Internal or External Benchmarking: What is the difference?

I was recently teaching a quilting class on color. One of my demonstrations involved explaining the difference between yellow/orange and red/orange fabric and how it can change the look of the quilt. We ended up in an animated discussion on the difference between the two. As both colors are made up of orange, questions that were discussed included: Why does it matter? How does it change the end result of the quilt? If you want or need an orange in your quilt, which one do you use? And if so, how do you know which one to use prior to finishing the quilt?

Although both colors appear orange, the difference of adding a layer of orange on a layer of red or on a layer of yellow changes the look of the fabric completely. Using either one in a quilt will change the outcome very quickly – sometimes good and sometimes very good – but neither wrong. It just depends on what you want for an end result.

It’s the same thing with benchmarking. There are primarily two main types of benchmarking and as the title suggests – one is internal and one external. As in the quilt above, each serves a purpose and though similar, provides different results.

So what is the difference?

Let’s begin with internal benchmarking. In its simplest form, internal benchmarking compares the results of one department, team or individual within an organization to another. It is then determined which practice or procedure produces the best results. That practice or procedure is then adopted by other departments, teams or individuals within the organization with a view to improvement throughout.

For example, an organization is happy with the performance of the third shift production department. Their waste is consistently 15% lower than the first and second shifts. This level of performance is the benchmark that management wants all shifts to achieve.

An analysis of the practices and procedures being used by the third shift is conducted. The analysis could focus on leadership expectations, teamwork, and set-up procedures – anything that may help them determine why the third shift results are more successful than the other shifts.

That analysis is called internal benchmarking. The results will be shared with the first and second shift management and a plan of action is set to determine where improvements can be made.

External benchmarking is what most people think of when the term benchmarking is used. It compares your statistical data with other organizations within your industry. The data goes into a report and can be reviewed by you and your management team. The best practice from the other organizations can then be adopted by your company.

As an example, the newspaper industry does a benchmarking report annually. It gathers data from thousands of newspapers across the nation and compiles it into a single report. The data includes circulation size, page counts, advertising inches, news inches, hours by departments, sales per hour, collection statistics, tons of newsprint used, etc. This report is then made available to anyone who participated in the report or anyone wishing to purchase it.

So how is it used? In reviewing the report, you see that your sales department is running 50% lower in sales per hour than other newspapers of the same circulation size. You contact a few of the companies with higher sales per hour and talk to them about their best practices and procedures. You can then adopt or adapt those procedure to your company to achieve better performance. That is external benchmarking.

Is one better than the other? No. Just like the use of yellow/orange or red/orange fabric in a quilt, it depends on the end result you wish to achieve.

Internal benchmarking is useful were no external benchmarks are available or there is not any competition in your markets. It relies on management to review the data and determine what the benchmark is and then to follow through with making the changes necessary to achieve expected results.

External benchmarks provide the added advantage of comparing your data against competitors. Without external benchmarks, an organization and its managers can only rely on itself.

The effectiveness of any benchmarking process depends on following through on the results. Whether the benchmarking done was against yourself or against an industry, it should be reviewed regularly and used to achieve bottom line improvements.