In this installment of Basics of Accounting for Small Contractors, I’m going to introduce you to the topic of benchmarking and look at why it’s important to use in your business.
Let’s start by defining the term benchmarking. Benchmarking is the process of comparing your performance to that of a standard, goal or “benchmark” (number). The benchmark can be an “average” or it can be “the gold standard” (the best). Benchmarking also allows you to determine if your company is doing better, worse or staying the same. It also is the process of continually searching for the best methods, practices and processes, and either adopting or adapting them and implementing them to become the “best of the best.”
One of the first companies to turn to benchmarking was Xerox (the copier company). Frankly, they were forced into it and didn’t know it’s what they were doing when they were doing it. After inventing the photocopier in 1959, they were so dominant in the market that they became a generic name for all photocopiers. They maintained that dominance for about 20 years. Then, their market share dropped to 35%. They lost high-end machine sales to IBM & Kodak. They lost low-end sales to Japanese manufacturers like Canon. They learned that the Japanese were producing, shipping and selling their copiers for what it cost Xerox to make theirs! If they were to regain their market share, they were going to have do things differently. This led them into benchmarking their business processes.
There are many benchmarks that you can track in your company. We’ll delve into those a bit later on. For now, I’m going to use a sports analogy to explain benchmarking.
In 1997, the Professional Golf Association (PGA) Tour was knocked back on its’ figurative heels by the performance of a 21-year old out of Stanford University at the Masters Tournament, the first of the four major golf championships of the year. Having turned professional just 8 months earlier, Eldrick Woods won the Masters tournament by 12 strokes! It’s a tournament record that still stands today. The gold standard of professional golf was re-cast that Sunday evening in April and the world was introduced to Tiger Woods. By the way, the Masters Tournament is an invitational event; meaning, you have to be invited to play. The field includes the Top 50 players in the world. This 21-year old beat the best players in the world….by 12 strokes! Since then, he’s gone on to win 13 more golf “majors” and a total of 79 PGA Tour wins. He’s only 4 wins from having the most wins ever on the PGA Tour. It’s taken him 18 years to reach 79 wins. The career leader, Sam Snead, needed 30 years to reach 82 wins.
So why am I sharing this with you? Well, it’s because there’s a strong correlation between benchmarking (i.e., “keeping score”) in sports and the business world. The numbers and benchmarks are different but the process is the same!
When you go golfing, the golf course has an established score that is the standard for players who play the course (differing tee boxes notwithstanding). That score is called par. On most golf courses, par is a score of 72. That is a benchmark to which you can measure yourself against. After completing your round of golf, you compare your score to the benchmark established by the golf course (i.e., 72). This is just one of many benchmarks.
How does your score for that round of golf compare to the others in your group? If it’s a tournament, how does it stack up against the rest of the competitors? How does it compare to the last time you played? How about the last time you played this course? These are all benchmarks. You can measure your performance against these other figures.
So, how do you go about benchmarking your business’s performance? There are a lot of benchmarking models that have been developed over the years. The Benchmarking Wheel (see diagram) is a five-stage process created by reviewing a number of other benchmarking models. The stages include:
- Planning – Assembling a team, defining and documenting what you want to benchmark and then measuring it
- Finding- Sources for benchmarking information (public information, industry data, competitors)
- Collecting – Determine how you’re going to collect the information and data and document the processes and benchmarks from the sources you find
- Analyzing – Compare your company’s processes and data to that of the companies, sources, etc. that you found & selected to benchmark yourself against. Then, measure/identify the gap in performance between yourself and the others as well as the reasons for it.
- Improving – Have team develop, implement and monitor progress for plan for improvement on the areas being benchmarked by the company.
In the next installment in the series, we’ll look at specific areas of your business that you can benchmark as well as KPIs (Key Performance Indicators) that you should be tracking.
Michael Bohinc is a Certified Public Accountant in Cleveland, Ohio, and the owner of Keeping Score Inc. He has served as the Chief Financial Officer of Norhio Plumbing Inc., his family’s plumbing company in Aurora, Ohio, since 1988. A veteran speaker, he's trained hundreds of contractors in the basics of accounting and on fraud prevention. He currently serves as the Interim Director for the Service Nation Alliance – Plumbing Group. He's also a die-hard Cleveland Indians fan. You may contact him via e-mail at mbohinc@keepingscorecpa