Risk Management

Benchmarking is Great—But Only with the Right Benchmarks

It is a very practical desire to want to know how your business processes match up to the processes of other businesses. Benchmarking can provide very crucial indications of whether your organization is really headed down the right path. But what happens when you benchmark wrong? Paul Teague writes for Procurement Leaders about the danger of using benchmarks to compare the wrong things.

Right and Wrong

Teague points to a report from the US Government Accountability Office (GAO), which finds that the Department of Defense (DoD) has been using the wrong benchmarks for oil prices, increasing risks in the military budget. DoD has been using the West Texas Intermediate (WTI), which it turns out has been long outdated in its usefulness compared to the similar Brent benchmark. Teague elaborates:

Is the GAO right when it calls the WTI the wrong benchmark for the DoD? Probably. In fact, there is some evidence that the WTI benchmark, which represents US prices, is becoming out of favor. According to Jamie Webster, an oil analyst for leading economic forecasting and analysis firm IHS Global Insights, one reason the WTI is lower than the Brent is its US origin. The boom in oil production in the US has resulted in more light, sweet crude oil than demand requires.

This is a case of a benchmark sounding right on paper but being disturbingly inaccurate when put into practice. Teague says that when benchmarking, you must use parameters that are realistic and appropriate for your organization. If that means a little extra digging to ensure the metrics you select are really best suited to the task at hand, so be it. The point of benchmarking is to help you keep your footing as you scale the mountain, and taking too hasty a step could send you slipping straight off edge. You can read the original article here: http://www.procurementleaders.com/blog/my-blog–paul-teague/2014/07/14/benchmarking-is-great—but-only-with-the-right-benchmarks

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