In this entry to the benchmarking series, I want to cover the benchmarking peer group. The benchmarking peer group is both vital and controversial for the vast majority of benchmarking projects. It is an issue we discuss at the beginning of every project, and it alone can make or break a benchmarking project.
But here is the problem: almost everyone’s thinking about their benchmarking peer group is totally wrong.
How to define a peer group
If I asked everyone that reads this post to list the criteria they would use to define their ideal benchmarking peer group, industry would be the highest priority for vast majority of you. It never fails that every time we discuss a benchmarking peer, everyone wants to benchmark with their industry peers. That approach is just flat wrong, though.
Don’t get me wrong, I understand why it is that way. We spend a lot of time in meetings talking about our market, our competitors, differentiating ourselves from them, selling against them, etc. All of this puts them in the forefront of our thinking (and our management team’s thinking). We spend a lot of time focused on them, so if we are going to benchmark something, we understandably want to gaze inside the workings of our industry peers.
The problems with industry peers:
- People who work for organizations within the same industry tend to have the same “filters” about how to work within that market. They are always trying to find out what each other are doing, and they are pretty successful. That leads to an awful lot of similarity amongst industry peers. You very seldom will learn anything that is really new.
- The fact that an organization is in your industry has nothing to do with the performance of their processes. For example, if your payroll process in performing poorly, why does the fact a company has the same industry designation mean their payroll process is performing well.
- Even if you benchmark with an industry peer and learn everything there is to know about how they operate, you still won’t be equipped to use that information. Organizations aren’t plug-n-play. Your culture, people, suppliers, products and services, customers, and infrastructure are entirely different than your competitors. Besides, if were able to replicate them exactly, you’d only be as good as them. Isn’t the goal to beat them?
A better way
At its essence, benchmarking is about learning how to improve business processes. You should define your peer groups based
on those factors.
Let’s say you are trying to improve your payroll process and that process must produce 100,000 payroll checks each month globally with 35% of those being issued to contractors AND have a 100% accuracy rate. Wouldn’t you want to learn from organizations having similar characteristics? What if your industry peers only produce 60,000 payroll checks each month?
The peer group should be defined using criteria about the process being examined. It is much more important to learn about a process that is similar to yours in output, productivity, and other key characteristics than it is to learn about a process from an organization that just happens to share a the same NAICS code.
C’mon, you’re better than that
So, if you are focused on industry peers in your benchmarking efforts, I say you are wrong. You need to be more creative and focused in how you define the organizations you want to call a peer. I’d love to hear what you think some of the best criteria are for defining benchmarking peer groups.
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Ron,
There are four types of benchmarking. Depending on the goal you are trying to acheive, you want to partner with the appropriate types of peers.
There are two where industry is vital or basicallly not an accurate benchmarking.
Measurement - if you measure apples to oranges you are not meeting the objective of the benchmark.
Strategic-If you are trying to understand where you are in contrast to your industry peers.
The other two types one of which is process benchmarking. You are right in the case of benchmarking a process. This would be the time when you want broader partners in the benchmarking exercise.
Lisa
Ron,
Thank you for taking the time to write about this subject. Let me add, you are describing a process benchmarking exercise and in those types of benchmarking industry peers constrains your view. You must acquire other similar size companies with similar process requirements.
You MUST have similar industry peers in any Strategic or Measurement benchmarking type exercises.
Can we agree?
Lisa
Lisa, first, thanks for the comments. These are great points and I love talking with folks that are interested and knowledgeable in benchmarking.
You have a couple of points that I’ll address. I try to outline them in some order.
1. Peer group determined by the types of benchmarking
I agree with you that there are various types. These are four of the most common (there are other ways to look at “type” like internal, external, etc.), but I don’t totally agree with you about selecting industry peers only for “measurement” and “strategic”. I can provide numerous examples where organizations learned breakthrough findings through measurement and strategic benchmarking with non-industry peers.
For example, on measurement benchmarking, I believe you should focus on measures that are normalized on standard values like organizational revenue, number of employees, or another relevant output. When you do that, it allows you to compare measures across peer groups, such as industry, size of organization, geography, or process output. Using the payroll example from the blog post, why wouldn’t you want to compare your measures (such as total cost of the payroll function per 1,000 of organizational revenue) to an organization outside your industry, such as a company like ADP that specializes in issuing payroll checks? I would want my measures compared to the best of the best, not just the best of my industry.
2. Only considering industry peers as “similar”.
I don’t view the industry designation at the characteristic that makes an organization “similar”. It is simply not the case. Instead of trying to convince you (or readers) that there are organizations from different industries that are similar, I’d like to show the opposite. Based on your logic, all organizations in the same industry are similar, and that hasn’t been that experience. As an example, when an organization comes to APQC to benchmark their supply chain, they want to look at industry peers, BUT they don’t want all industry peers. They want industry peers with business models and supply chains similar to theirs. They may be “high tech”, but they source materials from South America, manufacture in Southeast Asia, and have 10 distribution centers around the world. None of their industry peers are configured that way, so they don’t see them as similar.
I recognize that industry is important, but it is a blinder for most organizations and they are losing valuable learning by not examining other types of peer groups.
Let me know your thoughts.