Benchmarking performance indices: pitfalls and solutions

Many organizations include benchmarking as a component of their performance management system. Often, a performance index is used to quantify the ability of an organizational entity to operate successfully. Benchmarking a performance index is done inappropriately when statistical methods are employed that ignore sample size effects or use aggregate performance data over a period during which changes occurred within the organization. Benchmarking will also be ineffective when invalid targets are employed. When benchmarking is done incorrectly, customer satisfaction may actually decline due to gaming and poor morale among employees. Based on the philosophy of W. Edwards Deming, the techniques of statistical process control (SPC), and basic undergraduate statistics, a system is described for effectively benchmarking a performance index. Examples are presented to illustrate the pitfalls that exist in many performance management systems and to explain the system presented for effective benchmarking.