Benchmarking – Good, Bad or Plain Indifferent!

Benchmarking, particularly comparative IT benchmarking, have been used by many CIOs to justify their spending on information technology. However, opinions are divided on the results. Does scoring low in a particular benchmark puts a business at disadvantage? Or, for that matter, scoring high leads to higher unproductive spending? Questions like these have always troubled CIOs, CFOs and CEOs alike.

Benchmarking is old stuff, why to talk now?

In the current scenario where CIOs are increasingly reporting to CFO or COO rather than CEO, it becomes imperative that IT communicates its value add to business clearer than ever done before. Inherently, CFOs/COOs like clarity on investments made, running cost, and value added by an IT system to an organization. It is logical that even CIOs have similar agenda in mind. However, CIOs tend to run into problems while communicating this to CFOs or other business leaders primarily due to less business and higher technical orientation. This problem is compounded when leading outsourcing companies persuade business leaders to ask questions on value add and effectiveness of services provided by internal IT organization.

Key messages

  1. Benchmarking using comparative IT metrics, though contentious, provides a way of communicating value of internal IT to business
  2. Selecting a relevant metrics to benchmark is as important as the entire exercise
  3. Create three set of benchmarks: Internal, External and Trending
  4. Benchmarks are not just numbers rather perception and must map to business strategy or goals

Benchmarking using comparative IT metrics, though contentious, provides a way of communicating value of internal IT to business

Metrics are still important for CIOs as it helps in comparing their operations with peers and communicate value to internal stake holders. Differences arise when benchmarks are taken purely as number and not as perceptions. Every organization is unique in terms of strategy, culture, workforce and hence requirement or expectations from an IT system. Results from this exercise must be taken in with a thought of short-term gain versus long-term win. Again, as culture is key to innovation, not how much you invest in it, same is the case with IT benchmarking.

Ideally metrics can be used in below two ways:

  1. Comparing key indicators with a selection of close competitors/peers either from same industry, geographic region, revenue band or employee band.
  2. Using a stand-alone metrics that an organization can understand and connect to.

Option (a) above seems to be most logical. However, paucity of information pertaining to the selected competitors and peers makes this a lesser practical option. Stand-alone metrics thus comes in handy in such situations.

Selecting a relevant metrics to benchmark is as important as the entire exercise

Selecting relevant metrics and adapting it to one’s own industry is a much ignored crucial step in benchmarking. Each enterprise is unique in its own way. However, there are still some common processes. For example, manufacturing companies may use an ERP solution to keep track of inventory, a product life-cycle solution to design and develop products rapidly. However, they may also do something not common to a manufacturing sector, such as engineering consulting and custom design which aligns more towards the service industry. Typically IT spend for manufacturing sector is around 1% of sales revenues, however, it is close to 6% for service industry. Absolute care must be taken to adapt metrics to one’s own unique scenario.

Create three set of benchmarks: Internal, External and Trending

To objectively perform this exercise it is best that enterprises create three set of metrics:

  1. External: These help to judge efficiency of the current model and can be sourced from external sources such as consultants or any other third-party providers. Common examples are IT spend as percentage of revenue, IT spend per employee, IT spend per service line, IT operating expenditure as percentage of companies operating expenditure etc. These can be called as “Industry Benchmarks”. These must always be viewed in relation to business goals.
  2. Internal: These help in objectively manage IT performance by accessing current performance and identifying improvement areas with quantifiable goals. These are sourced internally from an organization, probably from a different process. These can also be used in conjunction to external benchmarks. Common examples are resource assessment and allocation, service delivery and value analysis (time savings, avoiding human errors, and IT driven revenue creation)
  3. Trending: Mostly used for operational improvement. These are used in conjunction with past performance of service delivery. One key point is to decide how many years of past data is considered relevant. For example, server downtime in last three years. This trending data helps in setting up improvement targets for current year.

Benchmarks are not just numbers rather perception and must map to business strategy or goals

Does scoring low in a particular benchmark puts a business at disadvantage? Or, scoring high leads to higher unproductive spending?

As mentioned earlier, difference of opinion arises when benchmarks and metrics are considered as just numbers. Benchmarking using comparative IT metrics is most beneficial when the deviations are viewed upon as guidance and taken together with the strategic objective of the enterprise. It should be noted that IT bench-marking should assess effectiveness, not just efficiency. For example, cutting down on the time required to answer a help desk call does not make business sense if the customer has to call again three times.

Recommendations for vendors and enterprises

For vendors, usage of IT metrics opens up an opportunity to develop new tools which help enterprises manage their IT department. Additionally, it presents them with a credible lead of a business opportunity. However, in cases where most of the services are outsourced to vendors’ usage of IT metrics may lead to closer reporting on value add to the enterprise in lesser cost.

For enterprises, IT metrics should map to strategic objective of the enterprise and simultaneously convey its value to the business.

What has been your experience while doing this exercise? Please do share your observations, experiences, and comments below.

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