Building Your Business Operations & Success What Is Benchmarking in Business? By F. John Reh F. John Reh F. John Reh is a business management expert, with more than 30 years of experience in the field. A writer and journalist over the past 17+ years, he has covered business management for The Balance. learn about our editorial policies Updated on August 12, 2022 In This Article View All In This Article HowBenchmarking Works Why Should Your Firm Benchmark? The Limitations of Internal Benchmarking Strategic Benchmarking Benchmarking Data Is Often Available for Purchase Defining a Benchmarking Initiative The Bottom Line Frequently Asked Questions (FAQs) Photo: Geber86 / GettyImages Definition Benchmarking is the process of comparing your own organization, its operations or processes against other organizations in your industry or in the broader marketplace. Benchmarking can be applied against any product, process, function or approach in business. Key Takeaways Benchmarking helps companies learn about improving their business practices by observing what other companies do.Benchmarking can help businesses reduce costs, increase profits, strengthen customer loyalty and satisfaction.Companies can learn from business practices from of internal teams, competitors within their industry or companies operating in completely unrelated sectors. HowBenchmarking Works The intent of benchmarking is to compare your own operations to that of competitors and to generate ideas for improving processes, approaches, and technologies to reduce costs, increase profits and strengthen customer loyalty and satisfaction. Benchmarking is an important component of continuous improvement and quality initiatives, including Six Sigma. Note Common focal points for benchmarking initiatives include measures of time, quality, cost and effectiveness, and customer satisfaction. A firm interested in improving their customer service practices may compare its own processes and metrics against those of its most successful competitor. If it identifies negative discrepancies or differences in measures, it may start improving its processes to strengthen its performance. The firm will observe and measure the competitor's operations, and in some industries, it will send in employees as customers to gain direct experience. A good example is a quick-service/drive-thru restaurant chain. As it is dependent on speedy and accurate service to maximize efficiency, cut costs, and increase profits, it will study the drive-thru practices of key competitors. Every second gained without sacrificing customer quality will allow the firm to increase its profits. Over the years, competitors have consistently innovated their drive-thru operations' configuration, such as the number of windows, the menu, the speaker boards and ordering approaches in an attempt to improve their performances. They are constantly watching and benchmarking against each other. Examples of Benchmarking in Business Xerox is considered the trailblazer when it comes to benchmarking for business. It has been reported that the company learned from practices followed by other firms in unrelated industries such as L.L.Bean, Hershey Foods and Mary Kay Cosmetics. The U.S. Department of Commerce awarded Xerox with Malcolm Baldrige National Quality Award in 1989 for the success it achieved through benchmarking. Pal's Sudden Service, a small hamburger and hot dog chain and another Baldrige Quality Award winner, is so successful at achieving best-in-class performance for drive-thru and overall restaurant operations, that it has opened an educational institute to train other organizations. Many companies in the fast-food market use Pal's as a best-in-class benchmark for their own operations. Why Should Your Firm Benchmark? The case for benchmarking suggests that a particular process in your firm can be strengthened. Some organizations benchmark as a means to improve discrete areas of their business and monitor competitors' shifting strategies and approaches. Regardless of the motivation, cultivating an external view of your industry and competitors is a valuable part of effective management practices in a world that is constantly changing. There are a number of core drivers of benchmarking initiatives in a firm: The most common driver for benchmarking comes from the internal perspective that a process or approach can be improved. Organizations will collect data on their own performance at different points in time and under different circumstances, and identify gaps or areas for strengthening. Many organizations compare themselves to competitors in an attempt to identify and eliminate gaps in service or product delivery or to gain a competitive edge. The data gathered in a competitive benchmarking initiative offers specific insights into a competitor's processes and thinking.The term "strategic benchmarking" is used to describe when a firm is interested in comparing its performance to the best-in-class or what is deemed as world-class performance. This process often involves looking beyond the firm's core industry to firms that are known for their success with a particular function or process. The Limitations of Internal Benchmarking While it's important to measure and monitor performance for all critical business processes, organizations should be wary of taking action based solely on an internal or insular view of their operations. A firm that is preoccupied with itself easily loses track of competitors and broader-world innovations and the changing demands of customers. Note Benchmarking is based on past performance which may not accurately predict the future. Strategic Benchmarking Looking beyond your own industry for the best-in-class performance of particular processes or functions is an excellent way to challenge your firm to rethink longstanding assumptions and practices. For example, Southwest Airlines famously analyzed the processes, approaches, and the speed of NASCAR automobile racing pit crews to gain ideas for improving their airplane turn-around time at the gate. The outcome of this benchmarking study is reported to have helped Southwest reconfigure its gate maintenance, cleaning, and customer loading operations, and to have saved the company millions of dollars per year. Benchmarking Data Is Often Available for Purchase Many industries and industry- or consumer-related organizations publish comparative data invaluable to the benchmarking process. For example, consumers interested in the quality of new or used cars can look to the organization that publishes Consumer Reports for its detailed testing and reporting results on new and used cars. Defining a Benchmarking Initiative Because any process, product, or function in a business is eligible for benchmarking, methodologies vary. Typically, the benchmarking process involves: defining the subject of the benchmarking studydefining the process or attribute to be studied in detailselecting and defining the measuresselecting the comparison setcollecting data on both the benchmarking subject and comparison setassessing the data and identifying differences and gapsanalyzing the root causes of the differences or gapsdefining an improvement initiative, complete with goalscommunicating the goalsimplementing the improvement initiative and measuring resultsreporting on the results, identifying improvements and repeating the process The Bottom Line Benchmarking is a potentially powerful tool to promote continuous improvements in an organization. However, relying on internal-only measures breeds a myopic perspective. Hig- performing organizations strive to identify processes, functions, or offerings that are important to their businesses and evaluate their efficiency and effectiveness against leading competitors or leading innovators. Care should be taken to define benchmarking initiatives deliberately and scientifically, or the results could be misleading. Frequently Asked Questions (FAQs) What is benchmarking in business used for? Companies use benchmarking to learn how to improve their processes and operations by comparing them with other companies within or outside their industry that do them better. Benchmarking helps generate ideas for improving processes, approaches, and technologies to reduce costs, increase profits and strengthen customer loyalty and satisfaction. What is benchmarking in healthcare? Benchmarking in healthcare helps healthcare facilities such as hospitals to provide better quality of care and improve patient experience while controlling healthcare costs. Updated by Mrinalini Krishna Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Associated Press. "Xerox Borrows From L.L. Bean, Other Unlikely Companies." U.S. Department of Commerce National Institute of Standards and Technology. "Malcolm Baldrige National Quality Award 1989 Recipient." U.S. Department of Commerce National Institute of Standards and Technology. "Baldridge Performance Excellence Program - Pal's Sudden Service." S Rao Vallabhaneni. "Wiley CIA Exam Review, Conducting the Internal Audit Engagement," Page 313. John Wiley and Sons, Inc., 2005. Ching M. Chang. "Service Systems Management and Engineering Creating Strategic Differentiation and Operational Excellence," Chapter 5.3. 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