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
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.