Most Downloaded Show of 2022 – Innovation Benchmarking

Benchmarking is the comparing of your organization to others to measure your performance and possibly identify areas for improvement. It has been common practice since the early 1900s. Frederick Taylor, an American mechanical engineer, is credited with coining the term “benchmarking” in his book, The Principles of Scientific Management. Benchmarking enables continuous learning and improvement by identifying those that are having an impact and change and following them. These learnings and improvements can nurture the innovation success of your organization.

Benchmarking helps you understand how you compare to others in your industry, making it easier to identify the best practices. For example, benchmarking enables you to identify the companies that use the best technology, the fastest production time, or the lowest costs. Whatever the measurement of success you define in your benchmarking activities, a benchmarking study can help an organization's managers make strategic decisions. It may also provide some insights into where to allocate your corporate resources. A common part of the data that gets collected in benchmarking is headcount. All kinds of weird metrics come out of this, such as dollars per revenue. While this is all good, there are also some challenges that we're going to discuss.

In general, benchmarking could prove useful in business units where benchmarking data reveals which competitors are performing better than others. However, before benchmarking, you must first conduct research to know who to benchmark against. You want to benchmark peers that are similar to you. You don't want something unrelated, such as comparing a software company to a steel manufacturer. You want something similar. Similar peers could be in the same industry, have similar sizes, or they could be selling and servicing in a consistent geographic area. It can be tempting to say we want to be more like Silicon Valley. If a restaurant in Milwaukee benchmarked itself against the leading companies in Silicon Valley such as Apple, Google, or HP, that comparison would be meaningless.

Benchmarking Failures

Benchmarking has been around for quite some time, and it has some strong benefits, but there are bad that can come from benchmarking as well. The key here is that benchmarking can have negative consequences if done wrong. For example, if you benchmark against peers who are poorly chosen, it is not going to work. This can lead to bad decision-making and can destroy organizations. Therefore, it is important to handpick your benchmark peers to get accurate insights. For example, in the late 90s and early 2000s, MCI WorldCom, a major telecom company in the United States, was reporting results far better than any of its peers. AT&T and others attempted to benchmark themselves to find out how MCI could have a such standout performance. This resulted in the industry changing its strategies and its investment models to chase the MCI WorldCom results. While their competitors tried to play catch up, MCI WorldCom continued to report surprising results. That is until authorities revealed that MCI WorldCom was practicing fraudulent accounting practices. They overshowed the revenue streams, and they misallocated expenses to make their results look good.

People had made decisions based on a benchmark against somebody who looked like they were performing outstandingly. To compete with how MCI was performing, they changed how they operated. MCI WorldCom eventually went bankrupt, but AT&T survived unscathed. They had size, scale, and all the capabilities. However, others in the industry got trapped in the benchmark. They made bad decisions, just like a company that I was at called Teligent. I was one of the original five founders of Teligent, and we got wrapped up in it. We were a competitive local exchange carrier, or what was called a CLEC at the time. We looked at MCI’s results and wondered how they were able to deliver those kinds of results. We made decisions to try to drive a performance level the same as MCI WorldCom. Eventually, Teligent ended up in bankruptcy, but I was long gone at this point. Because Wall Street was pounding on every telecom company in the industry to reach those same-level results, fast-paced innovation was essential. People made bad decisions because of a bad benchmark, and that bad benchmark was a result of fraud.

The Benchmark Trap

As a leader, whatever your role may be, odds are one of the big four consulting firms have either approached you, your CEO, or your board of directors to do an innovation benchmark on your organization. If not, count yourself lucky. If you have done an innovation benchmark, you know the nightmare this can cause for your organization. These engagements are all about comparing how an organization's innovations compare to each other’s innovation processes, approach, culture, etc. But why has this become such a hot consulting offer? Leaders in most organizations are feeling very uncertain about innovation. This may be due to their lack of ability to come up with new ideas, or because of their historical inability to implement new ideas successfully. An organization may be able to come up with an idea, but most organizations historically struggle with making those ideas real. How big of a problem is this and what are the consultants zeroing in on? There was a study by the Economist Intelligence Unit that found that only 38% of executives said their organization was, “very good at turning innovative ideas into commercial success”. When these kinds of studies come out, consultants are all over it. They quickly create a consulting service to ‘fix the problem’.

The problem is that only 38% of executives feel very good about their ability to turn innovative ideas into commercial success. When leaders benchmark their innovative approach to others, they're trying to benchmark themselves out of uncertainty and into comfort. They're uncertain because they aren't doing very well. They want to see how other people do it which causes them to try to copy the 38% to be successful. This is part of what I refer to as the benchmark trap. A single organization’s benchmarking engagement does not stand on its own because you don't benchmark against yourself. If you benchmark your organization's ability to turn out new ideas into commercial success, you are also benchmarking the quality of your peers who have been benchmarked before. You have to have somebody to benchmark against. This is the service that consultants sell. If you’re company A, and consultants have done a benchmark for Company B or Company C, they’ll do a comparison so you can determine how well you stack up. Leaders are looking for ways to stack themselves up, so they feel comfortable. However, when you benchmark yourself against competitors or industry best practices, the results will be that you become exactly like them in terms of innovation performance.

When you benchmark, you're either trying to compare yourself or you're adopting what is viewed as their best practice to you. This drives everybody in the industry to converge towards the mean in results. You're not going to be the leader. You're going to be me too. It's one of the things I always hated when I was in one of the big six consulting firms. I used to run the telecom consulting practice at Computer Sciences Corporation back in the early 90s. One of the things that we sold was benchmarking, but we also did process reengineering, consulting work, etc. We pushed on this concept of benchmarking, and I traveled all around the world and did these benchmarks. While you're selling it to the leaders, the leaders, therefore, get comfortable because they've got a document they can put in front of their board of directors, investors, or shareholders to show they’re just as good or better. As more and more companies within an industry or area focus on benchmarking and adopting best practices, everybody starts to look the same. If Company A has a best practice on innovation, and everybody copies that best practice, assuming that you can copy someone's best practice and be just as effective, you all start to look the same. I think best practices are the stupidest concept ever invented. Over my years of talking companies into doing best practices, I've seen the impact. It makes everybody average, and everybody looks the same. There is no ability to have to stand-up performance when you've adopted the same practices, approach, and strategies as everybody else. No matter how high or how low your original benchmark is, you may have been an absolute leader in sales or innovation if you hadn’t followed other’s benchmarks.

The Dangers of Comparison and Comfort

Innovation in benchmarking can be a powerful tool. It can bring benefits when done correctly. But it can also lead companies astray if it's not handled correctly. Let’s discuss some of the consequences of innovation benchmarking. Firstly, leaders run unnecessary risks trying to replicate the benchmark results exactly. We find areas where somebody else is better than us which causes us to want to replicate and adapt it. Why is this a problem? Because benchmarking typically involves leaders looking for insights and inspiration from benchmarking peers. The benchmarking experience is often oversimplified down to exactly what people did, how they did it, when they did it, etc. If they don't, it's a black box. It's oversimplified, and it's not enough detail to where you can duplicate it. We tend to focus on why they did all these different things. Firstly, you don't have all the details, because there are things inherently behind the scenes, and secondly, you’re thinking it's a formula. As a result, this can lead companies to take unwarranted financial, strategic, or organizational risks. When you're trying to replicate the benchmark experience of a peer, that experience is often unique to the peer. There's a lot of history in an organization that is not captured in the benchmarking activity. Be careful when leaders run unnecessary risks trying to capture the magic formula of an innovation benchmark.

The second consequence is that leaders may benchmark themselves out of uncertainty and into comfort without realizing it. When leaders take benchmarking too far, it leads to what I call the comfort trap. Leaders can miss new opportunities and threats that emerge in the market when they unknowingly benchmark themselves into comfort. While you are looking for insights from your peers, it's important to keep in mind that what works for them, may not work best for your organization. You may have a unique value proposition, a different competitive environment, different costs, or brand equity. Be careful you don’t cherry-pick those things that either make you look the same or slightly better, but no worse than your competitors.

The third consequence is that leaders benchmark their competitors rather than taking a fresh look at their innovation approach. This is probably the one that frustrates me the most. I get calls all the time from people who read my book or who have taken the innovation bootcamp, asking why it's not working for them. Be careful, take, what somebody else is doing in the innovation approach is not something you can replicate. They failed to take a fresh look at their innovation approach. They fall into the trap of comparing themselves to others who are not their innovation peers. You want to understand and find people who are innovating, that are similar to you, and not to duplicate or replicate, but adapt to what would work for your organization and your culture. If you're just looking to copy somebody else's innovation process, it will lead to bad decision-making that can destroy your organization. When you benchmark your competition, whether, from other industries, geographies, size, scale, etc., you automatically compare yourself to others who have been successful in completely different strategies for innovation success than yours. Attempting to imitate them will lead to failure.

Example: Picking the Wrong Peer

Here’s a personal example to drive the message home. When I was CTO at HP, the CEO, Mark Hurd, had a quote that was ingrained in everything the executive team did. “If you stare at the numbers long enough, they will eventually confess”. Mark established a culture he referred to as “extreme benchmarking”. This required every leader at HP to know the key benchmark metrics for each competitor and to have a plan to meet or beat the competitor's benchmark results. There was a lot of pressure from the benchmark numbers being compared to your competitors. If your numbers were not better than theirs, then you weren't running your part of the business appropriately. You had to be prepared to answer a question from Mark, walking down the hall asking, “what were the last quarter's benchmark results for XYZ competitor? And how and what is our current?” It was insane. The result was more than a few poor business decisions on the part of HP.

One example that I was directly involved in was the cutting of HP’s investment in innovation and R&D, to match the spending of our Asia Pacific-based competitors. Now, to give you some context, HP was spending roughly 3% of product revenue in the PC group on R&D. This included both consumer and commercial business products. To compare, Apple was spending about 9% of product revenue in the R&D group. The peer that Mark was forcing us to compare against, in our Asia Pacific base competitors, was spending 0.8% of product revenue on R&D. There was constant pressure to cut resources or move things like engineering offshore to get the benchmark closer to our peer. And let me tell you, the pressure was intense. This is the perfect example of picking the wrong peer. In the case of all my conversations with Mark Hurd, it was all about this Asia Pacific competitor. I wanted three times the R&D budget so that I could compete with Apple. That was my logical argument. Mark wanted 3% of my revenue on R&D spent down to less than 1%. I pushed back hard on this approach. My one regret was not pushing back even harder or finding a way to convince Mark and others of the folly of this approach.

Now you would think with my role and personal passion for innovation, I would have been able to figure this out. Nope, I failed, and it is one of the few regrets from my time as CTO at HP. Now, whenever someone says the word benchmark, my antenna goes up. Whenever you are thinking about doing any kind of comparison, understand the context of the information. Ask yourself if that somebody or thing is a good comparison. I spent almost 10 years in one of the big six consulting houses convincing others to do benchmarks. I've been on the other side of the table, and I'll be the first to admit, that was bad advice. Given it was the most popular advice, it was the advice everybody was giving at the time. In reality, you cannot just duplicate what somebody else is doing. You have to deeply understand the context behind what you are attempting to benchmark against.

Conclusion

The best way to avoid falling into the innovation benchmark trap is not to benchmark for benchmark’s sake. Instead of getting caught in this trap, learn from your peers. Don't assume that what worked for them will work for you. You need to have some discernment as to what would work and what to ignore. If you follow blindly, your organization will become average, or worse, will be destroyed. Instead, look at what your peers are doing and ask yourself two questions: “Why are they innovating that way?” and “what can we learn from that approach?”.

It is critical to get inside the mind of your innovation peer that you've identified and understand their thought process and discern what of their approach is worth you're experimenting with. Don't adopt at wholesale, find the elements that work and experiment with them. Otherwise, your organization may drive itself right off the innovation cliff.

 

To know more about innovation benchmarking, listen to: Most Downloaded Show of 2022 – Innovation Benchmarking