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The Value (and Limitations) of Benchmarking

5/10/11

By Matt Blumberg

Last year I executed a ton of external benchmarking projects, with different leaders inside Return Path doing both systematic and ad hoc phone calls and meetings with peer companies and aspirational peer companies to understand how we compare to them in terms of specific metrics, practices, and structures.

It’s possible I drove the team a little nuts, actually. To some extent these projects were the former management consultant in me rearing his head. But I was also just really conscious of trying to make sure that we stay ahead of the curve as we rapidly scale our business this year.
What is the real value in going through an exercise like this? I think it’s two-fold:

There’s no reason to reinvent someone else’s wheel: If a non-competitive comparable company has solved a problem or done some good creative thinking, then I say “plagiarize with pride,” especially if you’re also sharing your best practices with them. The reality of scaling a business is that things change when you go from 50 to 100 people, or 150 to 300, or 300 to 1,000 — and unless you and your entire executive team have “been there, done that” at all levels, or unless you are constantly replacing execs, there’s not exactly an instruction manual for the work you have to do.

Benchmarking can uncover both problems and opportunities you didn’t know you had: I think this is equally as valuable as No. 1. And even if you don’t uncover new stuff, you can at least validate theories about problems and opportunities that you suspect you have. Learning that comparable companies convert 50 percent better on their marketing funnel than you do, or that they systematically raise prices 5 percent to 7 percent per year regardless of new feature introduction (I’m just making these examples up) can help you steer the ship in ways you might not have thought you needed to.

Great. Those are two pretty big pluses to benchmarking. What are the limitations of benchmarking? I see three big limitations, and it’s really helpful to be aware of this going in.

Sometimes no one else has the answer, either: At Return Path we do run into this quite regularly—for example, a tough technical problem where literally no one else does it well, like disaster recovery. Or in how to solve channel conflict problems or streamline commission plans.

You can’t really know what another company does, unless you really know what they do: It is sometimes said that the only people who really know what goes on in a marriage is the two people who are in it. I think the same can be said for companies. Even an in-depth discussion with your peer or other person from a company is only going to give you glimpses of the inner workings. Another company may have natural advantages or disadvantages that aren’t applicable to your business. Benchmark reports can offer more breadth and depth, but are still limited by other the data was gathered.

You might find out that you are actually best in class at a particular function: In those cases, while some executives might chalk up the exercise to a waste of time, I still think there is learning to be had both from studying others and from discovering there is an area you don’t have to spend as much time worrying about improving.

Of course there’s always another level to get to, and this is also a place where the exercise is valuable. If through it you discover a couple other companies who are also best in class, you can work to facilitate a group brainstorming among the top peers about how to push the envelope further and be even better. This can even take the form of a regular peer group meeting/forum.

On the whole, I find benchmarking a good management practice and in particular a good use of time. But like everything, it’s situational, and you have to understand what you’re looking for when you start your questioning. You also have to be prepared to find nothing – and go back to your own drawing board. Good entrepreneurs have to be great at both inventing and, as I noted above, plagiarizing with pride.

About the author: Matt Blumberg is the CEO of email deliverability and security services firm Return Path. He writes the Online Entrepreneur with his colleagues George Bilbrey and Jack Sinclair. Together they will cover how to approach the business of email marketing, thoughts on the future of email and other digital technologies, and more general articles on company-building in the online industry – all from the perspective of an entrepreneur.


 

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