Benchmarking tools allow a company to compare intricate parts of its processes to another company’s or the industry standard. Companies usually go through the benchmarking process multiple times throughout their lifetimes. A few common tools include operational reviews, financial ratios, and business strategy analysis. There is no shortage of benchmarking tools or how a company should complete the benchmarking process. As this process is an ongoing analysis that never really stops, owners and managers have the ability to use different tools or tweak benchmarking procedures to make the best use of it.
An operational review, as part of benchmarking tools, is not necessarily an in-depth or difficult process to begin. It may be something like taking a look into how a department completes its processes to reviewing cost or production data reports. Using this method, a company may simply compare current data to historical trends from previous data. In short, the company is simply looking to improve itself based on whatever operational changes the company made earlier. Companies can compare their operational data to outside sources, though it may be difficult to gain this information.
Financial ratios are among the most common benchmarking tools used by companies. Individuals in the company take current financial statements and apply mathematical formulas to the information found there. The results are financial metrics that are highly comparable to another company’s statements once financial ratios are applied. The data allows a small company to compare itself against larger companies or an industry standard. Monthly formulas also result in trends that allow a company to determine if its financial data is improving or deteriorating based on current operations and economic conditions.
Business strategy analysis represents another form of benchmarking tool that may help a company improve its operations. For example, the company may use an outdated strategy that worked in the past but is beginning to struggle. Therefore, a change is necessary in order to remain financially viable, or the company may begin experiencing problems. Looking at current business models or strategies is the best way to find new, more profitable business methods for use in business operations. Measuring performance through a comparison of business strategies is also possible through benchmarking tools.
Benchmarking by itself can be meaningless. Companies must have a stated purpose for using this process; otherwise, it may be a complete waste of money. This is especially true of financial ratios. The data supplied from the formulas is meaningless unless compared to another company’s data to determine the strength or validity of operations.