Benchmarking – the Last Refuge of the Timid Bureaucrat

Julian Birkinshaw, Temporall Board Member & London Business School | 10 Apr 2019|

In the corporate world, we crave external validation for how we are performing. But if we want to be genuinely successful we need the self-confidence to establish our own measures of success.

I attended a leadership team meeting in a mid-sized firm recently. They needed to choose someone to run their employee engagement survey.  One vendor had a really innovative product, but it lost out to a more traditional competitor, who had a huge body of benchmark data. “We need to see how we are rated against our close competitors,” argued a member of the team, “so we can make the necessary improvements.”

But would detailed benchmark data on employee engagement really be that helpful?  Comparing yourself to others is a highly defensive play – it says, we will let others define what matters, and we will do our best to keep up with they think is important by copying them.  It is the last refuge of the timid bureaucrat.

To be clear, benchmarking isn’t a complete waste of time. If your firm is struggling, in the bottom half of however your define your sector, it makes sense to measure where you are falling short and to use whatever means at your disposal to get  up to par. But if you are in good shape already, benchmarking against competitors is a sure-fire route to sustained mediocrity.

So what’s the alternative?  To answer this, we first need to tackle the bigger question of what high performance actually means, or to put it in the words of my colleague, Sir Andrew Likierman, “how would you know if you were successful?”  Despite the efforts of many thousands of analysts, consultants and academics, it is remarkably difficult to come to a satisfactory answer. As a starting point, though, you need to separate out two questions: What to measure? And whom to compare with?

What to measure.  Audited financial statements are a good start – they give you reliable numbers, but they are backward-looking, and they ignore all sorts of intangible things that we know are important.  Customer-based measures, like market share or Net Promoter Score, are useful, but easily manipulated and fairly narrow in scope. Internal process measures, like time to market, quality, and safety are important but tell only part of the story. Employee engagement type measures are increasingly popular, but many people are sceptical of what they actually mean.

Who to compare with.  You can compare yourself with your entire industry sector – a useful but crude measure of performance. You can track yourself against a few specific competitors, but each one has its own idiosyncrasies that make direct comparison difficult.  You can track changes in your performance over time, but this information is hard to interpret (have our sales fallen because we did something wrong, or because demand dried up?).

You work through these options, and you reach a couple of obvious conclusions.  First, every measure has its weaknesses, so you need to measure a whole range of things to get a complete picture; hence the popularity of balanced scorecards, corporate dashboards, and the like.  Second, financial measures are inherently narrow and backward-looking, so you need to work extra hard to get a hold on the ‘intangible’ things that really matter – your people, their ideas, their relationships.  In today’s digital economy, intangibles are basically the only things that actually matter. As noted in a recent book by Jonathan Haskel and Stian Westlake, we live in a world of “capitalism without capital”. This explains the increasing popularity of employee engagement and culture surveys, and products such as McKinsey’s Organisational Health index.

But we are still missing a trick, because all these analytical tools and frameworks still takes us back into the world of benchmarking.  In a recent case I was involved in, we were told we were in the top quartile for employee engagement in our sector. Of course this made us feel good, but we quickly realise it didn’t tell us anything substantial or actionable – so we moved on to more important matters.

The only way forward is to have the self-confidence to move away from the tyranny of benchmarking.  The mark of a great company is that it stands out from the pack – it does something distinctive, it attracts followers, and it makes competition irrelevant.  How does a business like Amazon or WeChat (owned by Tencent) evaluate its success? By creating new solutions for its customers, and often in ways that cannot be easily measured. How does a top professional services firm like McKinsey or Goldman Sachs know it is being successful?   You can come up with all sorts of proxy measures, but none of them really does the job: status and pre-eminence are pure intangibles: they are in the eye of the beholder.

There is a lesson here from the world of social psychology. As an individual, you can be motivated by extrinsic rewards (for example a bonus or a promotion), or you can be motivated intrinsically, through your own personal drive to do something worthwhile or interesting. If we want people to achieve a satisfactory level of performance we use extrinsic rewards, but to get really good outcomes we need them to be intrinsically motivated.  Much the same can be said about corporate performance. Benchmarking provides the basic external validation that you are doing OK. But to be really successful, the motivation has to come from within. You need to have the self-confidence to plough your own furrow, and to choose your own measures of performance.

Here is an example: a large European energy business that has recently gone through a big internal transformation programme. I was interviewing its leadership team, and others at lower levels, a few weeks back. There was a real buzz in these meetings, everyone was excited about the new direction the business was going in, they wanted to tell their story.

But how did they know it was working?  The financial performance was good, but everyone understood that this could be explained by any number of factors. Customer satisfaction was high,   the employee survey data was positive, but again these were fairly superficial data points. I pushed a bit harder, how did they know the change programme was working?  The answers were informative: There are fewer political side conversations these days, they said; we see people taking initiative with new projects, without being asked; the quality of the conversations is much richer – everyone understands the business much better; people are much happier – there are smiles on their faces.  

It is easy to be sceptical here, and to argue that this stuff is irrelevant unless it translates into better financial results.  But my view is these executives were seeking to create a unique culture that reflected the needs they saw in the marketplace, as well as their own personal values.  So it made sense for them to home in on employee attitudes and behaviours that were consistent with their desired culture.

The bottom line is: we cannot avoid quantitative measures of performance and benchmarking-type comparison with others. These are part of the conversation in every organisation.   But we also need our own distinctive ways of shaping the conversation internally. We should be encouraging the executives in charge to develop measures that are true to their chosen course of action, and to stick with them.  This is the only true path to leadership.

 

Originally published on Forbes.com

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