Introduction

In this guide we will explore benchmarking all of the functions in business, including:

• The main types of benchmarking in business
• How benchmarking can lead to improved operational efficiency
• Five ways to improve operational efficiency in business
• Conclusion

The main types of benchmarking in business

External benchmarking (a.k.a. strategic benchmarking or competitive benchmarking)

The word "external" refers to the source of the actual benchmarks. This data comes from outside the organization (usually similar companies in their own industry) from which key performance indicators can be calculated.

For example, a common employee performance metric is revenue per employee, which can be easily compared to specific direct competitors. All that you need to calculate this is the annual revenue and the total number of employees from your competitors, which is usually available in statutory reports.

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The key things that you need to do for external benchmarking (strategic benchmarking or competitive benchmarking) is to decide which metrics that you want to measure, which organizations or companies you want to benchmark, how you are going to source the relevant benchmarks, and then analyze the benchmark results.

Internal benchmarking

In comparison internal benchmarking refers to data sourced from within the organization, which is then compared to another part of the same organization. This is more common with larger companies where business operations usually span across multiple countries. A good management team will actively measure comparative performance metrics across business units and countries, which then allow them to identify areas and business processes that may have room for improvement.

The key constraint with internal benchmarking is that you will need an organization that is large enough to compare similar things against each other. With that said, any company can always benchmark their own performance metrics over time and track changes to business efficiency or process improvement.

Functional benchmarking

Benchmarking specific functions can be either external or internal. Simply put, this kind of benchmarking is used to see whether a function is overweight with too many people or cost. Sometimes these key metrics can actually show that a function has fewer resources than is required to perform a particular process, which can be the main reason for low production efficiency and performance gaps.

CompanySights is a world leading provider of external functional benchmarks, designed to help professionals make better business decisions around headcount within every function.

How benchmarking can lead to improved operational efficiency

What do functional benchmarks tell us about operational efficiency?

Functional benchmarks are typically used as an indicator of operational efficiency, with functions in the top quartile having more efficient production processes compared to those in the mid range or bottom quartile. With this understanding of the benchmarking process, hopefully you are now equipped to identify areas of improvement within business operations, which will then result in improved operational efficiency.

What does the benchmarking process look like?

The benchmarking process includes three simple steps, as follows:

1. Determine what functions or processes you want to measure and why (e.g. reduce costs)
2. Identify similar businesses (or parts of the same organization) and collect the available data
3. Calculate the relevant benchmark metrics and analyze data

What do we do with the benchmarks?

Benchmarks are not very useful by themselves, so the next step is to compare them to data from your own company to see whether there may be room to improve efficiency within a function. After performing this full benchmarking process and identifying parts of the business where the company's performance could be improved, you can then consider ways to improve operational efficiency.

Five Ways to Improve Operational Efficiency in Businesses

1. Streamline operational processes

"Streamline" is a common buzz word in the business world. What it means is to explore ways to improve operational processes, usually through the adoption of automation. This can be in the form of de-duplicating processes (e.g., repetitive data entry for different unconnected IT systems), or assessing processes to see whether a software can do some of the heavy lifting (e.g., sending follow up sales emails to prospects who go cold).

These are both examples of streamlining operational processes with automation, which vary business by business. Remember that this is probably the key lever that you can pull to increase efficiency, lower costs, and ultimately achieve higher profits for your organization.

2. Reduce silos

Silos exist in almost every medium to large organization. They can refer to the necessary divisions within a company (e.g. Sales vs Marketing team), which are usually necessary as the business grows, otherwise people become distracted with too much information flying across other departments.

But the other definition of silos refer to informal and disparate groups that occur within many businesses. These types of silos can have a negative impact on employee morale, company culture, and overall operational efficiency. A business strategy that includes identifying silos and breaking them down can lead to significant operational progress.

3. Share resources among departments

Cross-function collaboration (or even within a function) is usually beneficial to the overall productivity of a business, but it is harder to achieve the larger an organization becomes. It can be a particularly big problem in the public sector where incentives are not set at an overall department level or cross-department level, which leads to silos (discussed above). The other thing is that within any company or organization there is usually some free capacity lying around.

Benchmarking helps to identify these functions or departments where these underutilized resources exist. So, businesses that share these resources will improve collaboration and achieve the defined goals, which will increase productivity and improve the current performance of the organization.

4. Focus on customer service and sales responsiveness

The front end of the organization can be a key driver of increased efficiency through improving specific practices to achieve more sales. This can include specific initiatives such as more employee training on how to use the company CRM software.

Other initiatives could be to add financial incentives to employment contracts that reward good behavior, such as consistently having up to date information in the CRM or giving bonuses to customer service employees who upsell to existing customers.

5. Iterate and focus on continuous improvement

Most companies assess and discuss financial performance on a monthly basis. However, they rarely consider and develop operational improvements at the same frequency, which are usually only triggered by a specific type of event, such as a cash flow shortage or a M&A transaction.

Companies that have an ongoing benchmarking process typically gain real time sales and operational performance insights that drive a culture of continual improvement. Between you and me, these are usually the companies that achieve world class performance.

Conclusion

Benchmarking functions within an organization is a great way to start your journey to improve operational efficiency. With the insights that benchmarks provide you should be able to identify areas where you can improve efficiency and start to instill a culture of continuous improvement.

Once these areas have been identified then there are many ways to improve operational efficiency, with the most common being a continual process of streamlining internal processes.

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