Management Tips

New-Generation Benchmarks

What role do industry benchmarks play in your planning process? Most business consultants would tell you that you really can’t do meaningful planning if you don’t combine internal data and external data as your starting point. Without both it is impossible to create a meaningful and believable plan. Benchmarks are a key part of external data and can provide very helpful information about the market you are in. Benchmarks can help you see if you are performing at a level that is consistent with your peers and help you pinpoint where you need to make adjustments to be more in line with your market.

It is important to know that all benchmarks are not created equal. Knowing where benchmarks come from, the time period they were derived from, and how the data is collected can make a huge difference. Unfortunately there are many problems with the most common benchmark data used by most companies today.

Many of the traditional sources of benchmarks are on their way to becoming obsolete. For the most part, the big benchmark providers use survey data and publically available government data. If you are okay with low-precision data that is at least a year old, then the traditional sources are fine. However, I would argue that this kind of data has very limited value and can be destructive if used where precision is needed.

For example, if you are looking for a benchmark that shows how much other companies like you are spending on rent or payroll as a percent of total revenue, you can get a pretty good clue from traditional sources. But if you want to know about market growth, profitability and the overall health of your specific market, you don’t want to use one and two-year-old data; and you certainly don’t want to use “wishful thinking” data derived from surveys.

Far better solutions to this dilemma are only now beginning to emerge. The right solution is for communities of companies within specific markets to participate in data networks that allow anonymous collection and sharing of performance statistics. In these arrangements, all participants can see how their performance stacks up against their peers, and more importantly, how the market is changing from month to month.

With the Corelytics Financial Dashboard, benchmarks are derived from current actual financial data showing “real-time” evolving trends. In addition, the benchmarks are translated into dollar values that are specific to each subscriber so they can see what their business would look like if it were performing at benchmark. When you combine benchmarks, goals and actual trend lines, it becomes easy to discuss performance with the management team and decide on actions that can close the gaps.

Emerging data-sharing networks require that data come directly from accounting and operations management systems, not data that is manually entered and subject to errors or exaggeration. This does require that the intermediary not introduce a bias, which can be the case when the data provider is part of a vendor supported publisher or a financial institution that caters to a narrow segment within a market.

With this information, everybody wins. You can see where demand is increasing and where it is decreasing. You can see where markets are becoming more or less profitable, and you can see if companies are building financial strength or losing it. All of this can be done in ways that do not interfere with the competitive process or give any individual company an unfair advantage. With more insight into market performance and business trends, business decisions become much more certain and likely to succeed. When a market is healthy, both the customers and businesses in the market win.

In the future, as market information networks grow, there will be much greater precision in the planning and decision-making process. And as trends and cycles and overall economic pressures get folded into the picture, business owners will be able to adjust their plans and expectations and avoid the overspending and underspending that currently happens with small businesses every day.