Benchmarking

Why Benchmarking Doesn't Always Lead to Best Practices

CFOs who are getting maximum payoff for their efforts tell how to grab the benefits and dodge the pitfalls.

Benchmarking is rapidly becoming an indispensable tool for savvy finance executives. Used wisely, it can transform a company's vision and clarify decisions on performance, markets and internal efficiency. But as the availability of back-office metrics has increased, misuse of the practice has become widespread. "In many cases, companies are looking out of the wrong end of the telescope," says Robert Howell, distinguished visiting professor of business administration at the Tuck School of Business at Dartmouth in Hanover, N.H.

Most companies' benchmarking efforts focus too narrowly on cost reduction, and that keeps finance's arms pinned in cost-center mode rather than enabling the function to flex its strategic muscles. "I would argue that the primary job of a finance function is to support the business and to support the senior executives in effecting strategy and ultimately producing results for shareholders and other constituents," says Howell, who frequently does consulting work for corporate finance departments. "I'm not so sure that the finance function has been enhanced by this concern about being in the top quartile in terms of relative cost relationship."

Howell insists that finance can strive for greater efficiency without making the mistake he calls "benchmarking the numbers" -- that is, myopically focusing on efficiency metrics at the expense of larger corporate objectives and needs. John Deane, founder and managing principal of The Alta Group, a Glenbrook, Nev.-based consulting firm that provides services and benchmarking information to the equipment leasing and financing sector, refers to that misuse as "academic" or "absolute" benchmarking. He notes that projects which adopt an absolute approach "sometimes -- not always -- may not be worth the cost or the disruption that go into them."

Companywide benchmarking initiatives undertaken in pursuit of a specific award or recognition may be particularly disruptive. When some winners of the Malcolm Baldrige National Quality Award, the preeminent quality and productivity award in the United States, encountered performance problems recently, many observers commented -- fairly or unfairly -- that those companies had made the mistake of getting out of their business and into the business of being a Baldrige winner. That criticism has stirred debate about the most appropriate application of benchmarking practices and about more granular topics such as how much thought an organization should put into selecting the group of companies to which it compares itself in the benchmarking process.

Those ongoing controversies prompted Boston-based consulting firm Bain & Co. to craft a careful and lengthy definition of benchmarking for its annual study of the value of various management tools (see High Usage, Happy Users, below). In its survey questionnaire, Bain defines benchmarking as a tool that "improves performance by identifying and applying best demonstrated practices" to operations and sales.

"Managers compare the performance of their products or processes externally to those of competitors and best-in-class companies and internally to other operations within their own firms that perform similar activities," the carefully worded definition continues. "The objective of benchmarking is to find examples of superior performance and to understand the processes and practices driving that performance. Companies then improve their performance by tailoring and incorporating these best practices into their own operations -- not by imitating, but by innovating."

High Usage, Happy Users

For the past decade, Darrell Rigby, director of Boston-based consulting firm Bain & Co., has conducted an annual survey to learn how global senior executives use and value more than two dozen management tools. "Benchmarking is one of those robust tools that year in and year out receives very strong satisfaction ratings," he says.And it's one that senior executives use often. This year, for example, benchmarking received the second-highest usage score.

The tools in the Bain study include specific methodologies such as Total Quality Management, Balanced Scorecard and Economic Value Added as well as broader, more general activities like strategic planning, outsourcing, change management programs and downsizing. This year's survey results include input from 708 senior executives at companies based in North America (40 percent), Europe (20 percent), Asia-Pacific (20 percent), South America (15 percent) and Africa/Middle East (5 percent).

Rigby's research shows that benchmarking's popularity dipped a bit in the late 1990s,when companies generally focused more on revenue growth, and picked up again in the past two years along with the renewed emphasis on profitability and productivity. The connection implies that benchmarking is used primarily as a cost-reduction tool, which strikes Rigby as off base. "You can use benchmarking for a wide variety of purposes," he says, "including as a way to enhance revenue growth."

Five-Star Rating

FelCor Lodging Trust Inc. is one company in which innovating, not imitating, is the norm. The $1.3 billion Irving, Texas-based real estate investment trust has developed an internal benchmarking program that luxuriates in detailed and comprehensive best practices data that it continually extracts from its portfolio of 180 hotels in 35 states and Canada. In addition to independent properties, FelCor owns hotels in seven brands: Embassy Suites Hotels, Holiday Inn, Sheraton, Doubletree, Crowne Plaza, Hilton and Westin. Most of these properties are managed by the three brand management compa-nies with which FelCor has strategic alliances: Hilton Hotels Corp., InterContinental Hotels Group, and Starwood Hotels & Resorts Worldwide.

Each month, executive vice president and CFO Richard J. O'Brien huddles with his finance group and their asset-management partners to pore over that portfolio and analyze performance and productivity metrics. The group examines high-level industry performance measures such as revenue per available room (calculated by combining occupancy rate and average daily price) and revenue by metropolitan area and by price segment. It hones in on revenue segments, including food and