Understanding Balanced Benchmarking

A different perspective on profit and performance

Balanced benchmarking provides a mechanism by which to assess and manage business branches and units. It also provides a unique insight as to the available paths to improve productivity and complements other analytical tools. The combined effect is that its use provides insight into best practices and ways to improve productivity.

manage business branches

A technique called “balanced benchmarking” provides managers with a sophisticated mechanism by which to assess and manage the effectiveness of different branches or units.

Managers can’t always trust their intuition about how employees will perform. Intuition can be misleading, or just plain wrong.

A growing number of savvy service businesses are using something authors H. David Sherman and Joe Zhu call “balanced benchmarking” to help assess and manage the effectiveness of their different branches or units.

Sherman is a professor of accounting at the D’Amore-McKim School of Business at Northeastern University in Boston, and Zhu is a professor of operations and industrial engineering at the School of Business at Worcester Polytechnic Institute in Worcester, Massachusetts. In their article, “Analyzing Performance in Service Organizations”, published in the Summer 2013 issue of MIT Sloan Management Review, they detail the ways that companies are using a sophisticated linear programming technique called “data envelopment analysis,” or DEA. They use the term “balanced benchmarking” in talking about this analysis.

“Balanced benchmarking is unique both in its ability to identify paths to improve productivity and in its value as a complement to other analytic techniques,” they write. In addition, they observe that “Balanced benchmarking simultaneously considers the multiple resources used to generate multiple services, along with the quality of the services provided. For example, bank branches can use six or more types of resources and provide 20 or more types of services, all of which are considered with balanced benchmarking. By combining this information, balanced benchmarking provides unique insights about best practices and opportunities to improve productivity and profitability — information not available with other techniques.” 

Looking at data in this kind of detail has been done by banks, insurance companies, computer manufacturer field service organizations, supply chains, and more. In the non-profit arena, the methodology has been adopted by government agencies, school systems, and universities.

Sherman and Zhu explain that balanced benchmarking “…allows a company to compare various business units (for example, the different stores of a national chain) in terms of different inputs (the number of sales clerks and managers, the square footage of the display space, the inventory, the advertising expenditures, the utilities used and so on) that are used to generate a number of outputs (total revenues, profits, number of customers served, average sales and number of items purchased per customer, customer satisfaction ratings and so on).”

For instance, consider a hypothetical example of a small chain of five custom-tailor shops. Take into account just two inputs: employees (measured in labor hours, or H) and supplies (measured in dollars, or S). Sherman and Zhu show that all five shops could have the same daily revenues and services through five different combinations of labor hours and supplies. Using this kind of analysis would show quite clearly if one store is less efficient than another if that one uses the same number of supplies, but more hours to achieve the same output as another store.

Sherman and Zhu note that balanced benchmarking goes well beyond crude metrics and ratios such as profitability and account billings per employee to assess the performance of different service providers—say, the London and Tokyo offices of a global advertising agency.

They write: “…[t]he power of balanced benchmarking is, of course, more apparent when there are many service units being evaluated, up to, say, 3,000 physicians or 2,000 bank branches, where the units are using multiple resources to provide several services (sometimes more than 20 types of service) and where these units might be located near each other or in different states or different countries.” 

For a complete overview of balanced benchmarking and managerial lessons from the dozens of studies Sherman and Zhu reviewed, see here to read the full article. 

This article is adapted by Leslie Brokaw from “Analyzing Performance in Service Organizations” by H. David Sherman and Joe Zhu, which appeared in the Summer 2013 issue of MIT Sloan Management Review.

Copyright © Massachusetts Institute of Technology, 2013. All rights reserved.