Benchmarking is not a cost management paradigm. Imagine looking at the fruit in the illustration and determining which is best. It can’t be done. It is literally comparing apples to oranges. It is merely often a fruitless exercise!
Benchmarking is a management technique often used by higher headquarters to compare subordinates’ performance. Say an organization wishes to evaluate snow removal efficiency among its multiple locations. Headquarters would issue a data call to all locations for cost and performance data related to snow removal. Subordinates would dutifully comply with the information request.
Headquarters would then compile the data, rank subordinates, and make comparisons. Those locations above the average benchmark would then be tasked to defend their higher cost.
While this sounds good, in my experience this is a relatively uninteresting line of inquiry. As one receiving such taskings, I found them very easy to answer. The benchmark involved typically failed to provide any benefit for two simple reasons.
1. The organizations being compared are different
2. The cost measurement practices among subordinates are different
Imagine comparing snow removal cost in Buffalo, New York, to a facility in Miami, Florida. Does the fact that Buffalo’s cost is significantly higher tell us anything useful? It is just different in Buffalo and that fact tells us nothing about relative performance.
The other obvious detractor from usefulness is that organizations seldom measure cost the same way. Perhaps Buffalo has so much snow removal that they have a dedicated cost center that includes the cost of a supervisor. The St. Louis facility has less of a problem with snow so they have a smaller effort, no full time supervisor, and the supervisory cost is likely included in the parent organization’s cost rather than the snow removal cost center.
Or maybe one site has a contract for snow removal within two hours and another’s contract specifies a six hour window. Is the difference of any importance to higher headquarter? It is very easy for subordinate management of the higher cost option to defend.
Benchmarking Micromanagement vs Cost Managed Organization
Higher headquarters involving themselves in details of cost and performance gives the appearance of cost management and control but little else. Furthermore, benchmarking seldom tasks the organizations that appear to be performing better than the average.
The Cost Managed Organization paradigm described in these blogs is more of a self-management process. Comparisons are only made to an organization’s own planned or historical performance. Furthermore, the comparison is only designed to raise questions, stimulate research into causation, and insure learning.
Higher headquarters has two concerns:
1. Do subordinates understand their costs
2. Are subordinates continuously improving
Evaluating subordinate understanding is a judgment call. It requires the higher headquarters to assess the logic, clearness, and confidence subordinates demonstrate in their after action reviews. This is not hard to do and comes with experience.
Continuous improvements are more obvious to assess as they are part of the after action review agenda. They are celebrated and often enthusiastically explained by the originators.
This brings up another problem with benchmarking. It excuses those who are ranking better on the metric. In a cost managed organization all subordinates should be improving all the time.
So benchmarking never reviews Miami snow removal cost and it can continue indefinitely as long as it is better than average!
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