For companies, embracing change means seeking out and adopting best practices. Benchmarking–the research and analysis of quantitative, empirical data–is a way to isolate weaknesses and strengths and to make connections between best practices and performances. Once these connections have been made, determining which practices are appropriate for an organization to adopt becomes a competitive imperative.
Metrics expert Chris Gardner recently discussed the dynamics of benchmarking for identifying best practices. Gardner is the manager of APQC’s Center of Excellence, which helps organizations uncover performance gaps and best practices through benchmarking.
Benchmarking Fundamentals
A fundamental question to ask when benchmarking is: What should we measure? “The key to developing effective benchmarking is to begin by choosing measures that are aligned with the company’s strategic objectives,” said Gardner. “Collecting data is time consuming and costly, so it is important that organizations have a clear sense of how the data will be used before starting the collection process.”
The next step in the benchmarking process is collecting and comparing data to determine how the organization stacks up to others researched. “This is what most organizations traditionally think of as benchmarking,” said Gardner.
Metrics allow an organization to understand its operational performance relative to external benchmarks (such as the industry average and top performers) and to assess its own internal progress over time. To ensure comparability, metrics should be normalized (i.e., put on a common unit basis) to reduce issues of operational scale.
Although metrics are useful, it is important to also look at the facts behind the numbers. Simply knowing that cost per full-time employee (FTE) is higher than the industry average, for instance, will not help an organization improve its performance. Instead, Gardner advises analyzing the data to discover what factors (e.g., management practices, systems, and organizational structure) within an organization are responsible for performance gaps and then identifying key practices for improvement.
Benchmarking Performance
Key performance indicators (KPIs) are the metrics deemed essential to understanding operational health. Measuring performance allows an organization to objectively determine what is working and what is not. In addition, by identifying successes, managers can reward and learn from best practices.
“Measurement has the power to focus attention on desired behavior and results,” said Gardner. “People will pay attention when they know their job is being measured, especially if the measurement is linked to compensation.” When targets are set using validated, normalized data, measurement will support a means to determine operational improvement. Of course, it is critical to tie process improvement to measures that matter to an organization. In doing so, measures can provide:
- feedback to guide change,
- assessment and baseline information,
- a compelling business case,
- a diagnostic tool to identify areas for improvement and set priorities, and
- a basis for communication (using a consistent definition).
Most measurement occurs at the process level, where the transformation from input (resources applied) to output (goods and services) takes place. The four main categories of metrics to assess performance at the process level are:
- cost effectiveness (e.g., $6.22 per invoice),
- staff productivity (e.g., 93 invoices processed per FTE),
- process efficiency (e.g., 11.2 percent error rate), and
- cycle time (e.g., processing time of 3.8 days).
Cost Effectiveness
Cost effectiveness measures tell how well companies manage cost. Normalized data usually include cost per unit, cost as a percentage of revenue, cost as a percentage of total budget, and actual costs versus budgeted costs. Supporting indicators include cost components as a percentage of total and disaggregated cost per unit. Examples of measures follow.
- Customer service/call centers
- Cost per call (or cost per minute)
- Cost per reported complaint
- Finance and accounting
- Cost per invoice
- Cost per remittance
- Human resources
- Cost per recruit
- Benefits administration cost per employee
Staff Productivity
Measuring staff productivity provides insights into how much output each FTE has produced. KPIs include units of output (e.g., invoices and purchase orders) per FTE and workload (e.g., customers and general ledger) per FTE. Supporting indicators can focus on factors influencing staff productivity such as hours of training per FTE and employee tenure. Examples of measures follow.
- Customer service/call centers
- Calls per representative
- Resolved complaints per FTE
- Finance and accounting
- Invoices processed per accounts payable FTE
- Remittances processed per accounts receivable FTE
- Human resources
- Total organization FTE per HR FTE
- Requisitions per recruiter
Process Efficiency
Process efficiency gives insights into how well procedures and systems are supporting the operation. KPIs usually include error rate and forecast accuracy rate. Supporting indicators can focus on factors that influence process efficiency such as system downtime rate and the degree of process automation. Examples of measures follow.
- Customer service/call centers
- First-call resolution rate
- Total resolution rate
- Finance and accounting
- Error exception rate
- Payroll processing error rate
- Invoice processing rate
- Human resources
- Turnover rate
- Ratio of acceptance to hires
- Ratio of acceptance to offers
Cycle Time
Cycle-time measurements deal with the duration required to complete a task. They are almost always expressed in units of time and include processing time and time to resolve customer inquiry. Supporting indicators can focus on factors that influence cycle time, such as the frequency of system breakdowns. Examples of measures follow.
- Customer service/call centers
- Average time to answer
- Average time to resolve complaint
- Finance and accounting
- Average time to process an invoice
- Days sales outstanding
- Human resources
- Average time to start (new employees)
- Time to process applicants
- Time to fill open positions
The four measurement categories represent a family of measures framework. This framework provides a comprehensive view of the business process. For example, measures can be developed to assess performance in all aspects of customer service, including cost management per call, quality of service, and labor costs.
The importance of comprehensive measures becomes particularly evident in cases where measures are in conflict. Take the example of the manager of a customer service center who decides to replace its antiquated automated answering system with a new model. This investment in technology will have a short-term impact on costs, but a quick payoff would be expected in the form of improved quality and shorter duration of calls. In another scenario, a decision to contain costs may be detrimental to service quality, which could lead to unhappy customers and ultimately impact revenue. Without looking at the whole picture, these two scenarios may be misinterpreted by management in terms of their overall success or failure.
Customer and Employee Satisfaction
Customer and employee satisfaction information are commonly used to understand operational health. Typically, this information is derived from rating and ranking questions. They may include multiple-choice and open-ended questions. Customer and employee satisfaction information provides organizations with subjective evaluations and perceptions of their employees and customers. Because this is opinion-based information, this information cannot be considered measures of performance. It is difficult to manage opinion; managers need hard facts to facilitate change. Opinions can, however, be used to direct traditional metrics benchmarking. For example, management can discover the importance of focusing benchmarking efforts on cycle time if they receive a low customer satisfaction rating in this area.
Taking a Look at the Big Picture
KPIs are also known as dashboards. A dashboard provides insights into business performance in one snapshot. Similar to the dashboard on a car, which provides the driver with an overview of key aspects of the car’s operation, dashboards provide a high-level understanding of how a business is performing. They are considered “measures of wellness,” in that by simply looking at them organizations can assess the health of the operation.
Beyond the numbers, organizations want to know what qualitative factors impact performance. Using statistical techniques such as correlation and cross tabulation can help reveal those factors that most prominently influence good performance. “Ultimately, clients want us to help them improve their businesses,” said Gardner. “We find making the connection between the numbers and management practices that drive business performance is a way to achieve this. That is the payoff to benchmarking.”
First appearead at APQC
Visit APQC on the Web at http://www.apqc.org.
