Benchmarking: Avoid comparing yourself to the industry average.
Benchmarking is a really popular tool for self-evaluation in the business world. It allows companies to compare their performance to those of other companies or industries. But what some fail to realize is that comparing yourself to industry averages is rather meaningless because it can't accurately tell you how you're doing within your own company.
In this blog, I'll break down three mistakes people make when they benchmark their company and suggest how they can avoid them so they get the most out of their benchmarking efforts.
The first mistake people make when performing benchmarks is to look at how their company is doing compared to the overall industry average. This can be very misleading. Why? Because it doesn't tell you anything about how your company compares to itself or other area's within your own company.
To put it another way, if you have an employee that makes $100k a year, and I ask you "how does he compare to the average American worker?", you probably wouldn't know what I was talking about. Just because all other Americans make $100k a year, doesn't necessarily mean his level of performance is average.
However, if I asked you "how does he compare to other employees within the same department?", then we'd have something that would be more useful. We'd know that the average employee earns $70k, and the poor guy at $100k earns above what most people in that department earn.
In both cases we're only comparing one company or employee against another company or employee. That's hardly benchmarking! It tells you nothing about your own performance! For example, I know that my sales team makes less than other product teams because they sell higher-margin products like software. However, we don't benchmark against other sales teams because they're not relevant.
Benchmarking can be very superficial in that it doesn't go far beyond looking at two different companies. A friend of mine said "why compare my sales team to a team that makes $300k when I could benchmark them against a team at $250k?"
It's true that benchmarking by industry average is more superficial, but it's still better than nothing. If comparing yourself to the industry average is all you're after then you should know that you're in for a disappointing experience. And sorry to say that you'll probably be surprised at how "average" your performance is.
So the first thing we need to think about when benchmarking is what are your goals? Are they quantifiable like revenue or revenue growth, or qualitative like building a better team? If they're qualitative then doing a benchmark can actually help you by showing you where you could be stronger and where you could improve.
If your goal isn't measurable in terms of dollars, then it's going to be hard to use benchmarks as a guide. For example, what are you supposed to benchmark your sales team against? You could compare them to the industry average of $150k, but that doesn't help you identify areas where they might improve.
Identify your goals first. Once you've figured this out then think about whether you can use benchmarks as a guide. If so, then knowing what the average is in your industry will be very useful and related to your goals. You'll also know that when comparing yourself to the industry average, it's not a reflection of how well you're doing, but rather how well the whole industry is doing. It will be a number compared to another number, and not your own performance.
Even if you can't use benchmarks as a guide, they're still valuable in that they give you the average, which can be a good thing to know. You might have found your sales team's $250k goal unreasonable while looking at industry averages, but after seeing what the average is you may realize $300k isn't that unrealistic.
The second mistake people make is benchmarking their company with themselves (or other companies) in the past. This can be very misleading for the same reason above. Again, the problem is that you don't know how your company is doing compared to itself.
Some companies do this and ask themselves "how am I doing compared to when I first came into my job?" or "how am I doing compared to when I started this 5 year plan?" This can be a useful check if you're comparing your plans against those of previous years, but it's not going to give you an objective measure of where you are today in relation to yourself.
It's an important distinction because the goal of benchmarking is self-evaluation. No one wants to be told by someone else how they are doing. Obviously, you don't want a friend or colleague to lie to you, but what if they're being honest but just really, really don't understand your company? And you're responsible for their evaluation of your performance.
This is where comparing yourself against an industry average isn't going to provide very valuable information, and in fact will be nonsense. For example, let's say that a manager described himself as "performing worse than the industry average". What would this mean? If he's looking at the overall industry average then he's comparing his results against everyone else who is also "performing worse than the industry average".
For me, the only way to know how your company is doing is to compare yourself against yourself. And not just in terms of sales but all aspects of the company (e.g. customer service, products/services, leadership, finance, etc.).
Conclusion
Benchmarking is often useful, but the idea that it will give you objective and useful feedback is mistaken. It can be telling of areas where you need to improve, but it's not going to show you how well your company is doing on any given day or week.
In the end, I think benchmarking a company against other companies in an industry can be a good thing to know. Knowing what the average is in your industry can be a good way to get an idea of where you stand compared to others in that industry. But don't compare yourself against another company - compare yourself against your own performance.