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External benchmarking is a way of measuring performance against an outside standard. Generally, benchmarking is used to ensure that a particular business or a part of its operations is functioning at a level that meets targets set by internal or external best practices. When benchmarking looks to external best practices, it uses industry standards or performance standards set by industry leaders as guidelines for internal performance.
Business operations are a system of related, but distinct processes. Typically, the goal of management is to integrate those processes while ensuring that each process meets quality and efficiency standards. Internal standards are often based on a company's culture or can be a reflection of an owner's or manager's personal work ethic. Often, internal standards are set by reference to profitability by setting targets and evaluating success by how incremental changes impact the bottom line.
Another way to measure business performance is by referencing best practices. Most industry is studied by analysts, academicians and researchers to identify the best ways of operating. These best practices result from a comparative study of results across industry participants over time. Best practices are external standards against which companies can measure their own performance.
When a company uses external benchmarking to measure its performance, it can refer to industry standards as reflected by best practices or the specific standards set by a market leader. For example, a company that evaluates its customer service might use the company in its industry that consistently receives the highest customer service marks in independent studies. It would use the results that leading company was able to attain as the benchmarks for its own departments and personnel.
To ensure the relevancy of external benchmarking, a company must pick a similarly-situated standard. This can sometimes be difficult, since every company is driven by unique forces that cannot be precisely duplicated. One of those unique forces is talent. Standards set by a company with uniquely talented staff, for instance, may not be attainable by a company with only lesser talent available.
If a company controls for those unique factors that skew performance results, external benchmarking can be an important part of strategic planning. Targets drive performance, and external benchmarking uses natural competitive forces to encourage staff to reach and exceed the standards set by others. In a real way, external benchmarking contributes to innovation and a company's desire to do more with the resources available, even if those resources are less than what is available to industry leaders.