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Benchmarking analysis is the process of comparing one company’s information or performance against another. This activity is quite common among businesses, especially publicly held companies. Many different analysis methods exist. For example, a company can compare its financial performance, product quality, production processes, or marketing campaigns to industry standards. Its purpose is to help a company become better at achieving goals through comparison with much more successful companies.
Owners and executives are the most important individuals in the benchmarking analysis process. These individuals must decide what parts of the company to benchmark against external standards. They implement processes where the comparison takes place in a timely manner. Other individuals or employees typically complete the bulk of the work. Copious amounts of information are often necessary to conduct benchmarking, especially when multiple parts of a company are under scrutiny.
A common example of benchmarking analysis is the comparison of one company’s financial data against a leading competitor’s data or the industry standard. Financial ratios are the most important tools when conducting this analysis. The use of financial ratios removes any difference in accounting methods or preparation of financial statements. Once complete, the financial ratio metrics present comparable data for the ease of analysis. For example, accountants can compare inventory turnover without regard to the specific types of inventory each company sells in the marketplace.
Goals and objectives may be a reason that a company engages in benchmarking analysis. If a company desires improvements in certain operational areas, it gathers performance data on the operations. Then, business analysts find the industry standard or leader for this specific process. Upon comparison of the two companies' data, owners and executives may set goals on how to improve internal operations to meet or exceed these outside guidelines. The company and its employees then work to improve operations until a subsequent analysis indicates the new goal has been achieved.
Benchmarking analysis is not always a foolproof process. Comparing data that has no correlation can result in goals or objectives that are unattainable. Additionally, creating internal benchmarks that have no comparable data in the industry may result in wasted time as the data is useless on its own. Owners and executives may be unable to make suggestions that improve operations by decreasing costs or increasing efficiency, two common goals of benchmarking analysis.
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