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Internal vs. External Benchmarking

When you think about benchmarking there are two fundamental types: internal and external benchmarking. As the names imply, internal benchmarking describes comparisons within an organization while external benchmarking involves comparing the subject company, or property, to external organizations. These external groups could either be within the same industry or companies could broaden their perspective and look at best practices from other industries.

Internal Benchmarking

Organizations with multiple locations will often start with internal benchmarking. The primary reason, because the benchmarking data is more readily accessible. For example, a hotel management company which operates several hotels of the same brand will have access to operational and financial data for all of these properties. They can make comparisons, such as looking at rooms revenue and labor costs for these hotels, without having to go searching for the information from an external source. Other examples of expenses which could be explored include: linen, complimentary food & beverage and information technology. All of which can be major costs and damaging to overall profitability if not kept in check.

Once the benchmarks are computed, and comparisons made across locations, the top performers can be identified. Then, it is time to dig a little deeper. Maybe Hotel A has a much higher cost of labor than Hotel B. Well, are they in a location with higher minimum wages? Is Hotel A a union hotel? Union hotels will often have a higher labor cost than non-union hotels; therefore, when benchmarking, make sure the hotel characteristics are examined to filter out operational discrepancies. Once all of the noise has been factored out of the figures, then best practices can be determined and spread to the other properties.

There can be limitations to internal benchmarking. The major drawback, a company needs to be aware of their competition and not just be inwardly focused. Organizations should compare how they are operating against competitors in their industry, or even branch out to other industries, in order to remain on par; or, take it a step further, and gain a lead.

External Benchmarking

External benchmarking does require additional planning and effort as it requires the collection of benchmarking data from other companies. In order to gather external benchmarks, an organization has multiple options such as creating formal or informal alliances with other companies to gather data and compare operational best practices, purchasing industry reports or examining public financial filings.

In the lodging industry there are multiple third-party companies which offer formal benchmarking services. It is up to the organization going through the benchmarking process to determine which third-party provider fits their needs the best. The following are a few of the questions which should be considered when searching for a benchmarking partner.

  • What data are they collecting and providing?
  • How are they collecting data? Would it be a cumbersome process to implement?
  • How are they insuring data comparability between organizations?
  • What are their data security practices?
  • Who has access to company data?
  • How are competitive sets created?
  • How quickly can I change or create a comp set?

The key is finding a third-party benchmarking company that will be your partner. The company's goal should be to assist you in your operation and not to just sell you a report. How flexible is the company? Will they create custom reports based on your needs and how quickly can they develop these reports? Also, determine what educational offerings this firm can provide. Are they simply pushing out the numbers or trying to educate the industry?

Benchmarking Process

Whether you are doing internal or external benchmarking, the steps in the benchmarking process remain the same. First, define what is to be benchmarked and identify the best practices. In the lodging industry there are many different processes and measurements which can be benchmarked. For example, if you are looking at processes, it could be how quickly guests are checked into the hotel; or, operational benchmarks may include NetRevPAR, TrevPAR and GOPPAR.

In the case of financial and operational benchmarks, it can be rather difficult to get a proper gauge of what the competition is doing. In most instances, it is necessary to work with a company that specializes in benchmarking as most hotels will not share their financial data with a direct competitor. A third-party benchmarking company is able to gather the data and provide anonymity to the contributing organizations. In return, the companies can have access to each others data for benchmarking comparisons.

Which leads us to the next step in the benchmarking process, comparing company performance to best practices. The information from a benchmarking firm will allow you to determine where you stand against your competition. If you are the top performer, great! If not, then you can utilize the measurements to further analyze your operation and determine if changes need to be made. Sometimes the competition just simply has an advantage in certain areas and will be a better performer; but, the majority of the time, operational processes can be updated to bring operational metrics more in line with the competition.

Steps in the Benchmarking Process

  • Step #1: Determine What to Benchmark
  • Step #2: Identify Best Practices
  • Step #3: Compare Company Performance
  • Step #4: Address Performance Gaps

The final step, continue to monitor and repeat the entire benchmarking process on a regular basis. This will insure that your company stays at the forefront and does not lag behind the competition.


Types of Benchmarking

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