Benchmarking strategy vital to business performance.

• Author: Angell, Thomas
• Position: PRIVATEcompanies

What company sets the standards in your industry, and what can you learn from them? Many executive teams sit around the conference table, beginning the budgeting process for the fiscal year and comparing their performance from year to year. That is a good start--but it is not enough in today's economy.

It is necessary to look at internal, as well as external, standards. The ultimate goal of benchmarking is to utilize actual peer operating results to improve the performance of all business processes, including production, purchasing, accounting and customer service.

Research demonstrates that performance in these areas can be improved by 18 percent through benchmarking, according to the Trendsetter Barometer, a quarterly survey of CEOs sponsored by PricewaterhouseCoopers. These are not just speculative questions--the answers form the foundation upon which you can build a benchmarking strategy for your enterprise.

An executive team that reduced the cost per full-time equivalent employee from $37,000 to $34,750 might be pleased, but not as happy as it might be. If it had compared the company's costs to industry standards, it might have discovered that the average cost per full-time equivalent employee in its field was $32,000.

Finding the relevant data--for the purpose of comparison and contrast--is the first step in benchmarking. Potential resources include trade groups, federal or state governments and even benchmarking Web sites. For example, AMMBIT (Advanced Middle-Market Business Intelligence Tool) is a benchmarking tool developed by PricewaterhouseCoopers. This interactive tool provides private companies access to aggregated high-quality and hard-to-find operational and financial performance evaluation data on more than 3,500 U.S. company datasets in more than 230 industries.

Once you have the data source, you must determine which metrics are most important for your business. These might include activity ratios like receivable turnover, inventory turnover, days sales outstanding (DSO), gross margins, income from operations as a percent of sales or net income as a percent of sales.

You should use a number of small metrics--from three to five--at any given time. Using too many metrics might make the process overwhelming. When first starting the process, in fact, you may want to use just one metric.

For example, a retailer named, XYZ Corp. decides to examine its metric of DSO to assist XYZ's finance team in determining the efficiency of its...