Management Accounting GuidelinesMAG - I

IMPLEMENTING BENCHMARKING

Issued byThe Institute of Cost & Works Accountants of India

(Statutory Body under An Act of Parliament)12, Sudder Street, Kolkatta-16.

Second Edition : Jan 2011

© The Institute of Cost and Works Accountants of India

Price : Rs. 100/-

Published by :

The President

ICWAI

12, Sudder Street

Kolkata - 700 016

Telephone : 91- 33 - 22521031/34/35

Fax : 91 - 33 - 22527993

ACKNOWLEDGEMENT

This Management Accounting Guidelines are based

on the guidelines issued by CMA Canada

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FOREWORD

Benchmarking is an answer to variousissues confronted by a ManagementAccountant. Some of these are ‘MatchingCosting systems with the best in the world’,‘Controlling the processes for monitoring andguiding operations’, ‘Quantifying the effectsof strategies on future cost levels’ and ‘to bein position to measure the cost effects on

ongoing changes’.

Benchmarking can be used for Products/Services andFunctions/Processes with respect to Internal operations,evaluating the competitors and comparing to the best in class.Benchmarking provides movement from gut feeling to marketreality, perception to objectivity, low fit to conforming highly toindustry standards. It helps in selecting the goals and objectivesin an effective manner and in measuring the productivity quiteaccurately. Competitiveness can be achieved and sustainedwith benchmarking with dramatic improvements. Outlining theindustry best practices is another way to benchmark. To me,benchmarking could be a starter for Total Quality Management.

I am happy to note ICWAI is bringing out the new printingof Management Accounting Guidelines on “ImplementingBenchmarking”. This is not only a timely intervention in theincreasing importance of the issue, but a bold step to underlinethe role of Management Accountants for Benchmarking.

The framework proposed in these guidelines is relevantto Management Accountants, Regulators and different typesof Enterprises

B M Sharma,

President

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PREFACE

The guideline brought out by Professional DevelopmentCommittee of ICWAI on Benchmarking is the first one in thisseries of Guidelines on Management Accounting. Theseguidelines cover the essentials of the subject from conceptionstage to implementation and review crisply andcomprehensively to guide the Management Accountant andthe Management to successfully implement the technique ofbenchmarking in their priority areas and reap immensebenefits. This is part of their TQM and CPI Continuous ProcessImprovement programmes.

Superior performance in meeting customer requirementsproduces competitive advantage in today’s marketplace. Anintegral part of strategic planning, benchmarking compares afirm’s performance to that of world-class organizations in orderto measure business excellence and establish realistic goalsfor improvement.

Organisations in India must be benchmarking to be ableto monitor and analyse the strategies which ensures propermonitoring and control whereas cost remains on target. It isup to the Management Accountants to provide their clients withcompetitive cost and strategic information in addition to theinformation provided on internal operations in this context.

This book provides a blueprint of the benchmarkingprocess used by leading practitioners, describes concretetools and techniques, prescribes a framework for effectiveimplementation, and discusses the issues and challengesinvolved in introducing benchmarking into a company’s

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continuous improvement program. The concepts, approachesand examples presented can be applied to all organizationsregardless of size, business sector, product or service.

I would like to place on record efforts put in by Mr. A. N.Raman Central Council Member of the Institute, Mr. R.Narayanan Past Chairman of SIRC, Mr. Veer RaghavanIyengar member of the Institute and Ms. Nalinee Jagtapstudent of ICWAI in bringing out these guidelines by theInstitute. We are also thankful to CMA Canada for extendingtheir helping hand in producing the publication.

We are grateful to Mr. Chandra Wadhwa President ofICWAI, Mr. Kunal Banerjee vice-president of ICWAI, themembers of Central council and the members of theProfessional Development Committee in particular who havegiven their valuable Guidance and support in bringing out thispublication.

Brijmohan SharmaChairman

(Professional Development Committee)

CONTENTS

Contents Page

● AN APPROACH TO BENCH MARKING IN INDIA 1

● INTRODUCTION 6

● THE ROLE OF THE MANAGEMENT ACCOUNTANT 10

● DEFINING BENCHMARKING 13

● BENCHMARKING TYPES 16

● IMPLEMENTATION GUIDELINES 21

● Planning 22

● Data Gathering 31

● Analysis And Integration 35

● Implementation/Execution 38

● Recalibration 42

● BENCHMARKING PROCESS TOOLS 44

● MANAGEMENT ACCOUNTING CHALLENGES 48

● CONCLUSION 52

● APPENDIX A 53

● APPENDIX B 60

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AN APPROACH TO BENCHMARKING IN INDIA

Benchmarking is a process used by entities to targetkey areas for improvement. This becomes very necessary inglobally competitive environment to sustain and enhanceperformance. This is taken up by entities as a continuousprocess of measuring their functions, processes, products andservices against competition. The International BenchmarkingClearing House a service of the American Productivity andQuality centre defines it as “a process in which companiestarget key improvement areas within their firms, identify andstudy best practices by others in these areas and implementnew process and systems to enhance their own productivityand Quality.

Companies in India are investing millions of Rupees onnew technologies, new manufacturing processes & systems,Research & development, Vendor development, Education andtraining. These companies need to know in advance thebenefits derived from these investments. There must bebenchmarking system in place to monitor and analyse thestrategies as they unfold so that control is maintained and costremains on target. They need to know:

� the effects of changes

� alterations to their plans

� their current costs and

� what they will be in near future.

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The call for improved information systems has focusedprimarily in the past on process control and product costing.A further requirement is to provide financial and costinformation on future strategies. But beyond the need for goodinternal information, is the need to understand the competitivesituation better. Thus, it is up to the Management Accountantsto match the strategy of their companies with that of thecompetitor’s strategic information in addition to the informationprovided on internal operations.

The management accountant’s challenges aresignificant:

� Outstanding process controls to monitor and guideoperations,

� ’World class’ product-specific costing systems,

� systems to quantify the effects of strategies on futurecost levels, and

� the ability to measure the cost effects on ongoingchanges.

These typify the needs for ’in-house’ managerialinformation. In addition, we must have trained ManagementAccountants who can not only generate information but alsobring it to life in new and innovative ways – ways that will helpthem and other managers to manage the affairs of theCompany in a better way.

Types of Benchmarking:

There are two types of Benchmarking. One is onProducts/Services. The other is on Functions/Proceses.

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While there are two basic areas or types ofBenchmarking, there are three different groups against whichyou can benchmark your operations. They are :

Benchmark internal operations – the best performingin your company

Benchmark your competitors – Generally the mostrelevant point of comparison for Products/Services

Best-in-class benchmarking – You compare your levelto companies in any industry engaged in functions orprocesses analogous to yours and are the best at what theydo.

The results achieved by Benchmarking are better thanthose attained through informal methods as shown below:

Without Benchmarking With BenchmarkingDefining customer requirement

Based on history or gut feel Market RealityPerception Objective evaluationLow Fit High conformance

Industry trendsSelecting effective goals and objectives

Lacking external focus Based on working examplesLagging Industry Credible, UnarguableHistorically based ProactiveIncremental increases

Determining True Measures of ProductivityPursuing pet projects Solving real problemsStrengths and weakness not Understanding outputsUnderstoodRoute of least resistance Based on Best Industry Practices

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Achieving and sustaining CompetitivenessInternally focused Concrete understanding

of competitionEvolutionary change New ideas proven practices andLow commitment Technology – dramatic

Improvements possibleIndustry best practices

Not invented here Proactive search for new paradigmFew solutions Business practiceAverage of industry Progress BreakthroughFrantic catch-up activity Superior performance

Getting started in Benchmarking:

Making a philosophical commitment to Benchmarkingis essential to initiate Benchmarking. Enthusiasm itself is notenough. Theoretical understanding of Benchmarking is noenough. Benchmarking can not be approached formally orhaphazardly. It is not merely copying what someone else isdoing. It is critical that it has to be integrated in to the TOTALQUALITY MANAGEMENT initiatives of the organization.Managers apply business process skills in the co duct ofbusiness units and the needs of customers in the market within a company. Some processes are common to differentbusiness areas while others are specific – usually related toparticular product or customer needs.

The strategic planning process aims to establish, on thebasis of competitive and market analysis, business unitstrength and weaknesses. Our definition of strategicbenchmarking is the development of measures for a business

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unit which quantify its key strengths and weaknesses, to givesome external reference to the strategic planning process.Quantification of such measures, to permit comparison withother business experience, is what justifies the term‘benchmark’.

A Benchmarking coordinator will be necessary to keeptrack of topics; visits and reports generated by thebenchmarking projects and help disseminate this information.By imaginative and willing to embrace change, the by word ofbenchmarking has to be “why not here?” Look at tings with anopen mind, step away from your operation and look at all thepossibilities. If you can do this, you can make strides.

In a competitive analysis of manufactured products, asingle point observation like comparing features of competingproducts can reveal features, technologies, design rules andsafety standards incorporated in to a product. But it fails toreveal the trend. A robust approach to competitive analysislooks beyond today’s product features and productionmethods to development of a broad profile on a competitor -its core capabilities, its technological velocity and trajectory,its strategic investments. These characteristics can not belearnt from single-point analysis.

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IMPLEMENTING BENCHMARKINGINTRODUCTION

The long-term viability of an organization - whether in acompetitive or not-for-profit sector- depends largely upon howwell it understands and meets its customer requirements on adaily basis. These requirements, and the ways to achieve them,are constantly changing thereby creating opportunities andchallenges. By studying and emulating world-classperformance in meeting these challenges, an organization canimprove its odds of survival.

Forms of benchmarking have been used in industry foryears. Walter Chrysler used to tear apart one of each new Fordmodel as soon as it came off the assembly line at the beginningof a model year. He sought to determine what componentswent into the car, how much it cost, and how it was made.Armed with this information, Chrysler had a betterunderstanding of his major competitor’s strengths andweaknesses. But it wasn’t until the 1980s, with the advent ofworld-wide competition in key industries, that benchmarkingcame of age. Xerox, Motorola, AT&T, DuPont, Ford, and otherleading-edge companies pioneered a much broader form ofbenchmarking. These companies found benchmarking avaluable means of improving their competitiveness andeffectiveness. It became an integral part of their strategicplanning, Total Quality Management (TQM) process, andContinuous Process Improvement (CPI) program.

As worldwide competition has spread to other industries,it has driven them to adopt benchmarking and other quality

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improvement tools. The U.S. Department of Commerceincorporated benchmarking into the Malcolm Baldrige NationalQuality Award (NQA) criteria as a way to reinforce continuousimprovement in all business processes. The 1989 NQA boardof examiners held a specific session on benchmarking duringtheir site visit and included it as the key reason for the award.In 1991, benchmarking was cited in 12 of the 32 evaluationcriteria.

Besides the United States, other countries, such asJapan (the Deming award), Europe (the ISO 9000 Standard),and Canada (the Award for Business Excellence), haveadopted benchmarking as a prerequisite for qualitycertification.

Benchmarking is a performance measure that providesthe driving force to establish goals of high performance andthe means to accomplish these goals.

This guideline describes a prescriptive model for thebasic benchmarking process that is being used by leadingpractitioners. It provides practical operating principles andrecommended approaches for implementing benchmarking.It is addressed to management accountants so that they canaccelerate the introduction of benchmarking into theircompany’s CPI program. It is designed to help make themanagement accountant a key contributor to the continuousimprovement process in the organization.

This guideline assumes an organization where thedecision to implement benchmarking has already been made.It is, of necessity, both descriptive and prescriptive. It describes

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benchmarking terms and processes, presents a frameworkfor building commitment to change, and defines benchmarkingconcepts and techniques. It prescribes how the managementaccountant can facilitate benchmarking. The concepts,techniques, and case study included in the guideline arestructured to be applicable to:

� businesses that produce a product or a service;

� all levels of an enterprise;

� all functions in an enterprise;

� enterprises in all business sectors;

� the public and private sectors; and

� small and large organizations

Today, many management accountants are no longer intraditional accounting roles and need to acquire the necessaryskills and knowledge to participate in the benchmarkingprocess. This guideline will, accordingly, help managementaccountants:

� comprehend the benefits of benchmarking;

� understand the phases of the benchmarkingprocess;

� understand their roles and responsibilities in abenchmarking project;

� appreciate how benchmarking activities can beused to set goals for an enterprise or a function;

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� appreciate the ethical and legal issues involved inbenchmarking;

� understand how to incorporate benchmarking intothe organisation’s strategic processes;

� explore opportunities to use benchmarking in themanagement accounting function; and

� comprehend the organizational and managementaccounting challenges in implementingbenchmarking.

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THE ROLE OF THEMANAGEMENT ACCOUNTANT

Traditionally, benchmarking-related functions such asindustry intelligence gathering, market research, reverseengineering, etc., have been seen as the exclusive domain ofmanufacturing, marketing, or strategic planning personnel.These functions are generally staffed and operated by non-accountants. Today, however, the evolving concept ofbenchmarking is seen as a company-wide function thatrequires many new participants. Since managementaccountants are trained in analysing, measuring, and reportinginformation focused on user needs, their expertise can be ofassistance in the design and operation of comprehensivebenchmarking data gathering, performance gap analysis, andreporting systems. These management accounting skills cangive credibility to the corporate benchmarking process. Theyalso position management accountants as the key link betweenstrategic objectives and operations.

To leverage this advantage, the management accountantshould integrate benchmark derived standards, competitiveperformance gaps, and recommendations into the existingmanagement reporting systems. These efforts will enhancethe role and responsibility of management accountants aschange agents in the enterprise. They can highlight the factthat a performance gap to the best in the industry can be thesource of a major disadvantage and keep managementfocused on closing the gap.

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Benchmarking cannot be undertaken without the supportof senior management, but once support is obtained,management accountants should be totally involved in theenterprise’s benchmarking activities such as:

� contributing to priority setting, from the businesspoint of view;

� ensuring that they are well represented in theselection of key benchmarking priorities for thecompany;

� providing leadership in initiating benchmarkingprojects;

� leading the discussion in gaining agreements on thebenefits to be achieved, companies to be studied,the approach to be used, and the role of eachmember on the benchmarking team;

� ensuring that the company knows the competitiveand best-in-class benchmarks, performance gaps,costs of quality, and that benchmark performance isprojected into the future and periodicallyrecalibrated;

� helping identify the greatest areas of opportunity toclose the performance gap;

� identifying the costs and benefits of changes basedupon performance gaps;

� creating a system of financial and performancemeasures to monitor ongoing progress againstbenchmark-based standards; and

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� incorporating benchmarking as a key ingredient inthe strategic planning and budgeting process andthe enterprise’s TQM and CPI efforts.

Management accountants could therefore have anynumber of roles in a benchmarking project. As they work withbenchmarking and become more comfortable with its use, theywill gain confidence in their ability to produce hard, reliabledata upon which to plan and execute business strategies thatmeet customer requirements.

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DEFINING BENCHMARKING

Several relevant definitions of benchmarking providevarious insights. Common to all definitions is a processdesigned to allow both an internal and external assessment inorder to develop and implement a plan to achieve leadershipin the marketplace.

According to D.T. Kearns of Xerox, “Benchmarking isthe continuous systematic process of measuring products,services, and practices of companies that are recognized asindustry leaders for the purpose of achieving superiorperformance.”

Gerald J. Balm of IBM has a similar definition:“[Benchmarking is] the ongoing activity of comparing one’sown process, product, or service against the best knownsimilar activity, so that challenging but attainable goals can beset and a realistic course of action implemented to efficientlybecome and remain best of the best in a reasonable time.”

Both definitions encompass several points:

Ongoing process

Since the external environment is continually changing,benchmarking has to be a continuous process as well. It cannotbe this year’s management slogan or a fad. Competitivemarket forces tend to drive benchmark performance trends toever higher levels of attainment. A rule of thumb is that if thebenchmark measurements are more than three years old, they

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are likely to be out of date. If an enterprise is not driven by thecompetition to be the best, it is likely to fall behind. Currently,only about 10% of all companies survive for more than30 years. An ongoing benchmarking process can help improvethe odds.

Measuring

Webster’s Dictionary defines benchmark as “a point ofreference from which measurement of any sort can be made.”Measuring involves far more than just quantitative analysis. Itincludes measuring the difference in processes with thebenchmark company. The quantitative component defines“what needs to change” and the qualitative component (bestpractices or enablers) defines “how to change.”

In many instances, a large part of the benchmarking effortwill need to be focused on understanding practice differencesthat contribute to benchmark performance.

Products, services, and practices

Benchmarking today is much broader than thecompetitive analysis function that traditionally focused onproduct features or price comparisons. Benchmarking not onlyanalyzes and measures the key outputs of a given process orfunction against the best, but also identifies the underlying keyactions and root causes that contribute to the performancedifference. This focus on means, many of which can beemulated or adapted, is a key concept of benchmarking.

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Best of the best/industry leaders

Achieving parity against the best in the industry may notalways guarantee success. The benchmarking goal should beto analyze one’s performance against the best in the world forthe output being benchmarked. This may be with a non-competitor organization outside one’s industry. For example,a multinational manufacturing company used Emery Air freightcompany as the benchmark for its billing function.

Benchmarking is an ongoing learning experience thatemphasizes the discovery of best practices and the adaptationof these practices for superior performance. Ultimately, itreflects an attitude that is driven by customer requirementsand competition to strive constantly for excellence. It is notalways easy and can demand a great deal of creativity ingathering data. Even when the data are gathered andanalysed, the affected organizations may react defensively andquestion both the data and their implications. Benchmarkingand its resulting changes and actions can pose significantchallenges to organizations.

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BENCHMARKING TYPES

Benchmarking, with its roots in competitive or industryanalysis, initially focused on competitive benchmarking. Withpractice, several distinct types of benchmarking have evolved.Each has its benefits and Short-comings and, therefore, eachmay be more appropriate in certain circumstances than others.The common types of benchmarking are described below.Organizations should be aware that the types are not alwaysclear-cut and that a benchmark may meet two or more of thefollowing definitions. Typically, however, benchmarks can bereasonably divided into two categories:

i) what is to be measured; and

ii) who is to be measured

In deciding what is to be measured, three types ofbenchmarks should be given consideration:

i) strategic benchmarks;

ii) functional benchmarks; and

iii) operational benchmarks

The relationship between these three benchmarks is describedin Exhibit 1.

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Exhibit 1 - Types of Benchmarks Based Upon What IsBeing Measured

Strategic benchmarks measure and compare the relativeposition of a particular company or an organization within anindustry and are the results of a company’s performance atthe functional and operational levels as described below. Theseare the benchmarks for the organization’s core competencies,key business processes, and success factors, such as returnon sales, productivity, customer satisfaction, or other factorsunique to the industry (e.g., cost/passenger mile).

Examples of key strategic benchmarks are:

� market share;

� return on assets;

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� debt-equity ratio;

� gross margin percent; and

� time to market.

Functional benchmarks identify products, services,and work processes from organizations that are not necessarilydirect competitors. These are benchmarks at a level belowthe strategic benchmarks. They most often involve specificbusiness activities within a given functional area such asmanufacturing, marketing, or engineering. Their objective isto identify best practices in any type of organization with areputation for excellence in the area being benchmarked.

Examples of functional benchmarks are:

� warranty as a percent of sales;

� on-time delivery;

� cost/order; and

� order turnaround time

Operational benchmarks are at a level belowfunctional benchmarks. They yield the reasons for a functionalperformance gap. An organization has to understand thebenchmarks at the operational level to identify the correctiveactions required to close the performance gap.

What approach should the organization take tobenchmarking: strategic, functional, or operational? Mostcompanies use a hybrid approach, with management driving

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the strategic and functional benchmarking and encouraginggrassroots to determine the operational benchmarks. Theadded benefit of the grassroots-level benchmarking is that theparticipants are also the implementors. This three-prongedapproach can facilitate the organization to gradually build upits benchmarking capability.

In deciding who is to be measured, three types ofbenchmarks should be given consideration:

i) competitive benchmarks;

ii) internal benchmarks; and

iii) analogous benchmarks

Competitive benchmarks identify the products, services,and work processes of an organization’s direct and strongestcompetitors in the industry. (The best in the industry are usuallyeasy to identify.) The objective is to compare the competitor’sproducts, processes, and business results with your own.Competitive benchmarking is useful in positioning anorganization’s products, services, and processes relative tothe market-place.

There are, however, some drawbacks associated withthis type of benchmarking. It is hard to gain the cooperation ofcompetitors to share information at the functional or operationallevel. The information is unlikely to result in any breakthroughinnovations. Opportunities may be limited to relatively knowncompetitive practices. And, this type of benchmarking may belimited to a small pool of participants, depending upon theindustry.

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Trade associations and other established industry groupsare beginning to address the collection and distribution ofbenchmarking information among their membership for theirmutual benefit.

Internal benchmarks compare an organization’s ownsimilar processes, products, or services. This is perhaps theeasiest form of benchmarking, since the potentialbenchmarking partners can be easily identified and are usuallywilling to share the information. This form of benchmarking, ifapplicable, should be considered first to establish a baselineperformance against which to compare external performance,and to identify the magnitude of improvement opportunities.

While internal benchmarking provides a quick, lessthreatening, and cost-effective means of promotingbenchmarking, the opportunities for improvement, however,are limited to the firm’s best internal practices.

Analogous benchmarks are the most difficult type ofbenchmarks because they compare performance to a world-class organization that may be in a very different industry butperforms a similar process. These companies may be hardto identify and a direct comparison may require adjustmentsfor accounting and other practice differences, but analogousbenchmarking offers substantial opportunities for innovation.For example, analogous benchmarking can result inperformance, technology, or methodology breakthroughopportunities.

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IMPLEMENTATION GUIDELINES

Benchmarking is deliberate, time consuming, and, attimes, difficult. It requires organizational discipline to besustained in the face of day-to-day pressures. Like TQM, CPI,etc., benchmarking has significant resource requirements thatneed to be focused during implementation. These are oftendrawn from other areas in the organization and these areasmay suffer.

Most companies seeking to implement benchmarkinghave found the transition challenging to achieve without thedirect involvement of the CEO, senior managers, and processowners. The drive to be the best in the industry or the worldcannot be delegated. It requires active, unwavering leadershipfrom the CEO and the senior team. The senior team must beseen to be championing benchmarking. To close thebenchmark gap in many instances will require toughoperational, organizational, and investment choices that mustbe supported by the senior management.

The second critical element to ensure success is awillingness to adapt and learn from others. Benchmarking is avaluable tool for introducing positive changes into anorganization. Companies, therefore, need to invest in thedevelopment of their capacity to learn and empower peopleto translate learning into changes.

In general, the movement from traditional competitiveanalysis to company-wide benchmarking will take between twoto four years and will be challenging as well as time consuming.

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Many specific projects along the way, however, can yield highreturns quickly.

The benchmarking process has been formalised by theleading practitioners into several phases. They all use anintegrated, systematic, and measured approach tobenchmarking reflected in the following five general phases:planning; data gathering; analysis and integration;implementation/execution; and recalibration.

In each of these phases, there are specific actions to becompleted as described below. While organizations canmodify them to meet a particular situation, these actions arerecommended as guides for the successful implementationof the overall benchmarking process. The five essentialphasesof benchmarking are illustrated in Exhibit 2.

Planning

The objectives of this phase are to identify what will bebenchmarked, who the best competitors or performers are,and how the data will be collected. This is perhaps the mostcrucial part of the project. As much as 50% of the totalbenchmarking effort can be spent in this phase.

The benchmarking planning phase is similar to projectplans for successful process improvement team activities. Itconsists of six activities; the sequence of these activities canbe customized depending upon the benchmarking needs, butusually all six should be carried out.

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Identify and prioritize the areas to be benchmarked.If the benchmarking activity has never been performed in theorganization, this step would examine the critical successfactors, products, services, and processes, and brainstormas many ideas as possible. Then, using decision criteria suchas cost of quality expenditures, areas of competitive pressures,or major customer dissatisfaction, organizations can selectthe projects requiring immediate benchmarking focus.Potential benchmarking opportunities must be in areas criticalto the success of the company as identified in the missionstatement.

Identify the internal customers’ of benchmarking,customers requirements, and outputs of thebenchmarking effort and gain the endorsement frommanagement. The guideline Managing Quality Improvementshighlights the process to be used to identify customers’requirements and how to develop a work process to meet theserequirements. Given the resources and time constraints ofbenchmarking partners, the organization’s requirements mayhave to be prioritized. Once the organization(s) to bebenchmarked have been contacted, their willingness to shareinformation may require further priority negotiation.

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Exhibit 2 – The Five Phases of Benchmarking

Establish the benchmarking or processimprovement team. Ideally, this should include the personswho are most knowledgeable about the internal operationsand will be directly affected by changes due to benchmarking.Often the recommendations based upon benchmarking areso far-reaching that, if given by an external organization, theaudience may dispute the reliability of the data andconclusions.

The team members should also be flexible and open tochange. Benchmarking is about change and the benchmarkingteam will have the rewarding opportunity to be the changeagents in the organization.

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Most successful companies use a wide variety ofemployee and management teams led by a process owner.These are temporary process improvement teams that aretrained on benchmarking as well as TQM tools. Wherepossible, the management accountant should serve as afacilitator on these teams.

Define the relevant benchmarking measurements.Relevant measures will probably not be the measures usedby the organization today but will be refined measures thatcomprehend the true performance differences. The actualprocess of benchmarking may change some of thesemeasures if a significant re-engineering of the process isdesired.

Developing good measurements is the key to successfulbenchmarking. The best measures are defined from thecustomer’s viewpoint - both internal and external. Managementaccountants may want to develop a balanced set of measuresthat look at the functional performance from a customerperspective, an internal perspective, a shareholder’sperspective, and a need for continuous improvementperspective. The financial measures are difficult to compareat face value as they are heavily dependent on accountingpractices that can vary widely across organizations.

With their unique skills, management accountants canidentify the right measures and their implications. For example,an overhead rate benchmark at the functional level may not bea good measure if it has been established for controlling,

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monitoring, and auditing purposes. This measure may beclosely tied to the internal processes but may be inappropriatefor a benchmarking comparison with other groups with differentinternal processes, as shown below.

Company X Company Y

Direct labour cost $200m $75m

Overhead rate 15% 30%

In this example, company X may not be twice as efficientin the assembly function as company Y if the latter company ishighly automated and has substituted direct labour with capitalinvestments.

While most business activities are measurable, it issometimes not possible to develop an appropriate numericalmeasure. Examples of this are an organization’s structure/design and philosophy, strategic planning processes, etc. Inthese cases, the benchmarking team can use a case studyapproach to identify important differences and lessons for theorganization.

Identify the organization(s) to be benchmarked. Thefirst step in the identification of benchmarking partners is todevelop a set of criteria for evaluation. The candidateorganizations can be matched to this criteria for selection. Thepurpose is not to select a successful organization from amarket perspective, but rather those organizations that aredoing something particularly well in the area to bebenchmarked. The above steps would have determined if theoutput is a benchmark against internal, competitive, generic,

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or world-class organizations. This will help determine thecompanies to include in the benchmarking process. Forexample, if the output is generic benchmarking in the area ofconsistent and timely service, the benchmarking team shouldconsider companies in the express delivery industry. To helpprepare a list of companies that are considered to be industryleaders or best in class, the team should consult:

� customers;

� members of professional or trade associations;

� securities analysts; and

� business directories and the people in their ownorganization

It should be recognized that no one company, howeversuccessful, is best at everything it does. The benchmarkingteam should, therefore, satisfy itself that the industry leaderclearly has an advantage in the area under consideration forbenchmarking.

If unable to find the best performer, the benchmarkingteam should consider the help of a business consultant. Thismay be especially necessary if the company being sought isoutside the industry. The plans to benchmark against the bestcompanies may have to be tempered by cost, time, value, andthe incentive for these companies to share data. Once the listof companies is developed, it needs to be narrowed basedupon several factors such as:

� Is the benchmarking partner friendly and willing toshare the information?

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� Are the businesses or the functions beingbenchmarked similar enough to produce validresults?

� Has the value of the information as related to itsimportance to the organization been taken intoaccount?

� What information must be provided to thebenchmarking partner?

Determine the data-gathering methods:

The benchmarking team should decide on the bestmethod for data gathering. This could be through national/international clearinghouses, mail surveys, internal sources,suppliers, consultant research, company visits, telephoneinterviews, or secondary literature searches.

Finding credible information to convincemanagement to implement changes is the heart of thewhole benchmarking process.

It is a good practice to explore the internal and publicdomain sources before conducting original research. Severalpeople inside the company may have access to benchmarkcompany performance such as:

� sales representatives;

� company suppliers; and

� professional or trade associations members.

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Public domain sources of information include:

� trade publications;

� trade shows;

� user groups;

� security analysts reports;

� annual reports;

� patent records;

� research papers;

� newspapers;

� buyers’ guides; and

� government documents

Some of these sources, such as Dun & Bradstreet, ValueLine, and Standard & Poor’s, can be accessed easily with thehelp of personal computers through “keyword” searches.

In recent years, national and international clearinghouseshave been set up to share generic benchmarks with a varietyof users. One of these is The International BenchmarkingClearinghouse, which is a service of The American Productivityand Quality Centre. Its mission is to foster the use ofbenchmarking and facilitate the sharing of information andtechniques among a wider audience of organizations to

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improve quality and productivity. Another is the SPI Council onBenchmarking established in 1990 by The Strategic PlanningInstitute, a non-profit organization in Cambridge,Massachusetts.

If these sources do not meet customer requirements, anoriginal study may be required. The original study method willdepend upon the time available, the complexity of theinformation being gathered, the level of accuracy desired, thespecial skills needed, and the cost constraints. In some cases,a combination of two or more data-gathering methods maybe necessary, such as a telephone follow-up after a site visit.

The relative pros and cons of some of the more popularmethods of data gathering are shown in Exhibit 3.

The benchmarking objectives and information needs willdictate the data-gathering mechanism.

Before the data-gathering phase is begun, the individualresponsible for overseeing the project (the benchmarkingprocess champion) should once again:

� review the full project plan with managementsponsors, other stakeholders, and the team;

� validate senior management ownership andcommitment; and

� validate team members and support.

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Exhibit 3 - Pros and Cons of Data Gathering

Data Gathering

Some general guidelines for data gathering include:

Questionnaire

Preparing a list of questions ahead of the contact ensuresa productive outcome. This implies that the team has anaccurate understanding of their own processes, verified bythose who do the actual work. Each of the questions shouldbe consistent with the purpose of the study. A goodquestionnaire is the foundation for any good benchmarking

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study. It begins by developing questions using the variousquality tools that define or characterize the benchmarkingproject. It also provides a common communication link amongthe benchmarking participants.

While preparing the questionnaire, the benchmarkingteam should weigh the pros and cons of various types ofquestions such as open ended, multiple choice, forced choice,and scaled questions. The intensity of question phrasing caninfluence the response.

After the questionnaire is developed, the benchmarkingteam should answer it using the internal data. This will uncoversome additional questions and/or modify others. It will alsoprovide a base for analysis of the responses from thebenchmark company. Sharing the answered questionnaire,prior to the visit, also helps develop a focused agenda duringthe visit.

Survey

If mail or telephone surveys are the preferred method,the benchmarking team will need to select the appropriatetarget population, obtain a mailing/telephone list, and providean incentive so that the target audience will respond.

Personal visit and interview

The initial contact is usually made by the benchmarkingteam leader. If the cope is broad or the benchmarking is in asensitive area, the initial contact could be made by senior

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management. The initial contact should be followed up with aletter confirming the following:

� visit date;

� visit objectives;

� potential number of attendees;

� the background of your organization; and

� topic areas and the questionnaire.

The analysis methodology should be carefully consideredto ensure that the data collected will be in a format or sequenceconducive to analysis. The team should then identify theappropriate contact, request a visit, and send a copy of thecompleted questionnaire prior to the visit. This shows that theteam is serious, and competent, and allows for a more efficientvisit. During the interview, the benchmarking team leadershould represent himself / herself honestly and clearly statethe objectives of the visit. He/she should be prepared to answerwhy a particular question is being asked and should also bewilling to share his/her own organization’s performance ifasked. At the conclusion of the visit, the door should be leftopen with the partner company for follow-up in the event thatclarification of information is needed, or that another visit isrequired. The team leader should follow up, ensuring that theparticipants get copies of the best practices findings.

The benchmarking experience has identified three teammembers as the ideal number to visit the benchmarking

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partner. One to ask the question, one to record, and the thirdto think of the next question.

The company’s market research department can be anadditional resource to the team in structuring and conductingquestionnaires, surveys, and interviews.

Legal / ethical considerations

The benchmarking team should be aware of the legaland ethical considerations in data gathering. For example,covert photography is illegal. Most companies have writtenpolicies regarding such information sharing. In general, thefollowing practices should be observed:

� Do not misrepresent yourself, your company, or thepurpose of your research.

� Do not entice others to divulge information throughillegal means.

� Do not ask for or obtain data on proprietary productsor processes.

A good guideline is “not to do to your benchmarkingpartner what you wouldn’t want them to do to you.”

An excellent guide on accepted moral standard is theProfessional Code of Conduct jointly approved by TheStrategic Planning Institute’s Council on Benchmarking andThe American Productivity and Quality Centre’s InternationalBenchmarking Clearinghouse; it is included in Appendix B.The code summarizes the protocol of benchmarking. There

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are similar guidelines developed by Xerox, AT&T, and othercompanies.

In addition to these guidelines, there are legalconsiderations that may govern the relationship betweenbenchmarking partners, such as antitrust laws, industrialespionage, and restrictive clauses related to intellectualproperty. When in doubt, the benchmarking team should consulttheir company’s legal department.

Analysis and Integration - After the data have beengathered, the benchmarking team should review them to ensurethat they are complete and consistent with the questions askedin the data gathering phase.

Depending upon the nature and the amount of data, thebenchmarking team may want to use the following sevenquality tools described in the guideline Managing

Quality Improvements:

i. Check sheets

ii. Cause and effect diagrams

iii. Histograms

iv. Pareto diagrams

v. Control charts

vi. Scatter diagrams

vii. Graphs

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If the purpose of the study is to gather qualitativebusiness practices and methods, organizations will still needto synthesize the raw data using the above steps to capturekey messages in a meaningful format.

The analysis should be related to the original purpose ofthe study. It should also comprehend the industrial, economic,cultural, and other environmental factors in which the benchmarkcompany is operating. Some of these may be difficult toduplicate in organizations.

Analysis of the data should lead to the determination ofbenchmark performance and the practices used to achievethem. In a balanced approach, more than half the benchmarkingeffort is likely to be understanding the practices that lead tobenchmark performance and their application to theorganization. It should represent a superior performance thatis being attained by at least one company in the study. Thedifference between this benchmark and the current internalperformance represents the current performance gap, asshown in Exhibit 4.

Exhibit 4 - Current Performance Gap

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The current performance gap is a measure of thedifference between the internal performance and the best inthe industry. This could be positive, negative, or zero. Thenegative gap is the one highlighted in this guideline because:

� it indicates an undesirable competitive position; and

� it provides a basis for performance improvement.

If there is no gap (zero), it may indicate a neutral positionrelative to the performance being benchmarked. However, azero performance gap can be short lived and is likely to be apoint in time. The zero position should be analyzed for anycontributing factors and the organization should identify themeans to transform its performance to a level of superiority orpositive gap.

To arrive at a level of superior performance should bethe ultimate goal of benchmarking. The benchmarking teamis, however, unlikely to find many instances of positiveperformance gaps in the beginning. The challenge in thepositive performance gap areas would be to maintain thesuperior performance. A periodic recalibration may benecessary to identify the size and trend of competitiveadvantage.

Irrespective of the nature of the performance gap, thecompetition is unlikely to stand still and, therefore,benchmarking teams should also estimate what the benchmarkperformance will be for the next two to four years. The futureprojections could be based upon a literature search,

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benchmarking study findings, historical trends, industry trends,and any expected technology or process breakthroughs. Thesame process can also be applied to project the internalperformance. This will help determine if the performance gapis widening or closing, as illustrated in Exhibit 5.

A properly conducted benchmarking study should leadto the causes of the current performance gap. From theinformation gathered, the benchmarking team should developa list of factors that appear to be driving the benchmarkperformance.

Exhibit 5 - Projected Performance Gap

Implementation/Execution

During this phase, the benchmarking team presents thefindings to management and obtains acceptance of theanalysis, conclusions, and implementation actions necessaryto close the performance gap.

Implementation/execution is a crucial phase because allcan be lost if the results are communicated poorly. The

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benchmarking recommendations may include sweepingchanges or requests for resources. To ensure

that acceptance is as high as possible, the benchmarkingteam needs to document credible data and present clear andconvincing arguments - specifically, the benefits to theorganization - using effective presentation techniques.Otherwise, the benchmarking findings may end up as anotherreport that contains recommendations that never getimplemented.

The benchmarking team should document their resultsin a manner appropriate to the organization, audience, andnature of study. The documentation would also serve asreference material for recalibration as well as for futurebenchmarking projects and teams.

In general, the documentation would include the following:

� the business needs being addressed by thebenchmarking project;

� the benchmarking project plan;

� detailed process diagram and flow charts for theinternal process;

� performance measurements;

� secondary research;

� best-in-class selection criteria;

� the questionnaire;

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� visit reports;

� assessment reports;

� recommendations;

� operational plans that describe the new process;and

� implementation plans for recommended enablers

The presentation to management should include thefunctional goals or planned performance to narrow, close, orexceed the benchmark standard based upon theorganization’s objectives. Establishing functional goals basedupon benchmarks is a productive way to integratebenchmarking into the strategic planning process. To ensurean enduring sustainable advantage, an organization shouldestablish both short-term and long-term functional goals. Theseshould be attainable, but challenging, goals that stretch thecompany’s ability to perform. If benchmarking requires a majorchange, the new goals should comprehend the effects on otherparts of the organization, capital investments, and pay-backperiods. (See Exhibit 6.)

Once management acceptance is obtained, theorganization needs to develop a set of action plans to achievethe new functional goals. The data gathered should be reviewedin the analysis and integration phase to understand how thebenchmarking partner is achieving its performance relative toits business practices and work processes.

Implementing these will help to facilitate the transfer ofbest practices from the benchmark company. But these actions

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may not be universal and must be carefully assessed beforeadapted.

Exhibit 6 - Closing the Performance Gap

Actions can also be defined by the benchmarking teamand the subject matter experts, using brainstorming, force field,and other quality tools. The actions can include, for example,process re-engineering, investment, or training.

It is critical that the actions are well defined to ensuretheir successful implementation. For each action, a descriptionof time frame, responsibility, resource requirements, and itsimpact on the performance gap should be included in therecommendations. This is related to conventional projectmanagement and is crucial to benchmarking because withoutit, the previous benchmarking steps would only be of academicinterest.

The action plan should also be reviewed with thefunctional staffs to obtain their commitment. All parties should

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understand the role they must play in implementation of theaction plan.

After the implementation phase begins, it is importantthat the benchmarking process owner monitors progressagainst the milestones established in the action plans. He/she should be prepared to adjust the implementation plan asa result of the organization’s resistance to change. Oftenpeople who were wholeheartedly enthusiastic at the beginningmay change their mind once they realize the magnitude ofchange on their functions. Additional training, coaching, andnurturing may be necessary. Additionally, management shouldbe kept apprised of the status to ensure continual involvementand commitment.

Recalibration

Benchmarking, like quality, is a journey rather than adestination. As organizations are well aware, the nature ofcompetition is constantly changing. Competition is likely toredefine the rules of competition by raising the benchmarkperformance threshold. Also, new entrants are likely to exploita market opportunity that has been left exposed.

Organizations, therefore, need to recalibrate benchmarksperiodically to support continuous process improvements. Tobe fully effective, benchmarks must be kept current and thebest-in-class designation regularly reviewed. The processowner will need to determine how often and how extensivelythe benchmarks need to be recalibrated. This will depend uponthe nature of industry, performance measures, and thecharacteristics of the business environment. A suggested format

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for tracking process improvement is shown in Exhibit 7.

Generally, strategic benchmarks will need to berecalibrated more frequently to assess the relative position ofthe company in the industry. The frequency of recalibration willdepend upon the following factors:

� new innovations and practices;

� critical external developments;

� process improvement needs;

� experiences from the past benchmarking effort; and

� a specified interval since the last bench markingeffort

Depending upon the business need, recalibration can,however, use an abridged customized approach through eachof the five benchmarking phases.

Exhibit 7 - Format for Tracking Process Improvements

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BENCHMARKING PROCESS TOOLS

Traditional accounting systems do not always providesufficient information to personnel responsible for closing thebenchmark performance gap. Management accountants,therefore, need to understand the use of statistical tools andprocess measures, data stratification methods, and otherquality management tools so that they can actively participatein, and contribute to, the benchmarking process. A samplelisting and description of these tools is presented in theguideline Managing Quality Improvements. Some additionalmanagement tools that an organization may find usefulthroughout the five benchmarking phases are:

i. Affinity diagram;

ii. Interrelationship digraph (I.D.);

iii. Tree diagram;

iv. Process decision program chart (PDPC);

v. Prioritisation matrices;

vi. Matrix diagram; and

vii. Activity network diagram.

Affinity diagram

This tool gathers large amounts oflanguage data (ideas, opinions, issues, etc.)and organizes them into groupings based onthe natural relationship between each item. It

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is largely a creative rather than a logicalprocess. First, group members generateideas and write each one on a card. Then,they sort the cards into categories andassign labels to each category of cards.

Interrelationship

digraph (I.D.). This tool takes complex,multi-variable problems or desiredoutcomes and explores and displays all ofthe interrelated factors involved. Itgraphically shows the logical (and oftencausal) relationships between factors. It maybe used to help create the future vision anddevelop operational and implementationplans; it may also be used to evaluatetriggers during recalibration.

Tree diagram

This tool systematically maps out inincreasing detail the full range of paths andtasks that need to be accomplished in orderto achieve a primary goal and every relatedsub-goal. Graphically, it resembles anorganization chart or family tree. This toolmay be used to develop the benchmarkingproject plan and implementation plans.

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Process decision program chart(PDPC)

This tool maps out everyconceivable event and contingency thatcan occur when moving from a problemstatement to possible solutions. This isused to plan each possible chain ofevents that needs to happen when theproblem or goal is unfamiliar. This tool isuseful during planning for contingencies.

Prioritization matrices

These tools take tasks, issues, orpossible actions and prioritise thembased on known, weighted criteria. Theyuse a combination of Tree and MatrixDiagram techniques, thus narrowing down options to those that are the mostdesirable or effective. These tools areuseful during planning.

Matrix diagram

This versatile tool shows theconnection (or correlation) between eachidea/issue in one group of items andeach idea/issue in one or more othergroups of items. At each intersectingpoint between a vertical set of items andhorizontal set of items a relationship is

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indicated as being either present orabsent. I n its most common use, thematrix diagram takes the necessarytasks (often from the tree diagram) andgraphically displays their relationshipswith people, functions, or other tasks.This is frequently used to determine whohas responsibility for the different partsof an implementation plan. This tool isvery useful during the planning stage inbenchmarking.

Activity network diagram

This tool is used to plan the mostappropriate schedule for any complextask and all of its related sub-tasks. Itprojects likely completion time andmonitors all subtasks for adherence tothe necessary schedule. This is usedwhen the task at hand is a familiar onewith sub-tasks that are of a knownduration.

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MANAGEMENT ACCOUNTING CHALLENGES

Management accountants have a significant role inensuring that best practices are institutionalized throughoutthe organization to achieve and maintain world-classperformance. In support of these objectives, they will need tosupplement and enrich existing costing and reporting systemsto create a system of performance gap analysis and to evaluateexactly what is required by each organization to meet thebenchmark performance. In addition, managementaccountants, along with the benchmarking process owner, willbe challenged in several areas as listed below.

Securing senior management support

Benchmarking is a company-wide need andmanagement accountants, if playing the lead role, will need tosecure senior management support to make it a part of theorganization’s culture. If it means no more than a few speechesand a lapel pin, benchmarking will not work. While seniormanagement does not need to be involved in all benchmarkingprocesses, it needs to provide leadership such as encouragingthe integration of benchmarking into strategic planning,recognizing benchmarking teams and individuals for theirefforts, and visibly communicating about benchmarking to theentire organization.

To facilitate management approval, managementaccountants may consider suggesting a pilot benchmarkingproject in one of the areas in which senior management has aspecial interest and one that can be successfully benchmarked.

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These areas may include:

� customer satisfaction;

� unit manufacturing cost;

� product development cycle time;

� overhead analysis;

� customer service;

� product requirement analysis;

� supplier management;

� distribution; and

� customer complaint handling

Once accepted, the organization will need toinstitutionalize benchmarking. Some companies establish anexecutive level council to oversee the implementation process.To support the council, these companies also assign a smallstaff to provide an infrastructure for the daily management ofbenchmarking such as:

� coordination;

� training programs;

� communication;

� a benchmarking library; and

� a database.

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Benchmarking training

Once management commitment is obtained, theorganization will need to invest considerable time and effort intraining the various levels of the organization in benchmarkingconcepts, methods, data analysis, and problem-solving skillsto create a common knowledge base. Training can beconducted by the Quality Office but it should be from the topdown: managers who participate in staff training reinforce theimportance the organization attaches to benchmarking. Themanagement accountant will need to participate and supportthis training.

The training program can cover the general outlinedescribed in this guide, i.e., the benchmarking definition, theneed for benchmarking, benchmarking phases and examples,and the benchmarking role in setting functional goals. It shouldalso include the identification of contacts for further informationor training.

Measurement systems

Crucial to the success of benchmarking is the ability ofmanagement accountants to develop a better understandingof their internal and external customer needs and expectations,and to develop measures that truly reflect these expectations.Frequently companies find that traditional measures are notonly inadequate, but misleading and must be overhauled anddiscarded. They should ensure that the organizationperformance measures are based upon the viewpoints ofcustomers, employees, shareholders, and need for continuousimprovement.

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Performance gap analysis:

Management accountants will need to facilitate theperformance gap analysis activity to determine what theorganization lacks to move from one point to the other or toleapfrog the competition to become the new industry leader.To close the performance gap, they should ensure that theorganization’s goals, mission, and objectives are tied to thebenchmarking process.

Financial practices

As management accountants are aware, differentcompanies, and different functions within the same company,are likely to use different accounting practices. If differencesin accounting practices are not considered, the benchmarkresults could be very misleading. Management accountantswill need to comprehend how these figures were derived andnormalise them for comparison.

To meet the above challenges, managementaccountants will also need to enhance their proficiency inseveral areas such as project management, problem-solvingskills, meeting facilitation, communication skills, TQMprinciples and methods, and interviewing skills.

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CONCLUSION

The objective of benchmarking is to provide a goal forrealistic process improvement and an understanding ofchanges necessary to facilitate that improvement. It is comingof age both as a process and as a profession. The leading-edge practitioners of benchmarking have made it an integralpart of strategic planning and TQM.

While many companies can expect a successfultransition, others will achieve only partial success. The changeprocess facilitated by benchmarking can be difficult and cantake several years to institutionalise. Several behaviouralfactors common to organizations can become inhibitors. Forexample, the functional areas identified to be at a significantperformance gap may question the findings and resist thenecessary changes. This guide is designed to alleviate someof these pitfalls.

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APPENDIX A: CASE STUDY

A case study in functional and operational benchmarkingis described below to highlight how benchmarking can facilitatesuperior performance.

The manufacturing company in this example operates ina highly competitive industry and has been experiencingincreasing pricing pressures from new Japanese entrants.Gradual but steady loss in market share caused the companyto institute corporate-wide TQM and benchmarking programsto win customers back and rebuild its core competencies.

The corporate senior management identified itself as theprimary customer for the strategic benchmarks, with theunderstanding that the functional and operational benchmarksbe carried out as well to sustain competitive advantages.

The strategic benchmarking process used literaturesurveys, industry reports, and internal market analysis. Itindicated the following relative positions of key competitors inthe industry, (see chart below).

The company, though still at a number two relativeposition, was losing market share to competitors x and y.

A major reason for market share decline was thecompany’s selling price premium as shown below.Management decided to lower their prices aggressively butto maintain their ROA by:

� benchmarking unit manufacturing costs;

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� understanding the causes for the differences; and

� lowering costs sufficiently to make them a source ofcompetitive advantage.

Competitor

x y z

Market Share 19% 17% 26% 9%

Year Over Year Market

Share Change (points) -3 2 3 -2

Return on Assets (ROA) 10% 16% 19% 10%

Customer Satisfaction 92% 94% 97% 90%

Selling Price Higher/

Lower than Industry 15% parity (10%) 5%

A preliminary benchmarking team was formed to developa plan to conduct these functional and operationalbenchmarking studies.

1. The team met with senior management and thecustomers of the output to further understand thecustomer requirements. Management assigned aprocess champion from its ranks to be in charge ofthe project for the duration and requested that thebenchmarking team and process champion holdperiodic reviews with senior management throughoutthe study.

Company

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2. Based upon the above meeting, the benchmarkingteam composition was altered to ensure that itincluded a management accountant as well asrepresentatives from:

� manufacturing;

� design; and

� procurement.

The team members were selected based upon theirknowledge of their respective fields, their willingnessto adopt new ideas, and the respect theycommanded from their peers.

3. The team then translated the senior managementrequirements into a detailed work plan including:

� time schedule;

� team roles/responsibilities; and

� measurements

It was agreed that the unit manufacturing costmeasure would be benchmarked at the product sub-system and commodity part levels.

4. The team determined that competitors x and y shouldbe included in the study. In view of the emergingJapanese competition, it was also agreed to includea few Japanese vendors as well as leading-edgemanufacturing companies from other industries who

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were known to be efficient producers in the study.The team brainstormed 30 companies that werenarrowed down to three using the following criteria:

� The companies had to be large, internationallyknown, and leaders in the markets they served.

� The companies had to have closely integrateddesign, procurement, and manufacturing functions.

� The end product had to be in a similar level ofcomplexity within excess of 1,000 piece parts thatare electro-mechanical in nature.

� The output volumes should be in small daily lots.

5. The team then began the process of developingquestions and identifying the data-gathering method.It was agreed to use reverse engineering forcompetitors x and y’s products to analyze theirdesigns and unit costs at the piece part level. Theother three companies would be contacted througha mail survey followed by personal interviews.

After the questionnaire was developed, thebenchmarking team answered it using the internaldata. This uncovered some additional questions andmodified a few others. The team discovered that ithad to reconcile the accounting and outsourcingdifferences among the companies.

6. Prior to the visit, the team reviewed all relevant data,available in the public domain, about the three

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companies. This information was also helpful inidentifying appropriate initial contacts.

7. Once the data were collected, the team proceededto tabulate, analyze, and determine the benchmarks.The team calculated the performance gaps andadvantages as they analyzed their current designs,processes, and sourcing against competitors andthree benchmark participants. In-house reverseengineering indicated a negative 20% performancegap against competitor y. This was revised tonegative 28% in subsequent benchmarkingmeetings with the three Japanese companies.

8. After reviewing the benchmark data, the teamidentified several areas that appeared to be causingthe performance gap. The major portion of theperformance gap appeared to be in the plasticsbased components.

9. Further analysis of the plastics piece parts showedroot causes that spanned virtually all functions - frommarket specifications, design, and manufacturing tovendor selection.

10. Based upon the industry trends and thebenchmarking study results, the benchmarking teamprojected the negative gap would grow by two pointseach year, causing further deterioration of the firm’scompetitive position if no new actions were taken.

11. The benchmarking team then organized the majorfindings and recommendations to close the

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performance gap. The recommendations wereranked based upon their impact on the unitmanufacturing costs (see pie graph).

12. The team identified additional audiences for thestudy results. In addition to the senior managementas the primary customers, division and functionalmanagers were also included. The method ofcommunication depended somewhat on theaudience.

� A memo of the conclusions and recommendationswas first distributed to the senior management, whichwas followed up with a formal presentation.

� Once the results of the study were accepted by thesenior management, the results were cascadedwithin the division and functional groups to ensurethat all parties understood the role they must play inthe implementation plans.

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� The results were also distributed to all employeesvia a newsletter.

13. The recommendations and functional goals wereintegrated into the company’s strategic plans andperiodic operational reviews.

14. The benchmarking team leader was appointed asthe process champion for the implementation phase.He monitored progress against milestones on aperiodic basis. If not on plan, he identified causesand recommended either corrective actions ormodified plans. He also advised senior andfunctional management of the status on a periodicbasis.

15. By adapting the best practices, the team was ableto demonstrate improvements rapidly. With twoyears, unit costs declined 10% for products inproduction and 21% for new products, declines thatreflected some of the new design guidelines. Thisbrought the company near parity with competitor y.Management was confident that the actions in placewould give the company a cost advantage within twoyears.

16. Based upon the success of this effort, managementresolved to build unit cost as a competitiveadvantage, and the team developed a plan torecalibrate the benchmarks. In addition to the priorcompanies, it was decided to include leading-edgecompanies from other industries as well.

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APPENDIX B: THE BENCHMARKING CODE OFCONDUCT

To contribute to efficient, effective and ethicalbenchmarking, individuals agree for themselves and theirorganization to abide by the following principles forbenchmarking with other organizations.

Principle of Legality

Avoid discussions or actions that might lead to or implyan interest in restraint of trade: market or customer allocationschemes, price fixing, dealing arrangements, bid rigging,bribery, or misappropriation. Do not discuss costs withcompetitors if costs are an element of pricing.

Principle of Exchange

Be willing to provide the same level of information thatyou request in any benchmarking exchange.

Principle of Confidentiality

Treat benchmarking interchange as somethingconfidential to the individuals and organizations involved.Information obtained must not be communicated outside thepartnering organizations without prior consent of participatingbenchmarking partners. An organization’s participation in astudy should not be communicated externally without theirpermission.

Principle of Use

Use information obtained through benchmarkingpartnering only for the purpose of improvement of operations

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within the partnering companies themselves. External use orcommunication of a benchmarking partner’s name with thedata or observed practices requires permission of that partner.Do not, as a consultant or client, extend one company’sbenchmarking study findings to another without the firstCompany’s permission.

Principle of First Party Contact

Initiate contacts, wherever possible, through abenchmarking contact designated by the partner company.Obtain mutual agreement with the contact on any hand-off ofcom-munication or responsibility to other parties.

Principle of Third Party Contact

Obtain an individual’s permission before providing theirname in response to a contact request.

Principle of Preparation

Demonstrate commitment to the efficiency andeffectiveness of the benchmarking process with adequatepreparation at each process step, particularly at initialpartnering contact.

ETIQUETTE AND ETHICS

In actions between benchmarking partners, the emphasisis on openness and trust. The following guidelines apply toboth partners in a benchmarking encounter:

� In benchmarking with competitors, establish specificground rules up front, e.g., “We don’t want to talkabout those things that will give either of us a

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competitive advantage, rather, we want to see wherewe both can mutually improve or gain benefit.”

� Do not ask competitors for sensitive data or causethe benchmarking partner to feel that sensitive datamust be provided to keep the process going.

� Use an ethical third party to assemble and blindcompetitive data, with inputs from legal counsel, fordirect competitor comparisons.

� Consult with legal counsel if any informationgathering procedure is in doubt, e.g., beforecontacting a direct competitor.

� Any information obtained from a benchmarkingpartner should be treated as internal, privilegedinformation.

� Do not:

� Disparage a competitor_s business oroperations to a third party.

� Attempt to limit competition or gain businessthrough the benchmarking relationship.

� Misrepresent oneself as working for anotheremployer.

BENCHMARKING EXCHANGE PROTOCOL

As the benchmarking process proceeds to the exchangeof information, bench-markers are expected to:

� Know and abide by The Benchmarking Code ofConduct.

� Have basic knowledge of benchmarking and followa benchmarking process.

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� Have determined what to benchmark, identified keyperformance variables, recognized superiorperforming companies, and completed a rigorousself-assessment.

� Have developed a questionnaire and interviewguide, and will share these in advance if requested.

� Have the authority to share information.

� Work through a specified host and mutually agreeon scheduling and meeting arrangements.

� Follow these guidelines in face-to-face site visits:

� Provide a meeting agenda in advance.

� Be professional, honest, courteous and prompt.

� Introduce all attendees and explain why they arepresent.

� Adhere to the agenda: maintain focus onbenchmarking issues.

� Use language that is universal, not one’s own jargon.

� Do not share proprietary information without priorapproval from the proper authority, of both parties.

� Share information about your process, if asked, andconsider sharing study results.

� Offer to set up a reciprocal visit.

� Conclude meetings and visits on schedule.

� Thank the benchmarking partner for the time andfor the sharing.

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Central Council

B. M. Sharma

President

M. Gopalakrishnan

Vice President

Central Council Members

Shri. Sanjiban Bandyopadhyaya, Shri. H. K. Goel

Shri. Kunal Banerjee Shri. Somnath Mukherjee

Shri. Chandra Wadhwa Shri. A. G. Dalwadi

Shri. Balwinder Singh Shri. G. N. Venkataraman

Shri. S. R. Bhargave Shri. S. C. Mohanty

Shri. V. C. Kothari Shri. A. S. Durga Prasad

Shri. A. N. Raman

Government Nominees

Shri. A.K. Srivastava Shri. D.S. Chakrabarti

Shri. Munesh Kumar Ms. Nandana Munshi

Shri. P.K. Jena