My Say: The hidden perils of benchmarking

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Sanjeev-Nanavati_MySay-WeeklyEVERY business competes. Companies use benchmarking, by comparing key performance metrics, as a way to determine where they stand competitively and to identify ways they can improve. It is widely practised and enthusiastically embraced. But does it deliver, and is the emphasis well placed?

It’s not the concept but in the application where problems arise. Benchmarking and its close cousin, emulating best practice, are hard to execute. Consider this: Companies have difficulty in benchmarking and transplanting best practice to different parts of their own organisation.

Large companies, for example, have different employee attrition rates in different departments and geographies since they cannot successfully migrate what works in one part of the business to another. If benchmarks can vary quite dramatically internally, how can companies hope to transplant best practice across companies?

One common flaw is the outside view of what leads to success is often incomplete and inaccurate. Why? Context, culture and hidden internal interactions create the outcomes that are visible. The internal logic and processes are not only difficult to discern but the way they interact with each other is often impossible to replicate. Companies falsely assume that the little bit that is visible from the outside is the key to success and they miss the fact that it is 80% of the iceberg that you do not see which is most important.

You can never predict exactly how a given set of practices that work in one company will work in another. Companies copy the organisation structure of others only to find that how the structure works cannot be easily replicated. They hire personnel from competitors only to find that these individuals were successful because of the system in which they operated and are unable to deliver the promised best practice.

Dressing casually and informally and changing office configurations are often inaccurately seen as ways to spark innovation. The key to successful benchmarking is to understand and emulate how others think. And this is very difficult to do. Aspiring to the “what” is fine but you have to find your own “how”.

Sometimes, it is the benchmark itself that is flawed. One fairly common fatal attraction is to look at a particular aspect of a business, such as customer experience, and look outside the industry to find a particular company to emulate — one bank aspires to have the customer experience at its branches be similar to that in an Apple store, for example. The aim of providing exceptional customer service is laudable, but following the example of an unrelated industry is exceptionally perilous.

An enormous amount of time and corporate resources are wasted on these alluring but futile endeavours. Presented as innovative and out-of-the-box thinking, they fail to recognise the vastly different ecosystems, products, customer behaviour and internal processes. How all of these interact with each other is almost impossible to determine, let alone reproduce. Both these flaws put stress and pressure on organisations as well as waste their resources. Mindless imitation is not benchmarking.

Another issue is the implicit assumption that the world is standing still. The company that you are benchmarking against is evolving and changing too. When and if a company arrives at the destination it is aiming for, it will find that the competitor has moved to a different or higher ground.

Benchmarking can be useful if done correctly. Focusing on individual processes and metrics should not be the central focus. For example, turnaround time and approvals in a bank or fulfilment time in an online business, while important to get right, should not be a substitute for the overall value proposition.

The big fantasy is that improving each process or each part will make the whole better. What this crucially misses is that it is the interaction between the parts of an organisation that makes the whole better. What matters to most stakeholders, be it customers, employees or shareholders, are a range of things. It is this total experience or value proposition that is important, not the efficiency of each discrete process. Not seeing the wood for the trees is one of the key perils of benchmarking.

When you applied for a mortgage loan, was how quickly you got approved the only thing that mattered? Turnaround time, because it can be measured, is a big focus at many banks.

However, other things matter too. For example, how much information was requested when the application was made, how much loan-to-value was approved, how long did the whole process of closing take, how helpful was the relationship manager, how responsive was the bank to queries post-closing, how good are the online banking facilities and, of course, how competitive were the rates.

If a particular bank is good across many dimensions, its overall value proposition can be superior to a bank that excels in one dimension such as approval turnaround time but does not do as well in the other things.

In large, professionally managed companies where perception often trumps reality and where managers are playing to an internal gallery for recognition to move onto the next big role, there is a premium on being seen as an original thinker and someone with big ideas. It is here that benchmarking finds fertile ground. By the time the futility of most benchmarking and best practice adoption exercises is evident, people have moved on to bigger things.

There is nothing wrong with looking outside for inspiration. But the focus needs to be correct and the pitfalls need to be avoided. Copying others or aspiring to be as good as somebody else is hardly innovative or a big leap forward. Creating your own uniqueness is a sign of innovation. What works better is a focus on continuous improvement. Though not easy, creating new value propositions is time and money well spent. CEOs and the boards need to realise that at the heart of every successful and sustainable strategy is uniqueness, not sameness.

Sanjeev Nanavati is a senior adviser to two leading management consulting companies. Until recently, he was the longest-serving CEO of Citibank in Malaysia. He is also the president of the American Malaysian Chamber of Commerce. This article was first published in Singapore Business Times.

This article first appeared in Forum, The Edge Malaysia Weekly, on March 2 - 8 , 2015.