The Lure and Limitations of Benchmarking

By Scott Whitbread

The term ‘benchmark’ originates from surveyors marking a stone to act as a consistent reference point for where to place their equipment with each visit to a site. In life and work we now use benchmarks all the time as consistent reference points to measure performance against: Are your investment returns keeping up with the market index? Are your cholesterol levels within the healthy range for your age? Are your department costs tracking above or below budget?

In business, the use of competitive benchmarking is inescapable. There are some merits to its use but also some limitations. It provides a meaningful ‘scoreboard’ of relative overall performance between competitors so that business owners can assess the relative impact of their competitive efforts. However, when applied at a granular level to compare the various factors of production and management, it has two fundamental limitations.

Competing by Copying

The first, a human problem, is that endless comparisons inevitably lead to competing by copying, where a business can become fixated exclusively on closing the visible gaps to its competitors in order to improve performance. Such a fixation severely limits the breadth of improvement opportunities that the organization can see and pursue. A sports team would never hope to win the championship by replicating every aspect of their toughest competitor’s playbook; why would a business expect to win by doing this?

Negating the Findings

The second limitation is a logical one. Each actor in a benchmarked set will have its own unique attributes that legitimize some deviations in performance from the others. For example, a toned bodybuilder will tend to have a very high Body Mass Index (BMI), much higher than what is considered to be the healthy range, due to their muscular physique. Does this mean they are obese? Of course not.

This logical flaw in the benchmarking argument provides a way out when leaders seek to use benchmarks to create pressure on their organizations to try harder. (“If those guys can do it, then why can’t we?” So goes the refrain.) In one business we observed, a paper products company, the managers of two of its mills succeeded in politically negating all the benchmarked performance differences between them. One mill claimed that, in the areas where it was being outperformed by its sister operation, it was because that operation had newer production equipment, which it did. The other mill claimed that, in the areas where it was being outperformed, it was because the other operation was located near a more highly-educated labor pool, which was also true. Was this reasoning sound? In the end it doesn’t really matter because this type of reasoning is considered sound and it cannot be proven one way or another. The opportunities to improve were explained away and management time and effort was wasted.

Opportunities beyond Benchmarking

While the lure of using benchmarking to improve performance is unlikely to wane anytime soon, balancing its use with other means of creating advantages will ensure you don’t succumb to its limitations. The most obvious counterpoint to benchmarking is to seek out innovative improvements that no competitors have yet achieved; to go beyond the benchmark. This usually happens by critically reexamining a presumed limitation in the way an industry does business and then overturning it.

Take the case of Steven Fosbury, the high jumper who first developed the technique used by all competitive high jumpers today (affectionately referred to as the Fosbury Flop). Prior to Fosbury, jumpers employed a variety of techniques (such as the western roll, the straddle technique, and the scissors jump), each of which required the jumper’s center of mass to pass above the bar. Essentially, their whole body had to be above the bar at the same moment in order to clear it. As these jumpers competed to eke out additional fractions of an inch, Fosbury challenged the fundamental premise on which all their techniques were based. By arching his back sharply at the apex of his jump, such that only a portion of his body was above the bar at any one moment, he was able to clear the bar while his center of mass actually passed underneath it. In essence, he had figured out how to clear the bar without jumping higher than it. Having started out as a mediocre performer, he went on to win the Olympic gold medal within five years.

In a business example, a large, open-pit mining operation had reached the limits of what benchmarking could offer them. A competitive benchmarking study had shown that they were the best among their peers in overall performance. They compared more granular factors of performance and found that, if the operation were to become the best in every category, it could further reduce its costs by 10%. Given the difficulty in becoming the best at everything, it was recommended they target a quarter of this value: 2.5%.

Knowing this magnitude of improvement would be insufficient, and sensing there must be more opportunity out there, the mine took a closer look at the levers on its business performance, including the areas where it was already the best-in-class. One such area was the ‘load factor’ of their haul truck fleet: how much ore, on average, is loaded into the trucks as a percentage of the truck’s rated capacity. The more ore in each truck, the fewer trips and thus less cost per tonne hauled. In this category of performance, they were the best; just several percentage points shy of rated capacity.

They decided to see if they could do even better. They challenged the fundamental concept of the truck’s rated capacity and asked what it would take to exceed 100%--something none of their competitors had attempted before. They were successful in finding a way to safely and reliably go beyond this limitation. This improvement, combined with some others of a similar nature, enabled them to achieve a 19% reduction in costs over the next 2 years; nearly double the total opportunity indicated by the competitive benchmarking study.

As these examples illustrate, compelling opportunities to improve performance exist outside the confines of benchmarking. So while you shouldn’t miss the opportunity to replicate a competitor’s breakthrough, you should also dedicate some resources to creating breakthroughs of your own. Keep this in mind as you grapple with the lure and limitations of benchmarking in your own business and other endeavors.