The Myth of Benchmarks
Beware the myth of benchmarks. Lots of time, energy, and money is spent running around trying to measure and conform to industry benchmarks. But strategy is about moving you away from the middle – towards a differentiated position.
For example, your CEO comes to you and says “Our spending on Sales & Marketing, R&D, or G&A is too high! We need to bring that number down to X% of revenue.”
The typical response in many companies is to immediately dispatch a horde of Six Sigma Black Belts to undertake various improvement projects.
Few organizations take the time to ask these questions:
Why is X% the right number?
What should our number be?
How does this fit with our overall strategy?
Suppose you were concerned with spending on employee benefits. As a specific example, consider the SAS Institute. SAS is one of the largest privately-held software companies in the world (annual revenues are about $2.2B), providing statistical analysis software to large companies. SAS is known for its family friendly culture and extremely generous employee benefits – yet they are not known for particularly generous salaries.
I would guess that SAS is probably in the 99th percentile of spending per employee on benefits, when you consider everything that they offer to employees.
Yet this spending reflects a deliberate strategic choice about how to engage and retain their employees.
The tradeoff for SAS is in employee retention – their turnover rate is 4%, not 20%, compared to other high technology companies. SAS clearly prefers this tradeoff and is able to sustain year over year growth and customer satisfaction. If they focused overly on a single benchmark such as employee benefits, their entire strategy would collapse.
Strategy is what differentiates you – so why should you conform to a benchmark? The critical question is to determine where you must be unique and where you can be good enough.
Should we spend more or less on this function or line item? The only answer is it depends – on your overall strategy for how you create a differentiated value proposition in the marketplace. As senior leaders, it is your job to think through the overall system that you are building and to determine and communicate which benchmarks matter – and which do not.
