Internal Benchmarking: How to Be the Best—And Stay That Way

Organizationshave been inexistence for

thousands of years—some successful andlong lasting, othersshort-lived. Throughthe years there hasbeen no clear-cut crite-ria or formula for suc-cess. Many business organiza-tions have been successfulthrough such intangible attrib-utes as dumb luck, falling into aniche market place, being thefirst, consumer acceptance, andso on. Other companies, usingthe best available business acu-men and methods, have failedmiserably.

Identifying, implementing,and maintaining the secrets ofsuccess is an elusive target.Banking on what has worked inthe past and your own internalOuija board are ineffective sub-stitutes for objective internalappraisal and external compari-son and analysis—what we callbenchmarking. In today’s eco-nomic environment of decreas-ing revenues and profits, result-ing in such measures as drasticlayoffs, wholesale downsizing,and selling off of assets andentire business segments, bench-

marking is becoming the tool ofchoice for gathering data relatedto implementing best practicesin a program of continuousimprovements, gaining competi-tive advantage, and surviving.The effective use of internalbenchmarking techniques notonly ensures maintaining opera-tions at their most economic,efficient, and effective levels,but also doing the right job, theright way, at the right time.Internal benchmarking, appliedconsistently, can become aneffective preventive measure ofsigns of erosion.

Benchmarking can bedefined as a process for analyz-ing internal operations and activ-ities to identify areas for positiveimprovement in a program ofcontinuous improvement. Theprocess begins with an analysisof existing operations and activi-ties, identifies areas for positive

improvement, and thenestablishes a perform-ance standard uponwhich the activity canbe measured. The goalis to improve eachidentified activity sothat it can be the bestpossible—and stay thatway. The best practice

is not always measured in termsof least costs, but sometimes inwhat stakeholders value andexpect in terms of performance.

WHY DOES AN ORGANIZATIONEXIST?

Before one even thinksabout performing an internalbenchmarking study of anorganization, it is necessary todetermine why the organizationis in existence. When I ask myclients this question, invariablythey answer, “To make money.”Although this is partly true,there are really only two rea-sons for an organizational entityto exist:

1. The Customer ServiceBusinessTo provide goods and serv-

ices to satisfy desired cus-tomers, clients, patients, and so

Is there a formula for success? Some companiesmanage to succeed by dumb luck. Others usesavvy business acumen and polished methods,yet fail miserably. But you can discover your ownsuccess formula using internal benchmarking,says the author. Here’s how you do it.

© 2002 Wiley Periodicals, Inc.

Rob Reider

Internal Benchmarking: How to Be theBest—And Stay That Way

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41© 2002 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/jcaf.10068

on, so that they will continue touse the organization’s goods andservices and refer it to others.An organizational philosophythat correlates with this goalthat has been found to be suc-cessful is “to provide the highestquality products and service atthe least possible cost.”

2. The Cash-ConversionBusinessTo create desired goods and

services so that the investment inthe organization is as quicklyconverted to cash as possible,with the resultant cash-inexceeding the cash-out (net prof-its or positive return on invest-ment). The correlating phi-losophy to this goal can bestated as follows: “Toachieve desired organiza-tion results using the mostefficient methods so thatthe organization can opti-mize the use of limitedresources.”

This means that we are inbusiness to stay for the longterm—to serve our customersand grow and prosper. A startingpoint for establishing organiza-tional benchmarks is to decidewhich businesses the organiza-tion is really in (such as the twoabove) so that operational effi-ciencies and effectiveness canbe compared to such overallbenchmarks.

WHICH BUSINESSES IS ANORGANIZATION NOT IN?

Benchmarking decisionmaking becomes simpler onceshort-term thinking is eliminatedand managers realize they arenot in the following businesses:

• Sales businessMaking sales that cannot be

collected profitably (sales arenot profits until the cash is

received and all the costs of thesale are less than the amountcollected) creates only numeri-cal growth.

• Customer order backlogbusinessLogging customer orders is a

paperwork process to impressinternal management and outsideshareholders. Unless this back-log can be converted into a time-ly sale and collection, there isonly a future promise, whichmay never materialize.

• Accounts receivable businessGet the cash as quickly as

possible, not the promise to pay.

But remember, customers are thecompany’s business; keepingthem in business is keeping thecompany in business. And, nor-mally, the company has alreadyput out its cash to vendorsand/or into inventory.

• Inventory businessInventory doesn’t equal

sales. Keep inventories to a min-imum—zero if possible. Procureraw materials from your vendorsonly as needed, produce for realcustomer orders based onagreed-upon delivery dates,maximize work-in-processthroughput, and ship directlyfrom production when the cus-tomer needs the product. Toaccomplish these inventorygoals, it is necessary to developan effective organizational lifestream that includes the compa-ny’s vendors, employees, andcustomers.

• Property, plant, and equip-ment businessMaintain at a minimum: Be

efficient. Idle plant and equip-ment causes anxiety and resultsin inefficient use. If it is there, itwill be used. Plan for the normal(or small valleys) not for themaximum (or large peaks); net-work to outsource for additionalcapacity and in-source for timesof excess capacity.

• Employment businessGet by with the least number

of employees as possible. Neverhire an additional employeeunless absolutely necessary;learn how to cross train and

transfer good employees.Not only do people costongoing salaries and fringebenefits, but they also needto be paid attention to—which results in organiza-tion building.

• Management and admin-istration businessThe more an organization

has, the more difficult itbecomes to manage its business.It is easier to work with less andbe able to control operationsthan to spend time managing themanagers. So much of manage-ment becomes getting in the wayof those it is supposed to man-age and meeting with other man-agers to discuss how to do this.Management becomes the pro-motion for doing.

If an organization does bothof these successfully—that is, payattention to its business and stayout of the businesses it should notbe in—it will more than likely(outside economic factorsnotwithstanding) grow and pros-per through well-satisfied cus-tomers, and keep itself in the pos-itive cash-conversion business.

Of course, an organizationalso has to stay out of the num-

42 The Journal of Corporate Accounting & Finance


Increase value without sacrificinginterests of any stakeholders.

bers business—that is looking atshort-term reporting criteria suchas the amount of sales, backlog,locations, employees, and the bigdevil, “the bottom line,” whichothers judge as success.

The organization mustdecide which of the above factorsto embrace as organizationalbenchmarks, which ones not toinclude as benchmarks, andwhich additional criteria toinclude as benchmarks. Thesecriteria become the overridingconditions upon which the organ-ization conducts its operationsand against which it benchmarks.

SOME BASIC BUSINESSPRINCIPLES

Each organizationdetermines the basic princi-ples upon which it con-ducts its operations. Theseprinciples then become thefoundation upon which theorganization bases its desir-able benchmarks. Examples ofsuch business principles includethe following:

• Produce the best qualityproduct at the least possiblecost.

• Set selling prices realistical-ly, so as to sell all the prod-uct that can be producedwithin the constraints of theproduction facilities.

• Build trusting relationshipswith critical vendors; keep-ing them in business is keep-ing the company in business.

• The company is in the cus-tomer service and cash-con-version businesses.

• Don’t spend a dollar thatdoesn’t need to be spent; adollar not spent is a dollar tothe bottom line. Controlcosts effectively; there ismore to be made here thanincreased sales.

• Manage the company; do notlet it manage the managers.Provide guidance and direc-tion, not crises.

• Identify the company’s cus-tomers and develop market-ing and sales plans with thecustomers in mind. Producefor the company’s customers,not for inventory. Serve thecustomers, not sell them.

• Don’t hire employees unlessthey are absolutely needed;and only when they multiplythe company’s effectivenessso that the company makesmore from them than if theydid it themselves.

• Keep property, plant, andequipment to the minimumnecessary to maintain cus-tomer demand.

• Plan for the realistic, butdevelop contingency plansfor the unexpected.

There seems to be an orga-nizational trend toward empirebuilding, particularly from thetop, and the power and controlthat comes with it. Even withpresent-day movements towardsuch things as downsizing,restructuring, reengineering,and other activities emphasizinggetting by with fewer peopleand resources, those in powerare trying to hold onto unneces-sary empires of people andbudget-allocated resources.While managers are quiteagreeable to reducing anothermanager’s empire, there is con-siderable resistance when it

comes to reducing the size oftheir own areas. In manyinstances, even with these quickand short-term reductions inpersonnel, there still remainsindividuals and layers of organi-zational hierarchy that areunnecessary (non-value-added).

Internal benchmarking, withits basic principle of doing theright thing, assists in buildingeconomic, efficient, and effec-tive organizations and maintain-ing them properly at all timesusing the correct techniques(best practices) for the situation.Internal benchmarking tech-niques assist the company inidentifying its critical problem

areas and then in treatingthe cause of the problemand not merely the symp-tom of the problem. Withsensible business principlesas the hallmark for thecompany’s internal bench-marking, the company canbe clear as to the direction

for positive movement and avoidmerely improving poor practices.Clear business principles thatmake sense to all levels of theorganization allow the companyto identify and develop the prop-er organizational benchmarks. Inthis manner, everyone in theorganization is moving in thesame desired direction.

Here’s an example of howunclear business principles getin the way of effective improve-ments and the implementationof best practices. I was doingsome consulting work for anorganization that was manage-ment top-heavy. The vice presi-dent of an operating area wouldgive a command to the directorreporting to him or her, thedirector in turn would give thecommand to one of his or hermanagers, who in turn wouldgive it to a supervisor, who inturn would give it to a work unit

May/June 2002 43


Change is growth, but threatening.

chief, who would give it to aworker. I joked that the workerthen gave it to the night janitor,who really did all the work inthe company. When the workwas done, it would go back upthe pole, stopping at each pointfor review and then back to theemployee for redo, and thenfinally to the vice president,who in many instances didn’tneed the information anymore,forgot that he or she had askedfor it or didn’t understand itanyway, and filed it in the circu-lar file. If another vice presidentor someone reporting to him orher needed some informationfrom this division, the requestwould go from vice presi-dent to vice president andthen back up and down theline. I asked a number ofemployees how they couldlive with this type oforganization—what I callorganizational crazy-mak-ing. They didn’t understandwhat I was talking about. I triedagain by asking the employeeswhy they did the jobs they wereasked to do without questioningthe need for them. I was told,“We just do it; it’s not our job toquestion.” And they do it untilone of them becomes a vicepresident.

Looking at this situation aspart of the company’s internalbenchmarking efforts, this prac-tice must be seen as a poorpractice and a negative per-formance driver. That is, ratherthan make it easier for employ-ees to work and achieve thebest results, this practice pro-duces more costly, inefficient,and less than desirable results.The practice must not be con-sidered for improvement, but asa negative organizational factorthat must be overcome andeliminated. With the right prin-ciples of basic business defined

for the company, it will beobvious that this is a conditionthat must be changed ratherthan improved upon.

THE CONCEPT OFSTAKEHOLDERS

Internal benchmarkingprocesses are directed toward thecontinuous pursuit of positiveimprovements, excellence in allactivities, and the effective useof best practices. The focal pointin achieving these goals is thecustomer—both internal andexternal—who establishes per-formance expectations and is theultimate judge of resultant quali-

ty. A company customer isdefined as anyone who has astake or interest in the ongoingoperations of the organization—anyone who is affected by ourresults (type, quality, and timeli-ness). Stakeholders include allthose who are dependent uponthe survival of the organization,such as

• Suppliers/vendors: external• Owners/shareholders: inter-

nal/external• Management/supervision:

internal• Employees/subcontractors:

internal/external• Customers/end users: external

In developing organizationalbenchmarks for operational per-formance, management needs totake into account the diverseneeds of each of these stakehold-ers. What might be best for one

or more of these stakeholdersmight not be best for others.Management needs to balancethese diverse needs in determin-ing the best practice for theorganization.

SAMPLE ORGANIZATIONALBENCHMARKS

Some examples of internaland external benchmarks forthe organization include thefollowing:

• Increased sales—in total, byproduct line, and by product

• Earnings per share• Total assets

• Return on investment• Return on assets• Gross profits• Net profits• Debt/equity ratio• Stock price• Dividends• Cash flow changes• Survival and growth

• Internal excellence (positivechanges)

• Competitive excellence—quality, timeliness, cost,responsiveness

• Supplier excellence—pre-ferred vendors

• Employer excellence—employee participation,empowerment, and so on

While owners may be mostconcerned with short-termbenchmarking criteria such asstock market price and earningsper share, other stakeholdersmay be more concerned withlonger term criteria such as realearnings growth, customer satis-faction, and ongoing positivecash flow. There needs to be ameaningful balance betweensuch short-term and long-termgoals of divergent stakeholdersfor the benchmarking process tobe most successful.



Minimize mistakes, maximizeopportunities.

ATTRIBUTES OFBENCHMARKING/PERFORMANCE MEASURES

In developing effective orga-nizational benchmarks, manage-ment should consider the follow-ing attributes. With thedevelopment of each benchmark,it should be tested against theseattributes prior to its establish-ment as an organizational bench-mark.

• Forward looking—con-siders present as wellas expected future con-ditions.

• Holistic—includes theneeds of all stakehold-ers as well as those ofinternal functions.

• Participative—devel-oped by and considering allof those stakeholders whomight be affected by thebenchmark.

• Quality focused—considersthe aspects of customer serv-ice and quality.

• Stakeholder driven—majorfocus on needs of one ormore stakeholders as appro-priate.

• Clear communication ofgoals and objectives—allaffected stakeholders knowexactly what results areexpected from the successfulaccomplishment of thebenchmark.

• Identification of best prac-tices and results—cleardescription of desired bestpractices and the result to beaccomplished through thesuccessful implementationof the best practice.

• Ability to change to achievebest practice—is the organi-zation in the position to easi-ly and effectively implementthe necessary changes toachieve the best practice?

• Part of program of continu-ous improvement—is thedesired benchmark and bestpractice part of a program ofcontinuous improvementrather than a stand-alonebenchmark?

• Internal and competitiveexcellence—is the bench-mark or performance meas-ure part of a program ofinternal operational andcompetitive excellence on anongoing basis?

BENCHMARKING—TOOLS FORDECISION MAKING

Organizational benchmarksprovide the tools for manage-ment to make those decisionsthat ensure the continued growthand prosperity of the company.Such benchmarks can assist inmaking the proper decisions inthe following areas:

• Resource allocation—inwhich operational areasshould the company’s finiteresources be allocated toachieve optimum results andoverall effectiveness?

• Strategic focus—whatstrategies (e.g., quality, cus-tomer service, vendor relia-bility, employee productivi-ty, and so on) are to beaddressed in the benchmark-ing process?

• Continuous improvements—which operational areas areconsidered most critical tobe included in the organiza-tion’s program of continuousimprovements?

• Competitive excellence—inwhich areas is the companyseen to have a performancegap compared to competitors,or where does managementbelieve excellence needs tobe maintained or improved?

• Objective measures of suc-cess (internal and exter-nal)—what are the specificresults (in quantitative meas-ures) that are desired fromthe benchmark?

• Recognized levels of excel-lence (competitors)—whatare the defined levels ofexcellence of your com-petitors and which onesshould be met and thensurpassed?

BENCHMARKINGPRINCIPLES

Internal benchmarking isthe comparison of existing prac-tices in your organization tobest practices within the compa-ny (or outside of the company),used as a change managementtool. The first step in identify-ing those areas for benchmark-ing is to fully understand eachfunction in the organization byanswering questions such as thefollowing:

• What is its purpose?• Why is it being done?• How is it being done?• By whom is it being done?• What does it cost to get it

done and is it cost effective?• Does it add value to our

product or service? • Is it achieving desired

results?• Can it be done less costly?• Can it be done more

productively?• Can it be reduced or

eliminated?• Is there a better “best

practice”?

May/June 2002 45


Strive for perfection, settle forexcellence.

• Can it be combined, simpli-fied, or made more efficient?

Some of the functions thatshould be considered include thefollowing:

1. Customer service and rela-tions (customer servicefunctions)

2. Sales and marketing (sellingfunctions)

3. Cash receipts and disburse-ments (cash-conversionfunctions)

4. Credit and order entry(administrative functions)

5. Purchasing, accountspayable, payment (supportfunctions)

6. Ship/deliver (customerdelivery functions)

7. Bill, accounts receiv-able, collections(accounting functions)

As part of consideringthe functions for organiza-tional benchmarking, companymanagement should identify

• Opportunities for improve-ment (to become the bestthat the company can)

• Gaps in performance (wherethe company is compared towhere they want to be)

• Best practices—both internaland external (where thecompany can gain sustain-able competitive advantage)

Identifying those areas orfunctions to benchmark withinthe organization and establishingbenchmark and best-practice tar-gets triggers

• Quality programs• Cost reduction efforts• Planning and budget process

realities• Operational review improve-

ment programs

• Management and organiza-tional changes

• New operations and ventures• Rethinking existing strategies• Competitive assaults

Many organizations havedeveloped systems that they con-sider helpful such as planning,budgeting, compensation, report-ing, cost control, and so on.These systems, rather than beinghelpful, may result in the build-ing up of unnecessary staff andresources characterized by multi-tiered organization levels andexcessive budgets and expendi-tures. As an example, whilesome companies are reducing

staff size through downsizingand cost cutting, they are hiringnew employees at the same time.When the company reduces staffsize, are they asking the rightquestions such as the following:

• Are we getting rid of theright people?

• Why were they hired in thefirst place?

• How did they get to thesepositions?

• How effective are our hiring,orientation, training, evalua-tion, and promotion prac-tices?

• What are our promotion cri-teria? Are they effective?

• What are the causes of ourorganizational problems?How can we correct them?

• What organizational struc-ture should work best for us?For the company and eachwork area?

• Are there areas in the com-pany where we actually needadditional personnel?

• Do we need the function atall?

• Can we achieve the same orbetter results in anothermanner (e.g., outsourcing,contractors, part-timers, staffas needed, and so on)?

• What do we do from here?Are we any smarter afterdownsizing and cost cutting?

• How do we keep improve-ments (best practices) on acontinuing basis?

The effective use of internalbenchmarking principles helps

the company to answer allof these questions, as wellas many others, that maysurface in the company’scontinual efforts at imple-menting best practices andimprovements.

COMPARINGPERFORMANCE

Internal benchmarking hascome to be known as a compara-tive process—that is, comparingperformance or results of oneindividual or group to another.The benchmarking process foran organization should start withmanagement’s identification, andclear communication, of thedirection and focus of the com-pany, both long and short term.The next step is for managementto define their benchmarks fororganizational growth. With suchdirection from top management,others in the organization canthen develop their correspondingbenchmarks for individuals,activities, functions, departmentsand so on. Departmental man-agement and operations person-nel can then analyze their activi-ties to develop best practices in aprogram of continuous improve-



You cannot mandate, only suggest;results are up to others.

May/June 2002 47


1. Management and Organization—Poor planning and decision making—Too broad a span of control—Badly designed systems and procedures—Excessive crisis management—Poor channels of communication—Inadequate delegation of authority—Excessive organizational changes

2. Personnel Relations—Inadequate hiring, orientation, training, evalua-

tion, and promotion procedures—Lack of clearly communicated job expectations—Idle, excessive, or not enough personnel—Poor employee morale—Excessive overtime and/or absenteeism—Unclear responsibility/authority relationships

3. Manufacturing and Operations—Poor manufacturing methods—Inefficient plant layout—Excessive rework, scrap, or salvage—Idle equipment and/or operations personnel—Insufficient or excessive equipment—Excessive production or operating costs—Lack of effective production-scheduling procedures—Poor housekeeping—Excessive, slow-moving, or obsolete inventory

4. Purchasing—Not achieving best prices, timeliness, and quality—Favoritism to certain vendors—Lack of effective competitive bidding procedures—Not using most-effective systems such as blan-

ket purchase orders, traveling requisitions, tele-phone ordering, etc.

—Excessive emergency purchases—Lack of a value analysis program—Purchasing unnecessarily expensive items—Unmet procurement schedules—Excessive returns to vendors

5. Financial Indicators—Poor profit/loss ratios—Poor return on investment—Unfavorable cost ratios—Unfavorable or unexplained cost/budget variances

6. Complaints—Customers: bad products or poor service—Employees: grievances, gripes, or exit interview

comments that are negative—Vendors: poor quality or untimely deliveries—Production: schedules not met, material not

available, deliveries not on time, quality poor, etc.

Some examples of internal benchmarks that can be usedfor such comparison purposes include the following:

• Internal to the Organization:• Organizational policy statements• Legislation, laws, and regulations• Contractual arrangements • Funding arrangements• Organizational and departmental plans: goals

and objectives • Budgets, schedules, and detail plans

• Developed by the Internal Benchmarking Team:• Internal performance statistics: by individual or

work unit• Performance of similar organizations• Industry or functionally related statistics• Past and present performance • Engineered standards• Special analysis or studies• Benchmarking team’s judgment• Sound business practices• Good common business sense

Exhibit 1

Indicators of Internal Benchmarking Deficiencies

ments. Such analysis is usuallydone first in an internal bench-marking study that enables theoperation to become the best itcan from within and then, ifdesired, through an externalbenchmarking study which pro-vides for comparison to otherorganizations.

Internal benchmarkingbegins with an analysis of exist-ing practices within variousoperating areas of the compa-ny—to identify activities andperformance drivers andexisting best practices. Perfor-mance drivers are the causes ofwork or triggers (e.g., customer

order) that set in motion a seriesof activities. Internal bench-marking focuses on looking atthe company itself before look-ing externally at other compa-nies. Significant positiveimprovements can be made asmanagement asks such questionsas the following:

• Is that activity needed?• Why does the company (or

department or work unit) dothat?

• Is that function or positionor material really needed?

• Can the activity be done bet-ter in another manner?

• Is that step necessary? Doesit provide value added?

Is you internal benchmark-ing up to snuff? Look at thehandy checklist in Exhibit 1before you answer. Internalbenchmarking is the first step inbenchmarking because it pro-vides the framework to improveinternal operations to best prac-tices prior to comparing internalpractices to external best prac-tices. Internal benchmarkingcan be accomplished solelywithin the control of the organi-zation. It requires no outsideparticipation.



Rob Reider, CPA, MBA, Ph.D., is the president of Reider Associates (Santa Fe, New Mexico), a manage-ment and organizational consulting firm. He has applied his expertise for clients in numerous industriesand disciplines in the private and public sectors. He is the course author and nationally-sought-after pre-senter for over 20 different workshops and seminars conducted nationally. He has presented over 1,000such seminars throughout the country. He is the author of the following professional management bookspublished by John Wiley & Sons, Inc.:

• The Complete Guide to Operating Auditing (with annual supplements)• Operational Review: Maximum Results at Efficient Costs• Benchmarking Strategies: A Tool for Profit Improvement• Improving the Economy, Efficiency, and Effectiveness of Not-for-Profits

He is considered a national expert in the area of performing internal and external benchmarking studiestogether with operational reviews. He can be reached via e-mail at [email protected].

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Internal Benchmarking: How to Be the Best—And Stay That Way