An underutilized resource, benchmarking is often lost in the shuffle of opinions from internal leaders and external consultants. Yet benchmarking is a powerful tool which leverages inexpensive observation over costly trial and error.
Benchmarking in Business Architecture
Business architecture is a vast subdomain of enterprise architecture, and many professionals can easily spend the majority of their career specializing within this space. Business architecture is the discipline which focuses on the design of the business itself. This entails capability mapping, business process design, SWOT analysis, risk management, and many other methodologies.
Yet at the end of the day, once a business sets forth in its mission to produce a product or service, more practical questions arise. Questions such as:
- Should we build or buy an analytics platform?
- Should we build a giant sales team, outsource our sales force, or use a hybrid approach?
- Should we use a marketing agency? If so, who are the best ones for us?
- When is the right time to hire a CIO?
These questions are often answered through a combination of in-house and outside expertise. In-house expertise often stems from seasoned leaders who have the salient experience. Outside expertise often comes from consultants who provide business and/or technical expertise.
In this article I’ll explain a different approach for answering common business architecture questions; one which uses a specific type of competitive intelligence called comparative benchmarking.
The Case for Benchmarking
The term “benchmark” actually has its roots in traditional architecture. A benchmark was a physical mark used by surveyors to serve as a stable reference point for further construction.
In today’s business world, standards remain elusive. Highly regulated fields such as banking or pharmaceuticals may have to abide by strict government standards, but general business domain measurements are inherently subjective and vary greatly from sector to sector and company to company.
The goal of benchmarking is to compare ourselves to either a standard, or similar-sized competitor. We do so in order to avoid making unnecessary mistakes and/or reinventing the wheel. In other words, we want to know what works via inexpensive observation rather than costly trial and error.
How CI and EA are Complimentary
In my opinion, enterprise architecture (EA) and competitive intelligence (CI) are merely two sides of the same coin. EA is focused inward towards the micro-view of the company itself whilst CI is focused outward on the macro-level market and its body of competitors.
CI and EA together create a symbiotic relationship. Competitive intelligence of the external landscape informs EA of relevant business architecture parameters and limits. Likewise, internal EA insights can be used in external market analysis, M&A, and tactics for outmaneuvering competitors.
Example Benchmarking Use Case
Now that the theory of benchmarking is behind us, let’s jump into a more real-world scenario. Let’s assume we work at Acme Firewalls; a security company which produces firewalls among other security products and services. We do about $1.5b USD in revenue annually, and we have audacious plans to grow our business. First, we have some tough questions to answer:
- What percentage of revenue should be spent on sales and marketing?
- Where are good places to hire technical talent?
- What should our profit margin be?
- How much should we be spending on R&D?
As with every corporate effort, there should be a goal; and benchmarking is no different. Here, our goal is simply to answer the questions above.
Before jumping into comparing our company to others, it’s best to understand the broader landscape first. This entails ascertaining which market we’re playing in, and who the key players are. There are many different sources to help obtain this information: Gartner Magic Quadrants, Forrester Waves, Standard Industry Classification Codes (SIC), and others. Although market segments aren’t necessarily finite, total addressable market and market share by competitors is always a good thing to understand as it foreshadows the degree of competition one can expect to encounter.
Once the market and associated competitors are established, it’s time to start comparing our company (Acme Firewalls) to a handful of similar-sized competitors.
It’s important for us to compare our company against true competitors as well as perceived competitors; that is, competitors our customers would pit us against in a buying decision. For the sake of argument, let’s say Acme Firewalls is similar to Check Point Software and Fortinet; two formidable competitors with similar revenue streams and global footprints.
Ethical competitive intelligence should use only information which is publicly available or given freely by the competitor in question.
As both Fortinet and Check Point are publicly-traded companies, three out of the four questions we have can be answered by examining SEC 10-K filings. The last question related to hiring would need to be answered by examining the job boards of these two firms.
In the example below, we can see that these two companies are similar in revenue and both have a global footprint with a heavy concentration of open positions located within the United States.
While recent revenue (top line) may be similar among these two companies, profits are a different story. Fortinet’s button line rocketed upward from 2017 to 2018, yet their profit margin (the space between the green revenue line and the red and orange areas below) is nowhere near as spacious as that of Check Point. Of course, that may be by design. Fortinet may not be inefficient, but rather, are using almost a billion dollars annually to ramp up a massive sales and marketing army for future growth.
Although there are similarities and stark contracts between Check Point and Fortinet, we can start to answer some of our questions through comparison:
Q: What percentage of revenue should be spent on sales and marketing?
A: Roughly 60% – 70% of total opex or 33% – 47% of revenue
Q: Where are good places to hire technical talent?
A: The United States, Canada, Israel, Japan, France, and India to name a few.
Q: What should our profit margin be?
A: 25% – 40%
Q: How much should we be spending on R&D?
A: 20% – 25% of total opex or 11% – 13% of revenue
An interesting (and very useful) side effect of scaling up a CI/benchmarking practice is the formulation of aggregate metrics. Rather than starting with a company and then examining its metric, you start with the metric (profit margin for example) then query all the companies that satisfy the threshold. The results are fascinating, and such information becomes highly actionable in an array of other business use cases such as investing and acquisitions.