Benchmarking the benchmarkers

Measuring and comparing HR processes to help improve performance is now a firmly embedded practice in many organisations. We take a look at the various ways of benchmarking the HR function.

Benchmarking HR activities and processes is common practice and its popularity is growing. The Work Foundation reported in 2003 that only 16% of the 125 organisations it surveyed did not then benchmark any area of HR activity¹. The latest data from the US-based Benchmarking Exchange shows that HR is the second most common business function to be benchmarked - only IT is benchmarked more frequently.

Suppliers of benchmarking services confirm that the benchmarking of HR is becoming more widespread. Mundy Carroll at Mercer Human Resource Consulting says participation in the company's annual benchmarking survey of executive pay, which has been running for more than 25 years, has increased by 25% to 30% over the past few years. His colleague Terrie Hughes comments: "Benchmarking the salaries of top management is now part of the fabric of compensation work and gradually it is going down to the rest of the organisation."

According to Richard Phelps, a partner at PricewaterhouseCoopers, which now owns the Saratoga benchmarking service: "Benchmarking is now an established business tool. Chief executives want to know what the competition is doing and HR directors are increasingly being asked how the organisation compares against its competitors."

Increasing membership and proliferation of benchmarking clubs also indicates that performance comparison is a high priority in many organisations. Ray Wilkinson at the UK-based Best Practice Club says its membership now hovers around 300 organisations and 4,000 individual managers, and that one-third of benchmarking requests regularly concern people management activities.

Levels of sophistication

Benchmarking can take place at three levels of sophistication:

• performance benchmarking compares hard data;
• process benchmarking examines the underlying causes for superior performance; and
• strategic benchmarking looks at less tangible factors, such as leadership and the management of change, that drive successful organisations.

There are four basic benchmarking approaches:

• internal - benchmarking against other departments or business units;
• competitive - benchmarking against direct competitors in the same industry;
• functional - benchmarking against organisations performing similar functions, but not in the same industry or market; and
• generic - benchmarking against best-in-class organisations in any industry or sector.

Using external salary surveys to ensure, for instance, that the remuneration package of the HR director is in the upper quartile for the sector; or comparing labour turnover with figures compiled by one of the national bodies (such as the annual Chartered Institute of Personnel and Development (CIPD) recruitment, retention and turnover survey) or industry-specific services (such as the IRS/CCA survey of the call and contact centre industry) is now fairly standard.

But exponents of benchmarking would generally not class simply comparing numerical data as benchmarking. Rather, it is the beginning of a much bigger process to understand how superior performance is achieved. "Benchmarking is far broader and [more] valuable than merely using linear metric benchmarks," says Chris Nutt, chair of FiSSInG, the not-for-profit HR benchmarking service from the HR Society (formerly the Manpower Society) that is used by many financial services companies and utilities. Phill Jennison, senior consultant at HR Benchmarker, the benchmarking service run by global law and consultancy firm DLA Piper Rudnick Gray Cary, agrees. "Collecting data and undertaking the analysis is only the start of the journey," he says.

Nonetheless, comparing hard data will highlight problem areas and is a useful first step in any benchmarking exercise. Half of the organisations polled by the Work Foundation in 2003 said measures had been introduced to change pay and benefits following a benchmarking exercise. Although John Bramham, author of the CIPD book "Benchmarking for People Managers", describes data comparison as the "first level of benchmarking", he says it is "entirely respectable and, contrary to what other texts may say, there is no reason to go further for its own sake".

Going further and analysing competitor, similar or best-practice organisations to find what makes them tick requires more effort and resources. Whereas performance benchmarking can provide data to show how costs and performance compare, process benchmarking involves identifying and comparing the key processes and practices that lie behind performance outcomes. Is another organisation's lower sickness absence, for example, due a superior return-to-work process, incentives or widespread flexible working arrangements, or a combination of these and more?

Going further still, and looking at what drives really successful enterprises, tends to involve long-term alliances with other organisations with the aim of using their experiences to identify long-term strategic objectives and introduce a step-change in performance.

Comparative data

Almost any activity can be the subject of a benchmarking exercise. Common areas for benchmarking the HR function or people-related factors include: absence rates; productivity measures; resignation rates; managerial and professional ratios; HR department costs per full-time employee; levels of commitment and engagement; training costs; number of days' training per trainer; revenue and profit per employee; recruitment costs per recruit; staff suggestion rate; and time spent on the recruitment process.

The Work Foundation survey found that the three most common benchmarked HR activities were pay and benefits (80% of respondents), absence (74%) and labour turnover (68%). Focusing on performance in such areas indicates that most HR benchmarking is concerned with comparing hard data to see whether an organisation is falling below some "benchmark" figure. Indeed, answers to a supplementary question revealed that benchmarking in almost half (47%) of participating organisations consists mainly of comparing performance statistics, whereas only 6% said it was mainly about investigating how superior performance is achieved.

Benchmarking begins with gathering data, whether or not the process is confined to comparing hard data or is the start of a much more extensive comparison or examination of performance. Key metrics will consist of ratios, rates and time taken for a task, for example. Any organisation wanting to benchmark needs to have in place effective internal data-gathering mechanisms. Saratoga consultants tend to work with the internal HR management systems staff to ensure the right metrics are extracted.

Most commercial benchmarking services require clients to complete generic questionnaires. Each of the two annual surveys - "HR performance indicators" and "Workforce performance indicators" - that make up the HR Benchmarker service from DLA Piper contains around 50 metrics. So, for example, the HR performance measures include the ratio of all HR staff to all employees and the average time taken to recruit (40 days), while the workforce performance index provides, among other things, a profile of the workforce by age, disability, ethnicity and gender, and the proportion of absence that is long term (more than 20 days). The contents of both surveys change over time to reflect the interest and needs of subscribers. User groups meet twice a year to confirm metrics for future surveys and agree the accompanying definitions - to aid comparison, the questionnaire is accompanied by a "definitions" document to ensure that organisations are submitting the same information.

Metrics for the HR Index, the human capital database from Saratoga, are also collected in accordance with strict definitions to ensure like-for-like comparison, although the company prefers its own consultants to extract the relevant data rather than rely on companies completing questionnaires.

Benchmarking services from trade associations also start by capturing key people management information. FiSSInG incorporates more than 140 key performance indicators (KPIs) in its base data and surveys. "All corporate members complete the standard survey," says Nutt.

IPF Benchmarking, which is part of the Chartered Institute of Public Finance and Accountancy and has been the main source of comparative statistics for local authorities for many years, operates an HR benchmarking club. Its 2006 survey contains sections on: the delivery of HR services; HR resources; health and safety; recruitment; and work-life balance. It also contains performance indicators, such as the annual number of working days/shifts lost due to sickness absence and the reasons for non-attendance, and the numbers of staff leaving and the reasons for doing so. The contents of the latest IPF survey were determined by a group of local government heads of HR, who, in 2004, met to define the issues that it is most important to measure, and to decide how best to measure them. This group piloted a draft questionnaire using data from their own organisation.

People Count, an HR benchmarking tool from Agenda Consulting for the voluntary and community sector, includes 50 key measures in its survey, with topics covered ranging from learning and development to salary strategy - 136 organisations participated in its 2005 survey.

Participants in a benchmarking survey submit data in confidence, usually only allowing the information to be disclosed to other contributors. The Best Practice Club, for example, adheres to the principles of the European Benchmarking Code of Conduct, which stresses that benchmarking findings be treated as confidential to the individuals and organisations involved and should not be communicated without their permission.

Reporting on performance

The cost of participating in a benchmarking exercise varies. DLA Piper charges around £1,000 a year for the most basic benchmark data (see below), while a 12-month subscription to the FiSSInG benchmarking club costs £1,500 (plus a one-off joining fee of £1,000 - club members must also hold corporate membership of either FiSSInG or the HR Society, which costs £400), and annual membership of the Best Practice Club ranges from £595 to £4,000, depending on the type of organisation and level of membership. In return, participants generally get access to a series of reports analysing the data or, in the case of benchmarking clubs, access to potential benchmarking partners.

Jennison at HR Benchmarker says that, from the results of each of the two annual surveys run by DLA Piper, subscribers have access to three levels of analysis:

• All-sector reports - go to all participants, with separate findings for the private and public sectors and for large (1,000+ employees) and small organisations. For example, the all-sector report for the "Workforce performance indicators" survey focuses on metrics relating to the engagement and management of the workforce, such as absence, discipline and grievance, performance management, staff turnover, workforce diversity and workforce satisfaction.
• Sector-specific analysis - same metrics as all-sector reports, but broken down into eight sectors: housing associations, universities, local government, central government, banking and finance, retail and leisure, manufacturing and engineering, and professional services. In addition to averages, sector-specific analysis provides a quartile evaluation.
• Organisation-specific scorecards - how an organisation performs on an agreed grid-set of metrics (most relevant from the 50 base metrics) against others in the same sector.

FiSSInG also produces organisational scorecards based on a combination of the benchmark data provided via templates by subscriber organisations and the findings of its surveys. It consists of a red-amber-green score sheet showing how the organisation compares with other members for each KPI. They also receive a spider chart, which groups KPIs to give an overall result in each of the capital accounts (for example, human capital measures, such as length of service) and operating accounts (including the number of HR staff to full-time employees) that make up the scorecard. Members' scorecards are discussed at meetings, although members do not have access to each other's results. "We go through the process and explain what the scores mean. It also enables each member to know who they are benchmarking against," explains Nutt.

The next step

Organisations that want to move to the next level of benchmarking, using the quantitative survey data as a spur to close the performance gap in one or two areas, need to identify organisations that perform better and learn from them. Aside from excelling in the chosen area of activity, potential partners need to be comparable in terms of their culture, size and processes. They also need to be accessible. Benchmarking clubs, trade associations and networking events are sources of potential partners.

HR benchmarking clubs are popular and more are being established. In March 2005, IPF relaunched its HR benchmarking club and attracted 71 local government members in the first year. The user groups established by DLA Piper are essentially sector benchmarking clubs within the wider HR Benchmarker community. DLA Piper has established user groups in local and central government with the PPMA (Public Sector People Managers' Association, formerly known as SOCPO) as well as with the Universities Personnel Association and the National Housing Federation. "We have now begun working with other sectors on both a regional and national level to create benchmarking groups with the aim of not just measuring, but understanding perceived best practice," says Jennison.

FiSSInG is primarily a club. "We encourage and facilitate networking between members as this increases the flow of learning and knowledge transfer," says Nutt. Members of the Best Practice Club have various networking opportunities. The club organises annual and regional "Gateway" meetings to bring members together to share information about practices. A members-only area on its website includes networking tools so members can contact each other, and use the Partnership Request facility, which enables members to identify benchmarking partners, post information requests, arrange site visits and share ideas and experiences.

Saratoga, too, aims to create and maximise networking opportunities so organisations can share best practice. As well as an annual conference and its talent and HR shared services network events, Saratoga organises benchmarking groups and workshops. Organisations focusing on absence, for example, come together in facilitated workshops to discuss and swap results and learn from each other. Saratoga will also act as an intermediary between organisations wanting to know how the best performers in a specific area achieve their results.

Putting the data to use

Benchmarking has come a long way since Xerox proclaimed it as the document firm's saviour back in the 1980s. Most commercial providers report an upsurge in interest among HR professionals, mainly due to demands on the HR function from senior executives to demonstrate that it adds value and for HR to become more strategic.

At the most basic level, benchmarking consists of measuring performance against industry standards - for example, sickness absence rates or labour turnover statistics across an industry or sector. At the more strategic level, it is about comparing processes, functions and culture to understand how other organisations have reduced absence or turnover, for instance, with the aim of improving performance. Evidence suggests that many HR departments are going no further than simply comparing statistics. It is a good start, but, if the HR professionals really want to help improve organisational performance, they will need to take the next step.