Three Types of Benchmarking
By Jeffrey Scott
The most sophisticated form of benchmarking is to compare your company, especially your divisions, with those of other companies. It is difficult to benchmark with direct competitors but reports, such as PLANET’s Operating Cost Study for the Green Industry, can help you see if you are in the right realm with your numbers.
The best form of benchmarking is done with other owners who will not only share their numbers with you, but will also share their operational explanation for what they are doing and not doing. (More on this later)
Dollars vs. Percents
Except for wages and pricing, 95 percent of the time you need to be comparing “percents”; this allows you to negate the difference in volumes and focus on what is truly comparable. For example, if you had a smaller volume the previous year or if you are comparing with a larger company, you want to look at percents.
Best in Class vs. Industry Average
It’s important to know where you stand compared to industry averages, but benchmarking against best-in-class averages is far more profitable. Therefore, don’t set industry averages as your goal. Consider it the minimum you need to reach to get a ticket to the game of success. (Keep in mind: Some best-in-class benchmarks mean people are spending more, not less; for example, in training and marketing.)
The three main categories to benchmark are marketing and sales, productivity and employee turnover, and time management.
Marketing & Sales
The main benchmark to measure is your return on investment (ROI). For each marketing initiative, what’s your ROI? On average, I like to see a return of 10 times on my marketing dollars. However, I will accept less if the investment is infrastructure related (website build-out) or low cost (referral incentive). I will accept zero ROI, if it is highly strategic, like community service, which can take up to five years to show a return.
The classic marketing benchmark is your marketing spend as a percent of revenue. There is a wide range of benchmarks here, but on average, successful companies spend more, not less. Between 1 percent and 3.5 percent is the norm, with some very successful companies spending more than that, especially during a growth phase.
There are three critical sales benchmarks to look at: closing ratio, upsales, and customer retention. Upsales, measured as the amount of enhancement sales made (to a maintenance client) as a percent of the maintenance contracts, is the one benchmark most often ignored. The industry average is low (20–30 percent) but the best in class are hitting 50 percent in commercial and 100 percent in residential.
Productivity & Employee Turnover
There are seven critical benchmarks to follow: with the most overlooked being “divisional gross profit.” Most companies lose or waste profit in one, but not all of their divisions. Therefore, it is critical you track your profit by division in order to identify where you are truly doing above average (if anywhere) and where you have the opportunity for big gains. You should also be tracking—by division if possible—net profit, overtime, contribution per hour, total payroll, equipment, and employee turnover.
Some of these benchmarks you track daily (contribution per hour) some weekly (payroll as a percent of revenue), some monthly (net profit), and some semiannually (equipment). Tracking employee turnover in key positions is critical in order to measure your corporate memory. Too high a turnover and you lose corporate memory and don’t build momentum.
The goal of owning your business is to create a lifestyle for yourself. However, most entrepreneurs get sucked into their business and don’t get to really enjoy the fruits of their labor. The big picture benchmark is “how many weeks vacation in total are you taking.” At a minimum, you should be taking three weeks; taking six weeks is not unheard of. This is important because if you are always working “in” the business, you will not gain the perspective needed to better grow and manage it. You need the mental breaks. You should also be measuring how much time you are working “on” the business in a given week, and how much “undisturbed” time you get each week.
Putting This Into Action
Just looking at the numbers alone won't get you to the promise land. You have to engage in an honest “drill down” conversation about why your numbers (percents) are different from those you are benchmarking against. It is this deeper discussion that will uncover the opportunities for you to exploit. (We call this “peeling the onion.”)
EXAMPLE: Mike Kukol from Horizon Landscape in N.J. sat down with seven other contractors to benchmark his numbers (during one of my Leader's Edge peer groups for landscape business owners). He found that one of his divisions was bringing in less than the same division at other peer group members’ companies. Overall, there was a gap of 10 percentage points between his company gross margins and those of the best company in the group. The group proceeded to "peel the onion" on his business, and it uncovered five distinct issues. Ironically, one issue resulted from his excellent employee retention. Mike used this data to recruit a new manager for his low performing division in order to invigorate it and the company culture. He also used the data to reset goals for all his key managers. His profits increased dramatically based on the feedback he got from this peer group.
Jeffrey Scott, MBA, is an author and business consultant who helps landscape contractors build their business and maximize profits. To learn more about his peer groups “for landscape business owners who want to transform and grow their business” visit GetTheLeadersEdge.com.