Benchmarking Your Business

Benchmarking your business in total or components of it is important in order to see if the output it generates are in line with historic figures, expected/budgeted figures, competitors and the market. The internal reporting system functions as the basis for this analysis but only when you compare it you'll truly be able to rate your success or lack of it appropriately.

The results of the following benchmarkings should be shared with the management team which in return breaks the necessary benchmarking factors (see also KPI) down to the separate departments. Depending on the company size it is definitely helpful if the different departments perform their own benchmarkings for smaller factors to further investigate the larger benchmarking factors. For departments to actually take responsibility in benchmarkings these factors have to be specific enough that they are as little as possible influenced by other factors/departments. People need to be able to "own" their benchmarking factors which is difficult if they are defined to broad (see article about KPI).

Benchmarking Against Historic Figures

Comparing your business as a whole (sales, gross profit, EBIT) or single components (HR costs, marketing input/output either as whole or per promotion) is one of the most basic forms of benchmarking. This kind of benchmarking is very intuitive and can be done fairly easily. The more detailed you perform this comparison the easier it is to see which actions had what kind of effect on your business.

For every business term and every benchmarking factor you should make notes about significant changes such as:

Internal

  • Changes in HR
  • Marketing / Promotions
  • R&D projects
  • New products
  • Changes in sales force
  • Changes in strategy (e.g. target group, road to market)
  • ...

External

  • Demographic changes
  • Technology changes
  • Political changes
  • Changes in regulations
  • Direct competitor activities
  • ...

The comparison against historic figures helps you to identify if you are doing (relatively) better or worse than in the past and what some of the reasons for this could be. This type of benchmarking should be done regularly (on a monthly basis and in some cases for certain benchmarking factors maybe even more often)

Benchmarking Against Your Budget

The second most common benchmarking businesses do is against their own budget. Depending on how your budgets are created this may however lead to a distorted conclusion since the budget may also contain company internal political aspects which may not fairly represent what the business actually believes will/should happen.

Nevertheless a realistic and objectively formed budget is a great asset in order to see early on how well certain business activities perform compared to what was expected. Here it is also much easier to investigate cause and effect against the more detailed the budget and actual figures are. Ideally you have defined certain activities during your budgeting process with expected outputs which you can now compare against the actual output.

This form of benchmarking is a great tool which forces you to improve your budgeting process (in terms of detail and accuracy), teaches you about the different causes and effects on your business and allows you to operate your business in a more controlled way since you can make adjustments in order to achieve your set goals and see which assumptions actually work out as expected.

This type of benchmarking should also be done regularly (on a monthly basis and in some cases for certain benchmarking factors maybe even more often) in order to make adjustments as soon as possible and reach your company goals.

Benchmarking Against Competitors

A little bit more uncommon is the benchmarking against competitors. This kind of benchmarking is more difficult since you require external information which many competitors don't like to release for obvious reasons. While you will not be able to benchmark your business in detail against a competitor you will at least be able to compare some key figures. Some countries (e.g. Germany in the Bundesanzeiger) force you to release public information regarding your business which you can access. Some companies have to release more detailed information based on their type of business (e.g. stock companies release annual financial reports). Additionally you are able to get some information through credit rating agencies for a fee.

Important benchmarking factors to compare against competitors can be:

  • EBIT / EBIT margin / EBIT growth
  • Sales / sales growth
  • Gross profit margin
  • HR Costs / HR margin
  • Costs per employee
  • Sales per employee
  • Marketing expenses
  • Target group
  • Pricing strategy

By benchmarking against significant competitors you can understand how your business performs compared to theirs and which improvements you may have to make. It also shows you if there is significant room to grow, how much growth is possible and what kind of competition risk your business is exposed to.

Benchmarking Against The Market

The market benchmarking is usually something where you have to rely on external reports. These reports can cost easily $ 3,000 to $ 6,000. In some cases there are however cheaper reports available from small local agencies and institutes which provide a great overview about the market and how it is expected to perform (e.g. Germany Sparkassen Branchen Reporting).

These reports are also helpful when creating a budget, risk report or business plan. The figures provided are usually very generalized but some key figures you'll be able to use for your benchmarking are growth rates (historical and future), changes in demographics and market trends.

Benchmarking against the market gives you a great overview about your business performance compared to the whole market and in return allows you to come to some interesting conclusions such as if you perform better than the market you must be taking shares of competitors or if you perform worse than your strategy may need to be revised etc.