Benchmarking can refer to an exercise where a comparison of performance is made against a “Best in Class” individual or organization. If I were to benchmark myself in the 100 meter sprint against Usain Bolt, he would be the 10 and I would be a 1. Only because fractions are not allowed…
In business, benchmarking is a very useful and relatively easy exercise to undertake. It separates management perceptions of performance from reality by comparing standardized measurements against a recognized “Benchmark”. These can be as broad as your business model requires but they do need to be standardized measurements. If your management team is measuring something that no-one else cares about, there really is no value.
Sales, Income, COGS, and ROCE etc. are all standardized metrics of management. They are good points of reference. Are you above or below the mean and by how much? This will lead you to ask other questions, mainly why? Why are we ahead or behind? The follow up question is what. What are we doing differently? Lastly how. How can we gain on the benchmark company or protect the edge we have over it?
If your performance is better or worse than the benchmark, it is good to know with some level of certainty. Knowing, not assuming, you are ahead or behind is a validation of what you have done. However, the real managerial benefit is in being able to separate the methods and strategies that affect your performance against the competition. Knowing enables you to protect your edge and build on the success. Bare in mind it is just as easy to lose ground as gain ground if you operate on a coin toss and carry a rabbit’s foot.
Think about Nokia and Apple. Nokia was once the absolute benchmark for cellular telecom. Today it might be argued Apple has taken that spot. But together the average level of managerial performance would represent our industry benchmark. Throw Motorola, Samsung and Rimm into the mix and now you can see that the combined data set is a clear representation of industry performance, not value but performance.
Now look back 12 years and would Nokia have been above the average and Apple below. Today that benchmark as an average of the constituent parts has not changed a great deal but the situations of the participants around it have. Apple is now well ahead in most managerial criteria and Nokia behind.
Where do you find a benchmark? Most benchmarks are an accumulation of data from within an industry sector – typically provided anonymously by CPA’s who work with clients in the space. In aggregation these data points create a performance map and provide an average level of performance in all the key areas of management. The term average does not sit comfortably with some and it has to be understood that an average is simply the line at which we can be qualified as either the “Best of the worst” or the “Worst of the Best” and by engaging in a benchmark against your industry peers you are determining your relative position. These benchmarking services do not rank you definitively against a single target, but they point at comparative managerial strengths and weaknesses.
In our work with financial services advisors who wish to either sell or buy a business, valuation is a primary issue. If I were to take two firms, each with the same GDC, the same number of employees, and similar client counts, current doctrine would have each firm valued as equals. I will argue, and do frequently, that this doctrine is utterly wrong. This method takes no account of the managerial performance underlying the revenues. It assumes every other aspect of the business are equal – it assumes an industry average of management is present. Before you assume your firm is worth $X, or that the firm you wish to buy is worth a multiple of its revenues, step back and ask yourself, “Is this an average business, above or below, in its operational capability?”
Only a deeper dive into the firm’s performance will tell the truth and Benchmarking is an easy way to begin that exercise.
Eighty20 uses Financial Services benchmarks. Profit and loss, and balance sheets are segregated by revenue levels and by practice specialty. The following baseline reports are available to you for FREE .
Financial Planners – Revenues of ~$1.0M
Financial Planners – Revenues of ~$1.0M to $10.0M
Financial Planners – Revenues of ~$10M Plus
Insurance Agents and Brokers – Revenues of ~$1.0M
Insurance Agents and Brokers – Revenues of ~$1.0M to $10.0M
Insurance Agents and Brokers – Revenues of ~$10.0M Plus