Before you review last month’s financials, remember that those numbers, while important, are old news. What you need is a program to fix something right now, today, so that tomorrow’s profits are bigger, or tomorrow’s business is more valuable. A benchmarking program can be the platform for these gains.
Benchmarking is “comparing yourself to the best example of how another organization performs a process,” according to Larry Autrey, managing partner of Whitley Penn.
“I have always assumed that everyone is trying to make their business better. In doing so, they’re trying to find a standard by which to measure it. Benchmarking, in my mind, is the right answer.”
Smart Business spoke with Autrey about the process of benchmarking and how it can increase the value of your company.
What benefits can a benchmarking program produce?
The business environment has changed radically in recent years, and the consequences of failing to manage value can be severe. Benchmarking can determine what is achievable, identify constraints and limitations, improve processes and operations, make you more competitive, and exploit the investment of others.
What are the basics of benchmarking?
If you know what you’re trying to accomplish, it’s much easier to get there. Implementing a program involves a four-step process of planning, research, analyzing data, and putting the results into tactical plans specifically adapted for your company. A key part of the research phase is to identify the company’s value drivers, which are areas that drive up the value of the business. There are probably two or three categories in any business that are going to drive cash flow, profitability or value. We try to benchmark those categories that will have the most impact.
Once the key value drivers are identified, we look for leading indicators. For example, if gross profit is the category you’re going to benchmark against the competition, and you are currently two percent shy of what the leaders have, then the question is, What can I look at every day that improves or deteriorates gross profit? This should help you in determining if you can meet or exceed that benchmark.
What kinds of companies should utilize benchmarking?
Benchmarking is for any company that is concerned with improving cash flow, profitability or value. Sometimes it’s not easy, because perhaps the industry you are in is very unique. But there’s always an industry that you can find to learn something from or to mimic, and to benchmark against.
Even businesses that are considered the best in their industry have an area they would like to improve, and somewhere in their mission may have identified something they want to protect themselves against. They may have knowledge of another leading business that slipped up and lost profitability or value and, therefore, want to capitalize on what others may not have by implementing safeguards to protect what they have in place.
Can benchmarking be used internally?
Benchmarking can be used internally to compare processes with firms from any sector of the economy. Additionally, within a large company, you could put a strong-performing division up against another division and try to benchmark the less profitable division against the more profitable. Sales companies can benchmark aspects of bids before they go out. But I believe it’s more effective externally when used to compare your business with competitors and similar businesses, or against the best practices in your industry.
What key factors should be considered when outsourcing a benchmarking program?
Before outsourcing, make sure the company understands your mission. Usually it’s cash flow, profitability and valuation. Often, a business will obtain a valuation to determine what it is worth today, and then the goal is to increase its value by 25 percent. As part of the valuation, an outside firm should determine the top two or three key value drivers. If it’s understood what drives value in your business, then benchmark parameters can be developed.
LARRY G. AUTREY is managing partner of Whitley Penn LLP, CPAs & Professional Accountants. Reach him at (817) 258-9190 or firstname.lastname@example.org.