But figuring out who’s the best in the mechanical contracting business takes more than just looking up at a scoreboard. “We don’t have a public forum to decide who’s best or why they’re the best,” said Jerry Jackson, president of FMI, during a session on “Performance Benchmarking” at the recent MCAA convention. “We need to bring visibility to the process of profitability.”
To shed light on the subject, FMI and MCAA recently undertook a joint venture to document the “best-of-class” practices of highly profitable contractors. In response to the project’s initial attempt, 48 MCAA member firms filled out an extensive survey that measured more than 250 “metrics,” or financial measurements of their businesses. The members paid $395 to take part and had to give financial data that covered the past three years. Once they sign on, the participants also promise to fill out the survey again every year.
Compared to Whom? Bench-marking is just another name for comparing. But what exactly you compare and how you go about the process is what separates the three different types of benchmarking.
Self-comparison or baseline benchmarking, for example, measures a particular company’s performance against its own past performance. “It’s relatively easy to do, but the problem with it is that you’re only measuring yourself against yourself and you may not be the best,” Jackson said. “You will improve, but you’re not likely to make any major breakthroughs.”
The second type called process benchmarking purposely compares a company’s performance with another company’s. For example, Xerox used the method during the 1980s when it was having its head handed to it by any number of Japanese competitors. In order to make improvements to its shipping and receiving procedures, Xerox emulated L.L. Bean, the well-known catalog company.
“The main idea is to find the best practices, regardless of the industry,” Jackson explained. “But the tendency is go outside your own industry. As a result what you choose to compare and whom you choose to compare it to can be somewhat subjective and very time-consuming.”
Performance benchmarking, on the other hand, identifies the best of class by namely treating a specific industry as the “classroom” and a company’s financial ratios as the “grades.”
So who makes up the best of class? “The best of class is determined by profitability. Period. End of paragraph,” Jackson said. As a result of the number of participants, FMI broke down the results into two camps: firms with between $2 million-$25 million in sales, and firms with more than $25 million in sales. Jackson said that with more participation, “we could slice the results much finer, down to increments of $1 million if enough firms joined the process.”
According to the tabulations, the Best of Class for each sales group had very similar profitability ratios. For example, the $2 million-$25 million category had a return on investment last year of 42 percent; a return on total assests of 14 percent; and a return on invested capital of 36 percent. The larger mechanical contractors had a ROI last year of 45 percent; a ROTA of 14 percent and ROIC of 37 percent.
Although performance benchmarking focuses on financial results, the process also seeks to connect business practices to those results. “We do need more of a timeline before we can emphatically say, ‘These are the top five things you should do.’ However, just by looking at the results we have to date, we can tell you what practices are at least ‘associated’ with profitability.”