-shattering insights, unless you are a very large company.
When looking for which businesses to compare yourself, you need to consider a number of factors.
Firstly, make sure to look for businesses with a similar size, structure, and which have similar objectives to yours. Too many differences, and meaningful comparisons become harder to find – although some processes, like how a post room operates, are similar across all businesses.
In this regard, direct competitors are often the best place to start when selecting comparators – but be aware they will normally be reluctant to give you much information.
While exchanging information is often at the disposal of your competitors, it’s important to note that there might be legal or ethical barriers to a free exchange of information between businesses.
When you have identified some suitable businesses, try to select three to six individual ‘partners’ – these will be the businesses you approach to exchange information with as part of the process.
Your local business support organisation or trade association might be able to provide suggestions for partners – or trade publications could provide inspiration.
If you are searching a very broad sector, or an industry you are less familiar with, you could try approaching a benchmarking clearing house or club.
How do I collect information from my benchmarking partners?
Once you have selected some benchmarking partners, contact them and explain the purpose of your study, making sure to emphasis the benefits of working together to exchange information.
If they agree, start to draw up a benchmarking agreement – this is a document that sets out the terms of the benchmarking process.
You can look at sample agreements on the internet to provide guidance when drafting your own.
All benchmarking agreements should contain: whatever information you want to exchange, how you will use that information (and who will use it) and how, and when, you will collect and exchange the information.
However, it’s important to remember to never ask for anything you are not willing to share yourself.
The next step is to decide how you will collect your information.
If you only wish to collect simple information – like how much they pay their staff – then a questionnaire or email exchange will normally suffice.
For a truer and more in-depth view of how a business operates, nothing can replace a visit to the company itself.
It is a good idea to go with someone else when you visit, as you can discuss your experiences and impressions to arrive at a more objective view.
Remember to invite your partners to conduct their own visits.
How do I use information collected from benchmarking to improve my business?
In an effort to improve your own business, you should identify the key differences between you and your benchmarking partners.
These might include differences in performance indicators such as gross margins, level of waste or staff turnover.
It may also include differences in individual processes such as recruitment procedure or where you source raw materials or even differences in strategy such as what quality standards you have for your product or how your management system operates
After identifying the differences, comes the more uncomfortable part – investigating why you differ.
Typical reasons could include that your IT or manufacturing process is obsolete or inefficient, you have pursued a different recruitment strategy, you have a different target demographic, you have different organisational limits or you have poor control of overheads and costs generally.
The next step is deciding what to do.
At this stage, your options are to change your processes, identify areas for improvement, change your strategy or simply change nothing.
Change your processes – if you can see your competitors or close benchmarking partners achieving more with a different process, try to adopt what’s working about that process in your own business.
Identify areas for improvement – sometimes the answer is not so clear, and you may simply need to earmark departments or practices that just aren’t working. For example, your marketing team is underperforming.
Change your strategy– perhaps you are not ambitious enough, or your standard of customer service is too low for your industry.
Change nothing – perhaps there is a good reason for the difference, or changes are impossible on the scale you need to do them.
When you have implemented the changes, review the whole process – did the benchmarking achieve its objectives? What would you do differently next time?
Where can I go to get help with benchmarking for my business?
Specialist benchmarking consultants can be invaluable in getting the most out of a benchmarking process, especially if it’s your first time.
A specialist may help you with objectivity (you might find it difficult to get sober assessments about your business from within), identifying and contacting potential benchmarking partners, project management ( a specialist will be extremely experienced in conducting the most effective project possible.) and overcoming resistance to change.
In addition, you should try contacting your local business support organisation for help.
Most offer some specialist form of the ‘UK Benchmarking Index’, a service which will provide your business with a health check, and highlight where benchmarking would be most effective in your organisation.