It originated with land surveyors who made distinctive marks-called "benchmarks"-on rocks, walls or buildings to use as reference points for their topographical surveys. Today, as adapted for business usage, the term "benchmarking" refers to the baseline used for evaluation and measurement.
Corporate benchmarking formally started
less than 25 years ago. In 1979, Canon introduced a midsize copier for less
than $10,000. Xerox, who could not even manufacture, let alone retail, a
similar machine for that price, initially assumed that Canon was deliberately
under-pricing to buy market share. Over time, however, as Canon's copier sales
continued without a price increase, Xerox engineers determined that Canon's
more efficient production methods enabled them to sell profitably at these
prices. As a result, Xerox decided to benchmark Canon's processes with the
objective of reducing its own costs.
From 1980 to 1985, Xerox adapted Japanese
techniques which enabled the company to cut unit production costs by half and
reduce inventory costs more than 60 percent. This remarkable turnaround by
Xerox launched benchmarking as a popular new management movement in the United
States. Intrigued by the idea of generating corporate, organizational and
marketing improvement by collecting and adapting the best practices of others,
many of the nation's leading corporations soon adopted and refined benchmarking
techniques. The power and universal applicability of these techniques were
formally recognized when the Malcolm Baldrige National Quality Award mandated
benchmarking for all entrants.
While benchmarking had its start in
manufacturing and heavy industry, a properly implemented benchmarking program
can provide significant benefits to financial services organizations.
Benchmarking adherents believe that being "good enough" is never good
enough.
Benchmarking has two basic elements: 1)
the evaluation of a company's own processes and procedures to identify
strengths and weaknesses; and 2) the identification, analysis and adaptation of
the processes and procedures of successful companies.
Listening To The Marketplace
Successful benchmarking studies begin with clear objectives that relate
directly to fulfilling the needs and wants of customers and prospects. Clearly
stated goals provide a "litmus test" for corporate decision-making
and ensure that the process results in the creation of products and services
that resonate in the targeted marketplace.
Internal Benchmarking
With objectives established and a reasonable understanding of customers'
preferences, the company's next task is the systematic examination and
evaluation of: internal processes and procedures within and between business
units; marketing approaches for financial products and services; and the
effectiveness of distribution channels. A company must know its own operations
thoroughly before using them as the baseline for future endeavors. One of the
greatest benefits of benchmarking is that, if a company learns nothing else, it
has a much greater understanding of how it does business.
Competitive Benchmarking
With the internal baseline established, the process moves on to the systematic
identification of competitor and industry best practices. A major virtue of
benchmarking is that it keeps organizations attuned to industry changes.
Incremental improvements of, say, 10% or 15% may be more than acceptable until
competitors take a radically new approach. An example of such a competitive
onslaught in the financial services arena is Merrill Lynch's creation of the
CMA Account, which enabled it to quickly amass more demand deposits than any
banking institution. The banks ceded their historical dominance in an area of
significant profitability by continuing to routinely strive for greater
efficiencies and incremental improvements.
This example also points to what is
probably the most artful part of the benchmarking process-determining what and
where to benchmark beyond the obvious direct competitors. The challenge is to
identify firms that will be worthy of the resources required to obtain the
needed intelligence. An early story of benchmarking illustrates the value of
looking outside your industry or market sector. Early in the twentieth century,
circuses traveled from town to town on schedules that often left very little
time between performances. The German General Staff sent several of their
finest to America to "shadow" the circuses. From their observations,
they learned much about the complicated logistics of coordinating the process
of striking tents, packing gear, handling equipment and people, and then efficiently
setting up at the next location. Although this benchmarking was not done in a
military context, the lessons learned were readily adaptable to improve troop
deployment in World War I. This story also reminds us that it is important to
emphasize that you don't adopt, but rather adapt, desirable practices to your
own situation.
Few financial services organizations have
adopted benchmarking programs. This is not surprising since benchmarking, a
relatively new management and marketing tool, grew up in an industrial setting.
However, we believe that an effective benchmarking program can help a company
create constant improvement. Benchmarking also provides a measurement system
that facilitates valuable introspection. Further, it sensitizes the
organization to change and to staying alert to opportunities to make quantum
rather than incremental improvements. These benefits are too important to be
missed by any financial services organization.