By Steven P. Kahn
ARM Tech, and Editor
Practical Risk Management
Copyright © 2004 by ARM Tech. Used with permission.
[This paper was provided by ARM Tech, which publishes Practical Risk Management. It appears in Practical Risk Management as Topic A-19.]
Benchmarking, a widely used tool, is applied (and sometimes misapplied) to evaluate many risk management program elements. This paper discusses the use of benchmarking and how to obtain best results from a benchmarking project.
What Is Benchmarking?
Definitions of benchmarking abound. Four that best illustrate the concept are:
A continuous formal process for comparing the business practices of organizations that are recognized as best-in-class for the purpose of meeting or surpassing industry best practices.
An ongoing systematic process for evaluating the functions of companies that are acknowledged as world-class for the purpose of establishing goals.
The continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders. (From David T. Kearns, CEO, Xerox Corporation.)
The search for industry best practices that lead to superior performance. (From Benchmarking: The Search for Industry Best Practices that Lead to Superior Performance, by Robert C. Camp.)
While definitions vary, the most successful benchmarking projects:
Benchmarking is utilized to identify best practices from other organizations to help improve your organization. A risk manager tries to achieve many goals, including reducing costs, stabilizing costs, communicating risk management results, and improving risk management processes. Analyzing how the most successful risk managers have structured their programs can provide important guidance.
Benchmarking is not merely a quantitative comparison (e.g., comparing workers' compensation loss rates or comparing the cost of risk). Successful benchmarking requires analyzing the processes that lead to a particular outcome (e.g., low cost of risk) to determine why the outcome was achieved.
What to Benchmark
Potential quantitative benchmarking subjects include:
Cost allocation plans.
Allocated loss adjustment expenses (ALAE) as a percent of losses.
Service provider fees.
Excess insurance rates.
Potential qualitative or process benchmarking subjects include:
Broker selection method.
Claims administration firm selection method.
Claims adjusting process.
Scope of coverage.
Some organizations start with a quantitative benchmarking project. If it appears cost reductions could be obtained, the project may move to benchmarking various risk management processes.
How to Benchmark
An effective benchmarking project requires several steps. These are, according to The Benchmarking Book, by Michael J. Spendolini:
- Communicate benchmark findings and gain acceptance.
Establish functional goals.
- Leadership position attained; practice fully integrated into process.
Important points to consider when benchmarking include:
1. Benchmarking Partners. Select organizations known to excel in the specific areas you wish to benchmark. If you plan to benchmark claims administration processes, don't necessarily select an organization because it has a low cost of risk. Also, consider firms in other industries, insurers, or others you might learn from.
Don't confine your search for benchmarking partners to your industry. The goal is not to equal the best organization in your industry. The goal is to become the best organization in your industry. This may require looking at a broad range of organizations.
The benchmarking project will require significant time from your benchmarking partners. Before you include an organization in your project, be sure they understand what is required and will spend the necessary time.
One good approach is to form a benchmarking group composed of five to ten risk managers. This working group can share results, resolve data collection problems, and is more likely to provide necessary data.
2. Benchmarking Team. To collect and analyze data and to put the results of the benchmarking project to use is time consuming. It can require significant time.
You should select benchmarking team members with expertise in the processes being benchmarked, with credibility in your organization, with the ability to communicate, and with the ability to work in teams. Do not select people simply because they are conveniently located, are available when you need them, or because your organization can do without them.
Team members must also be objective. Consider this carefully as you consider risk management staff, broker representatives, and consultants for participation on the benchmarking team.
3. Data Collection Methods. Data can be collected in several ways, and the list that follows sets forth possibilities and the advantages and disadvantages of each.
If possible, collect data through personal interviews. This allows prompt resolution of data definition problems and is likely to produce best results.
Also, many risk managers are buried in surveys. Personal interviews show greater commitment on your part and are more likely to receive the full attention of your benchmarking partners.
Data Collection Options
(Source: The Benchmarking Book, by Michael J. Spendolini)
Meetings and Facility Tours
Expensive (travel costs)
Can be scheduling difficulties between your team and benchmark partner's team.
Surveys or Question Sent by Mail
Review of Published Data
Combination of Methods
Using a combination of methods carries all of the advantages and disadvantages of each method used.
The Successful Benchmarking Project
Here are some points to remember to be successful:
Do the right kind of benchmarking. Consider practices and processes, not just quantitative data. Remember, it is the practice or process that leads to the favorable quantitative result.
Structure the project to maximize learning. Avoid hiring a consultant to visit other organizations. Try to send employee team members. They will learn first hand how your benchmarking partners achieved their results and will establish contacts that may be important later.
Send the right people. The employee team that visits other organizations should be open to change. They must also be able to quickly establish a rapport with others and be able to focus on the critical issues.
Prepare thoroughly. Team members must understand what information is desired and the benchmark process being used. This requires team meetings and data analysis prior to meeting with benchmark partners.
Don't do too much at once. If you want to benchmark many issues, consider splitting the project into several components. You are more likely to obtain thorough responses to data requests if you approach the project incrementally.
Points to Remember
The American Productivity and Quality Centers International has developed guidelines for benchmarking projects. These are:
Refrain from discussions or actions that may imply restraint of trade.
Treat information you receive as proprietary and confidential. Do not disclose information from others without their permission.
Be willing to give benchmark partners the same type of data you request and to share at least some of the results of your analysis. This will encourage participation.
Use the information you obtain to improve your operations, not simply to advertise your success.
When you approach a potential benchmark partner, speak to senior management. Your first approach should not be to the unit you wish to benchmark.
Don't use your partner's name with others without permission.
Benchmarking is a very useful tool. Properly applied, you can gain great insight into the processes that yield the results you wish to achieve. However, a properly executed benchmarking project is not simple or quick. It requires careful preparation, analysis, and execution.
Benchmarking: The Search for Industry Best Practices that Lead to Superior Performance, by Robert C. Camp. Copyright 1989 by ASQC Quality Press, 611 E. Wisconsin Ave., Milwaukee, WI 53202.
The Benchmarking Book, by Michael J. Spendolini. Copyright 1992 by AMACOM, a division of the American Management Association, 135 West 50th St., New York, NY 10020. (2nd edition published in 2000.)
About the Author
Steven P. Kahn, CPCU, ARM, is a managing director with ARM Tech and one of the firm's founders. In his more than 25 years as an independent consultant, he has worked with numerous pools, individual government entities, and other types of organizations throughout the country. He is the editor of Practical Risk Management.
ARM Tech provides professional guidance in the areas of strategic risk management, financing alternatives, and technical analysis to assist clients in understanding their portfolio of risk. ARM Tech, Irvine, Calif., can be reached at (949) 608-6500, or www.armtech.com.
Practical Risk Management, published by ARM Tech, is a widely used risk management reference. It is used by managers in more than 30 countries and is available in print and on the Web (www.pracrisk.com).
About the Symposium
Benchmarking for Continuous Improvement in Risk Management is presented as a public service of the Public Entity Risk Institute (PERI), 11350 Random Hills Rd., Suite 210, Fairfax, VA 22030. Web: www.riskinstitute.org.
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