Better Your Business: Benchmark It
Business owners like to think they know intuitively what's going right at their companies--and what's not. But Elfrena S. Foord, a financial adviser in Sacramento, wanted hard evidence. In her business, winning the client's trust is everything. She needed to know if she was getting it.
So the managers at Foord, Van Bruggen & Ebersole decided last year to check on what customers really thought about their service by doing some benchmarking--a process that measures a company against the standards and practices of other companies.
The results were surprising and sometimes humbling. While the firm got high marks for performance compared with its peers, a consultant's study concluded that the partners weren't meeting often enough with clients. "I also found out I wasn't as good a communicator as I thought I was," says Foord. She promptly enrolled in a four-weekend course. The upshot, says Foord, is that today business is up 10%, a rise she credits in part to the benchmarking study.
BEST PRACTICES. The use of benchmarking is growing quickly among small companies as it becomes easier to do, experts say. Huge amounts of data have become accessible, on software and through the Web, that allow owners to find out how rival companies are doing--and how they do it. Done properly, the process can improve customer satisfaction, identify industry breakthroughs, and spark changes that give a company new competitive advantages.
Benchmarking falls into two major categories. The first is a simple comparison of common financial measures--such as debt load and inventory levels--to the norms for a particular industry. But these ratios tell you only that something is wrong. Finding the problem and fixing it requires a second kind of benchmarking, a more qualitative but still systematic search to identify the best practices in your industry. Instead of merely asking: "How am I doing?" say advocates of this process, you need to be constantly asking: "What can I do better?"
The financial snapshot is an important first step, though. The idea is to focus on key business ratios to see if you're way out of sync with similar companies. For example, if you're carrying more debt than most rivals, you might have trouble weathering a recession or price war. Other criteria to focus on include inventory turnover, return on investment, selling, general and administrative expenses as a percentage of revenue, and liquidity measures, such as current and quick ratios, which tell you whether you have enough cash on hand to pay routine bills. "Often, businesses think their performance is pretty good and are shocked to see how they compare to others," says Samuel W. Bookhart, a benchmarking consultant in Chadds Ford, Pa.
Take Rountree Transport & Rigging Inc., a specialized long-distance trucking company based in Jacksonville, Fla. In 1994, Rountree used Dun & Bradstreet's BusinesScope database to see how its accounts receivable and payable stacked up against its rivals. It discovered that its receivables went uncollected for an average of 48 days, vs. an average 33 days for the industry. In effect, Rountree was giving its customers an interest-free loan.
SIT ON THE BILLS. The problem, officials discovered, was that Rountree drivers waited until they returned to the home terminal to turn in invoices. Now, invoices are turned in immediately after a job to the closest terminal. This simple change cut billing time in half, from 12 days to 6 days, and outstanding receivables dropped to 28.5 days, well below the industry average.
"We also found out that we were paying bills too quickly," says Thomas D. Runck, vice-president for finance. Now, bills are paid five days before the due date, unless a discount is offered for early payment. "Our cash flow improved significantly," says Runck.
The real benefits of benchmarking come, though, from taking a more proactive approach. Instead of waiting for a problem to arise, avid benchmarkers make it part of their routine to seek out and measure the best practices in use elsewhere--and then shamelessly adopt those tactics as their own.
Unlike ratios, comparisons of business practices don't come neatly packaged in a database; someone has to go out and look for them. The search need not be limited to your rivals. You can compare processes within your own organization or among companies with similar processes, even when they're outside your industry. The inspiration might even come from best practices at a company that is completely different.
Popular targets for benchmarking include cycle time--how long it takes to do a job or launch new products--and asset management, which scrutinizes how equipment and people are employed. But customer satisfaction is the topic studied most often, and it's not just a matter of asking customers what they think. The trick is in how you ask it, as the Houstonian Hotel & Spa learned when it set out in 1990 to benchmark its customer service against its peers.
The idea was to identify problems from customer comments and then adopt the best practices to improve the Houston hotel's rating. It soon became apparent that the Houstonian's existing effort at benchmarking was part of the problem. The staff always left a 40-question comment card in each of the 300 rooms, but the response rate was a meager 2%--no more than par for the industry. "We only heard from those who were very dissatisfied or very satisfied," says Greg Clark, executive vice-president.
Clearly, the survey itself didn't measure up to best practices. The solution came not from another hotel, but from a nearby auto dealership where a hotel manager was having his car serviced. The cashier handed him his bill and a comment card--with only four questions. Unlike Houstonian's exhaustive quiz, this one took only seconds to fill out.
START DIGGING. So, the Houstonian chopped up its survey into 10 different cards with four questions each and handed one card to customers at check-out. The result? Today's response rate has soared to 80%. The staff chimed in by proposing that suggestions from the cards should be circulated daily, instead of going to company headquarters. The payoff: Clark says customers who say they would choose the Houstonian again rose from 85% five years ago to 99% recently.
Sound like something you would like to try? There are two ways to go about it: You can do it yourself--providing you can spare the time. Or you can hire a consultant, providing you can afford the considerable fees.
First, decide what to benchmark by starting with a good internal financial analysis from a commercial database (table, page 6). Trade groups and government agencies also offer databases designed to help you compare financial performance and benefits against your peers.
Next, put together a benchmarking team. To do it right, they will need to devote half a day each week for a couple of months. It won't work if the goals aren't specific, so choose no more than three topics to benchmark at once.
Then, start digging. "Ask yourself, where can I best learn the process I want to improve," says Fred D. Bowers, a consultant based in Acton, Mass., who in 1990 created Digital Equipment Corp.'s benchmarking program.
You can arm your team with a host of data on benchmarking from the Web and your local library. A good place to start is the Benchmarking Exchange (www.benchnet.com), which helps companies share information from surveys, market studies, and lists of best-practice companies. Take a peek at rivals' Web sites. Business gumshoes who specialize in "competitive intelligence" often are amazed at the intimate data some companies choose to post.
Next, identify companies that may serve as benchmarking "partners"--companies with best practices that might teach you what they do. Network among customers, suppliers, and employees, and ask them who they think is best at the process you're trying to improve. Other sources to poll include chambers of commerce, small-business development centers, trade associations, industry experts who know of breakthrough practices, and companies that have won local and state quality awards. (In fact, say benchmarking experts, consider applying for an award even if you don't have a prayer; the process provides discipline, and it's a good way to get feedback).
PLAN TO SHARE. Getting your would-be partner to help is another matter. Direct rivals might be reluctant to share their methods, but others may embrace the idea if you don't come empty-handed, says Michael J. Spendolini, a benchmarking consultant in Laguna Beach, Calif. "Offer to give something in return," he says. For instance, if you're looking to improve your customer satisfaction process and you already have a great order system, plan to share it with your benchmarking partner.
If possible, conduct one or more on-site visits to observe and compare your partner's methods firsthand. You may not be allowed to do hands-on work for liability reasons, but you still can learn enough to do a fair imitation back at your office.
Some owners may know which areas need improvement but are lost as to how to make the changes. That's where consultants can help. Fees can range from $250 for an informal customer-satisfaction survey to $75,000 for an in-depth, qualitative benchmarking study.
It's money well spent if you find the right person. Consider Master Maintenance, a small paint-deleading contractor in Concord, Mass. "We knew we did good work, but we just weren't getting the jobs," says Bob McGarry, who started the five-person company with his wife, Eileen, in 1988. McGarry did a little benchmarking on his own with other contractors and learned that his bids took too long to work up, which in turn meant he had less time to solicit other business, and they needed to be more accurate. So he hired Fred Bowers to find the industry's best practices and set them up at Master.
After a month, Bowers was back with some answers. To speed up the bids, Bowers recommended doing on-site estimates with a laptop computer. As for generating more business, Bowers saw Eileen as an untapped resource. He suggested Master farm out the billing and painting, which freed Eileen to bring in more revenue by doing estimates and making cold calls. For good measure, he suggested a Web site to increase their exposure, a tactic used by other contractors. But the most surprising suggestion was that the McGarrys should stop bidding on every contract that came along and concentrate on the most profitable jobs. Today, the McGarrys aim to do work for large government agencies.
All told, the McGarrys estimate that Bowers' advice will help Master more than double its revenue in the next year--which means his $30,000 fee will pay for itself several times over.
As for Elfrena Foord, the financial adviser who wanted to survey her customers, she turned to Success Profiles Inc., a consulting firm in San Diego, Calif., that specializes in measuring best practices. "The consulting firm got better answers and was better able to analyze the data than if we did the survey ourselves," Foord says.
That $5,000 survey was just the beginning of her company's quest for best practices. Today, Foord says, the partners routinely benchmark by attending industry conferences, going to seminars, and networking among other professionals to find out better ways of doing business. "Benchmarking has become a way of life for our firm," she says. "It's a mind-set." It's also the kind of thinking that keeps you in front of the competition--a good place for any business to be.