Market changes, social changes and technological progress lead to an ongoing need to adapt your business model. In order to remain competitive, changes are necessary, which have to be considered in strategy and planning and subsequently implemented. Benchmarking is a method to help you to identify performance gaps in comparison to other market participants.
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Strategy development serves to shape the future based on the opinions and views of the management. The strategy process is usually complemented by competitor analysis, SWOT assessments and other strategic planning methods. The strategic analysis shows – in general – potentials, strengths and weaknesses of the company. From the analysis concrete recommendations for action in all value dimensions can be derived. In addition, Benchmarking helps your strategy process in connection with the following planning parameters and methods:
- Comparison (Benchmarking) of the company positioning and cost structures in comparison with other companies
- Linking Benchmarks with strategic planning tools
- Contacts with other thought leaders and top managers
- Benchmarking results can be used for top-down or bottom-up planning processes
- Mapping of the value drivers in a business plan
Through a benchmarking analysis, for example, existing planning processes and calculators can be renewed and lead to better planning with new value drivers. Benchmarking leads to a better focus on the following planning dimensions:
- Focusing on value drivers of planning
- Action planning
- Linking with your company’s compensation systems
- Integration of external benchmarks into the planning process
- Scenario planning
- Use of top-down or bottom-up processes
New insights help to identify potentials and reduce costs. The benchmarks allow to identify efficient organizations and structures and support a target-oriented adjustment of your business processes. Targets of the benchmark process are therefore:
- Performance gap quantification
- Cost comparison and reference to value calculations
- Complementary analysis for related decisions (e.g. make or buy)
Scope of a Benchmark
A good benchmarking model distinguishes between different cost components sometimes even processes. E.g. OPEX, Investments (CAPEX), Direct costs, Indirect Costs, etc.
- OPEX (Operational Expenditures): Current costs incurred to maintain business operations
- Direct Costs: Costs which are directly accountable to a cost object
- Indirect cost: Costs that are not directly accountable to a cost object
- Process related: All Costs that are assigned to products
- Remaining costs: Costs that are not part of the above categories e.g Non-Core or non-operational activities
- CAPEX (Capital Expenditures): Expenditure on longer-term assets “Investments”
- Non Financial parameters – ESG (Environmental, Social and Governance)
Comparability of the benchmarking results
In order to achieve the comparability of the benchmark results the following steps should be followed:
- Segmentation of Costs: Assignment of raw cost data to predefined cost segments using an activity-based costing approach.
- Harmonization of Costs: Create data comparability by adjusting for country specifics and clustering of similar companies.
- Normalization of Costs: Division of harmonized data by relevant cost driver to achieve benchmarking indicators.
- Cost analysis and documentation: Analysis of benchmarking results and graphical representation and documentation.
Interpretation and validation
The results need to be analyzed and the analysis shall lead to the following conclusions:
- Calculation of total performance gap as sum of performance gaps per activity (= cost position – reference)
- Mathematical value that has to be validated to determine actual savings that can be realized
- Identification of country/ company specifics that cannot be changed (e.g. credit and collection – payment morale)
- Evaluation of strategic decisions that should not be changed (e.g. strategy of innovation leadership – higher costs for product development or IT)
- Identification of remaining differences e.g. due to process inefficiencies, weak contract negotiations, etc.
Savings opportunity realisable
- Reduction of performance gap by external factors leads to a savings opportunity that can be realized
- Experience shows that for certain activities up to 30%-60% of performance gap is realistic
A good benchmarking analysis takes several months to complete, as a costs analysis needs to be prepared. The cost structure needs to be agreed with other participants of the benchmarking study (e.g. your competitors or other market participants). The results of such a study will offer valuable insights in your business processes and help you to improve your business model and cost structure. Contact us to set up your analysis for your industry.