Peer Benchmarking: #1 Tool for Improving Your Business

What is possible?

The reality is, humans have a hard time figuring out what is possible. The interesting thing is, the art of the possible is about envisioning the future, but humans really only move into the future by peeking into the past. It's just the way we work. To envision what is possible, we rely almost exclusively on two things:

• Our own past performance
• Others' past performance

Virtually every development on earth is incremental. Evolution is incremental. In sports, records are broken every day - in tiny increments. To break a record, the athlete's challenge does not require him/ her to create a new reality. The athlete is not required to deliver a never-before-in-history performance. The bar is set much lower - simply edge current reality by a hair. Consider as well that each of us is heavily influenced by psychological barriers that, by their very nature, are not real. They exist only in the mind.

Take the 4-minute mile as a case in point. Though generations of runners clipped second after second off the 4-minute-mile record without interruption - and steadily approached the 4-minute-mile mark - there was a widely accepted belief that it was not humanly possible to run a mile in fewer than 4 minutes. And so, as world-class milers approached the 4-minute-mile mark, the pace slowed. The only explanation for this is the psychological barrier. Self-doubt, if you will. Runners came closer and closer to the mark, and then it happened. In 1954, Roger Bannister finally posted a time that began with a 3 (3 minutes and 59.4 seconds) and, in the ensuing months, the rest of the field burst through with their own times under 4 minutes.

So Goes the Business World.

Business people are obsessed with learning others' accomplishments. Why? Because we are unsure whether we can do something until we see that someone else has. If you can, then maybe I can. And when we meet someone who accomplished X, Y or Z, we're further emboldened. Why? He/she doesn't look any more special than me!

Peer benchmarking is about looking at what other companies similar to yours are doing. If you, as a business owner, can match the best of your peers in key categories such as inventory turns, collection rates, gross profit margins, labor productivity, etc., then you will secure your place among the 20% who enjoy the spoils of victory.

Where to Find Peer Data.

The first place to look is your industry or trade association. Call the executive director and inquire. If they don't currently gather and publish peer data, launch an initiative to get this important member benefit in place. The second place to look is the Risk Management Association (RMA). Ask your banker if he/she can get you in touch. RMA is a not-forprofit that gathers financial statements and relevant data of small and midsize private companies, aggregates them and publishes the results.

Comparing Peer Data to Your Company Data.

Once you've obtained peer data, the first task is to understand them. Spend some time immersing yourself in the way the data are compiled and presented. It can get a little complex, but the investment of time and effort is well worth it.

Second, organize your own financial statements in a way that mirrors the peer data you obtained. Calculate the various ratios the same way as the peer data.

Third, identify areas where your business appears to underperform. We use the word "appear" because there can be many explanations for a large deviation. Give much thought to the possible explanations. Obtain assistance from your accountant because accounting policy and/or methodology can be a key factor.

Fourth, identify which area, if improved, would have the greatest positive impact on your business.

Fifth, develop a strategy for improving your business' performance in the area you target. This may include spending time investigating how some of your peers achieve better results than you do. A great way for doing this is to attend your trade show or industry conference with peer data in hand. Ask around. Corner a few business owners and/or managers whom you respect or have in the past shown a willingness to be open and helpful. Make it your priority to leave the event with answers.

Sixth, track your company's progress. Garner your employees' support and assistance. Involve them in the pursuit of improvement, if not peer-leading performance. Set goals and consider offering incentives.

I'm convinced that peer benchmarking is vastly underused in the business world. But that's good for you and me. If all of our competitors were on the ball, we'd have a much more challenging row to hoe.

Copyright © 2009 by D.L. Perkins, LLC. All rights reserved under International and Pan American Copyright Conventions. Reproduction, in any form, in whole or in part, is prohibited without written permission from an officer of D.L. Perkins, LLC. Issn. No. 1556-2026. Vol. 4, No. 6