Are Industry Benchmarks Good Performance Indicators?

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Metaphor Compare Apples To Oranges LightIndustry benchmarks are used widely to compare relative performance and gauge where your company stands. Beware the validity of the comparison. You might be comparing apples with oranges.

Results are comparable when companies run their business exactly the same way. We know that is hardly the case. Product offerings, size, operating procedures and rules are different. The differences have a bearing on the outcomes.

For example, revenue per square foot is a typical benchmark performance indicator in the retail industry. For a department store, the vast product portfolio certainly makes it difficult to do a fair comparison. Narrowing it down to a product category might make better sense. Even then, the product choices would skew the results.

It is a time-consuming task to normalize your own results in order to make them comparable to the benchmark measurements. You could do this only when you have sufficient detailed information. In most cases, such details are difficult to obtain. So why would organizations bother to gather and publish volumes of benchmark results?

The benchmark data serve one purpose. That purpose is to provide a crude reference point. Having said that, this reference performance indicator could be completely irrelevant.

For instance, a software engineering company in a niche market would find the ratio of labour and benefit expenses to total revenue for the entire software engineering industry meaningless. There are too many variables to consider for adjustments. The effort is unlikely justified.

Businesses use industry benchmarks as performance indicators when there is a specific need for them, say to satisfy regulatory reporting. If you were to set targets for the benchmark measures, it would be prudent to identify clearly the assumptions and the appropriate conditions for a rational comparison. Otherwise, you might be chasing a target that is not important for the business. Instead of using benchmark measures, it is more beneficial to focus on performance indicators that drive critical improvements for the business.

Take a look at the benchmark performance indicators you use, are they relevant in improving your business outcomes?

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