What is Benchmarking and Why Is It Important?

Many business leaders have adopted the practice of measuring company performance by monitoring key performance indicators (or KPIs). However, monitoring KPIs is just the first step in gauging business performance. There needs to be some standard against which KPIs are measured and compared. The process of comparing your business’ KPIs (or any performance standard, for that matter) to some kind of objective standard is referred to as benchmarking. Benchmarking is one of the most effective things businesses can do to improve their operations and boost profitability and productivity.

Key takeaways

• Benchmarking gives meaning to performance metrics

• Benchmarking identifies performance gaps and improvement opportunities

• Benchmarking supports continuous improvement and competitiveness

The concept of benchmarking goes back to the idea that performance measurements (including KPIs) mean very little in and of themselves without a basis of comparison. You can’t just look at numbers in isolation; rather, they need to be compared to (or benchmarked against) an objective standard. Benchmarking enables you to understand what is the acceptable standard in the industry and where your organization stands in comparison to that standard.

Companies at times might be reluctant to use benchmarks. One of the most popular reasons for this is the belief that they are their own organization, and hence, do not need to emulate any other organization. This is where it is critical to underline the fact that benchmarking does not mean copying what your competitors do. Instead, benchmarking helps organizations stay in sync with the market and customer needs. For example, if a bank offers a 4-hour turnaround time for any customer complaint, the bank might be tempted to believe that they are doing a great job with a short turnaround. However, if other leading banks have a turnaround of 2 hours, then the scenario changes. Suddenly, the ‘great job’ is 50% below the benchmark. Customers will likely prefer a bank that resolves their concerns in the fastest possible timeframe.

Benchmarking enables companies to determine which of their processes and procedures could benefit the most from improvement, and in which areas these improvements might yield results. By benchmarking their performance on a consistent and ongoing basis, companies can gauge how effective their improvement efforts are over time.

Frequently asked questions

What is benchmarking in a business setting?

Benchmarking is the practice of comparing an organization’s performance metrics against external standards such as competitors, industry averages, or recognized best practices. This comparison provides context for internal data and helps leaders understand how their results measure up in the real world.

Why is benchmarking more valuable than relying only on internal KPIs?

Internal KPIs show how performance changes over time, but they do not reveal whether the organization is keeping pace with industry standards. Benchmarking provides that external point of comparison, helping companies identify hidden weaknesses, prevent complacency, and focus on areas that will improve their competitive position.

Should benchmarking be done once or continuously?

Benchmarking is most effective when done regularly rather than as a one-time project. Continuous benchmarking helps organizations monitor whether improvement initiatives are working, stay aligned with industry trends, and remain competitive as market expectations evolve.