An introduction to benchmarking

This piece outlines the benefits that are accruing to those who have started benchmarking and how you might go about starting to benchmark your organisation.

One of the doors that is opening to arts organisations with the advent of better and more easily shared data is that of comparative analysis. Instead of only being able to use your own figures for internal strategy and external advocacy; tools such as those provided by The Audience Agency, Culture 24 and the Culture Benchmark enable you to compare your data anonymously and confidentially to your peers.

Benchmarking and other forms of comparative analysis are simply means of measuring the relative performance of an organisation. This usually entails using an agreed set of definitions or criteria across the comparison set. The league table of countries and their tally of Olympic medals is a simple form of benchmark where the agreed definitions are the gold, silver and bronze medals. The importance of the agreed definitions is that it means that you know you are comparing apples to apples – vital if the comparison is to be meaningful!

Examples of comparisons already being used in the arts include the way in which Arts Council England uses elements of the annual submission in individual discussions with NPOs on topics such as income diversification. Indeed any time when discussions about ‘best practice’ move from the use of prose to the use of figures are essentially shifting the debate into a benchmarking scenario.

As benchmarking requires the existence of robust data it tends to follow on from work undertaken to establish common measurement criteria and processes of regular measurement & reporting. The three key areas in which benchmarking is emerging as a regular and important activity are:

• Comparative analysis of audience activity
• Benchmarking of business models, income diversification and cost management
• Analysis of the social impact of public funding

The first two of these are already well under way in the arts, the third can be expected to become a normal activity in the sector over the next five years.

Simply put benchmarking helps you define what ‘good’ and ‘best’ mean in a particular field of activity so that you can then work out how you stack up against ‘best in class’ and make informed decisions about what improvements are needed.

Without a benchmark it is likely that when planning the next year’s budget or estimating the audience figures when building your forward plan that you will work on the basis of ‘like last year but plus/minus a bit’. A recent example of how the lack of suitable comparison figures has impacted the sector is the focus over the last few years on the development of private donation income streams. Whilst this type of income certainly has a role to play, many organisations have over-estimated the percentage of income that donations might contribute. The risk in this case is that an organisation will base its expectations not on what the data shows to be a sensible figure to aim for but instead on the gap it needs to fill or the general discussions coming from government or funders which are themselves not based on any robust data analysis but are the optimistic views based on a handful of case studies being cited as the goal to aim for.

Such optimism is dangerous when the future of an organisation is at stake. Pragmatic realism based on good research into the likely successes of different income generating options is preferable!

Benchmarking data is useful to all arts organisations to inform strategic decision making and to underscore their achievements when reporting to funders and other stakeholders.

Just how different would your senior management team and board meetings be if instead of saying ‘we need to win more grant applications’ or ‘we need to do something about raising donations and sponsorship’ you could start with something like ‘the average percentage of income achieved from trusts and foundations for an organization of our size, sector and profile is X% of turnover. We are currently achieving Y% from these sources - can we discuss how we get from Y to X in the next 1-2 years?’. Or alternatively ‘We are already in the top quartile for income achieved from donations so whilst we will aim to grow it we can now focus our attention on our earned income approaches.’

The latter feels far more confident, more focused and more in control of the factors that are affecting the success or failure of the organisation. This is the crux of the matter. Benchmarking your organisation helps you to become clearer not just about what your strengths and weaknesses are (you probably have a good intuitive knowledge about these) but the scale of these strengths and weaknesses and thus the size of the mountain to be climbed. This helps you prioritise your activities better as you have a quantitative understanding of the difference between make or break activities versus nice to haves. In summary, the internal uses of benchmarking and comparative data are:

• A quantitative understanding of your strengths and weaknesses (versus your peers)
• Identifying areas where improvement is needed and clearly defining the scale of the change you wish to make
• Informing plans to diversify income, manage costs and develop audiences
• Helping to set goals that are more than ‘plus a bit, minus a bit’ and instead are based on progress towards best in class

One way to think of the role of benchmarking when talking to people outside your organisation is to think of it as a way to underline your key messages. In the main, data is not a substitute for fine prose but it does help drive a message home. How much stronger would your message be if instead of saying that you’ve been growing the income you achieve from royalties, you could say that whilst the national average for arts organisations when it comes to income from intellectual property is 1% of turnover you are already achieving 2% and it is set to continue to grow.

This sort of message that communicates your successes is great for communicating with funders both public and private. Such soundbites can be reproduced by funders in their own reports and are very memorable when communicated verbally in presentations etc.

If you rely heavily on a cohort of volunteers then using comparative data to focus their attention on something like, raising income from the café, or increasing the number of people who buy the ticket that includes the donation, is a useful approach. It works because you can show a before and after and therefore the volunteers can see the impact of their actions and can measure the successes more easily.

For some individuals data is the preferred way to receive information. For example, from individuals located in finance departments with less direct access to the arts from the Treasury at a national level through to the finance departments of Local Authorities. These are individuals who are used to interpreting figures to reach their conclusions and find this easier than reading prose explanations. It is therefore very useful to be able to communicate both in prose and in figures – treat it as if you are speaking two different languages and choosing your language depending on who the other party is.

In summary, benchmarking can be used with stakeholders in the following ways:

• Communicating your achievements
• Making stronger funding applications
• Galvanizing volunteers and members around key issues/challenges

It matters who you compare yourself to. If you are running a visual arts organisation that doesn’t have a public space it is unlikely to be wildly useful to compare yourself to Tate as the differences will vastly outweigh the similarities. Having said that whilst you might be interested primarily in a comparison against your immediate peers, there may also be times when you are in an aspirational mood and you decide that a comparison against a group of organisations who are already doing something that you aspire to will tell you more than just a comparison against the usual suspects. So how do you choose who to compare yourself to?

It is worth thinking about who you consider your peers to be. You are aiming for a list of 10-20 organisations who are roughly similar to you in what they do, how big they are, whether they are located in an urban or rural setting and whether they are in London or not. Think of this as your ‘home group’. So whilst you may well be interested in the national average for say the percentage of income achieved as an NPO, it is just as important that you know how the average for your ‘home group’ varies by comparison to the national average. An example of these sorts of differences can be found in the paper published by Common Practice titled Size Matters which looks at the differences between the business models of large and small visual arts organisations and takes a cohort of nine small to medium sized London organisations as its ‘home group’.

In some senses benchmarking is nothing new. Many museums have been doing it for years as have clusters of larger theatres. The Audience Agency has been running Snapshot Performing Arts since 2003 which offers audience comparisons based on the activities of a cohort of small, medium and large scale London arts venues and Snapshot Visual Arts has been running since 2010.

What is new however is the ease with which such comparisons can now be made and the focus from key funders on using this data to inform funding decisions and report on the impact of their programmes.

Creative Scotland have been revising their annual data submission form in order to enable greater access to their data going forward. The work has looked at not only what data is collected but also how it might be made accessible whilst protecting the sensitivity and confidentiality of the data held.

The Newcastle & Gateshead cluster of larger venues has been harnessing its data for several years and now publishes the results of its economic impact research annually. More about this cluster can be found at http://ngcv.tv/ with downloads of a variety of documents including their annual impact assessment and related briefing notes. Headlines from the 2011-12 data include their total economic contribution to the North East of some £77.6m which supports some 2003 FTE jobs. Their data goes on to summarise the return on investment, the attendance levels, learning & participation engagements, additional visitor spend as well as information on volunteering levels and visitors from outside the region.

The Birmingham Arts Partnership undertook a benchmark exercise for the first time in 2012 as there significant cuts were being negotiated with Birmingham City Council. This work is not in the public domain but headlines include the total turnover, total number of employees and a breakdown of the types of income. This is so that both the cluster as a whole and individual organisations within it can see how dependent they are upon grant funding of various forms and which organisations have particular strengths in different types of earned income from both their tangible and intangible assets. The focus was on the results of key ratios 2, 3 and 5 – see section 5.2 for details. This benchmarking exercise has lead to more in-depth discussions about how the skills in individual organisations can best be used to improve the performance in other organisations in the cluster.

Both Paul Hamlyn and Esmee Fairbairn foundations have been improving their evaluation approaches to enable them to report in more detail. Paul Hamlyn have published Assessing Impact on the social impact of their programmes.

In order to start benchmarking you need to answer three key questions:

• What comparisons would be the most useful to your organisation now?
• What data do you have to hand?
• What data can you get hold of to compare yourself against?

Here’s a bit more detail to help you answer each of these questions.

You do need to know how your business model stacks up vs your peers, you also need to know how you compare when it comes to your largest sources of income and audiences. On that basis we recommend benchmarking your business model first in order to set a baseline for a more detailed comparison of your key income sources, and your on and offline audiences.

If you have specific plans for either a cost cutting exercise or a new income stream add this to your benchmarking shopping list.

This is where the devil is in the detail so rather than give long explanations on the pros and cons of different ratios to look at where the answers would need to be nuanced to cover variations in sector, size and geography lets just pick a top 7 to be getting on with:

1. Equity ratio – this is the reserves as a percentage of total revenue income and thus an indicator of the resilience of the organisation as a whole
2. Revenue concentration – how dependent are you on one or two core funders? What is the highest percentage of income from a single source?
3. Administrative cost ratio – this is the overheads as a percentage of total revenue and it reflects the flexibility of your cost base
4. Profit margin – this is the surplus or profit as a percentage of total revenue income
5. Robust revenue model – the percentage of total income that is classified as ‘earned income’ i.e. non-grant income
6. Intangible assets – is there anything for this line in your balance sheet? What percentage of your net assets or net current assets is it?
7. Asset utilisation – the ratio of fixed assets to total income

It should be noted that this list of key ratios is in line with the recommendations of a number of industry specialists including CIDA Co., Mission, Models, Money and Counterculture.

Now you need to locate your organsation's data. There is a fair chance that you will have one or more of the following types of data in your organisation:

• End of year report and accounts
• Arts Council (England, Wales, Ireland) or Creative Scotland annual submission data
• Audience and or box office data
• Online and social media data

It is worth working out what period to look at. For accounts information annual data is the place to start but you might want to look at monthly or quarterly data for audiences.

When it comes to making comparisons you have two choices: join in with existing benchmarking groups or services vs. collate your own. If you are new to this it is probably easier and quicker to join an existing service or group. The two main benchmarking services available across the UK are those provided by The Audience Agency (audience comparisons) and MyCake's Culture Benchmark (business model). You will find that Culture24 has built an expertise around digital and social media comparisons and in Scotland Culture Sparks and The Audience Business have built an audience benchmarking programme. Don't feel obliged to use these however, feel free to build your own comparisons using data from one or more of the following sources:

Looking at the organisations and clusters who are already benchmarking there are a number of benefits that are accruing to them as a result of their work:

• Goal setting (e.g. income development, cost cutting) becomes more pragmatic and realistic as it is informed by better data. This is particularly valuable in areas like donations and sponsorship where there is a prevailing opinion that this is a growth area but the real benefits are much more variable and are only substantial in certain circumstances.
• Greater clarity within the organisation on how business models in the arts tend to change as the turnover increases or decreases
• More detailed understanding of how the ‘best in class’ achieve their successes
• Access to a succinct, fact-based summary of the organisations greatest strengths and weaknesses
• Greater familiarity within the senior management team of the key ratios and comparison points for the organisation and more regular checking of progress
• Greater visibility with and respect from funders
• Greater visibility as leaders who are using all the resources available to them to continue to develop their organisation in a tough economic climate e.g. the Common Practice cluster

Whilst there is a growing interest in benchmarking amongst the national funders of Arts Council England, Creative Scotland, Arts Council Wales and Arts Council NI, it is really the private trusts and foundations who are leading the way. In particular those trusts and foundations whose interests extend across not just the arts but other parts of the third sector. The Paul Hamlyn Foundation and Esmee Fairbairn Foundation are two funders who have been evaluating the impact of their own activities over the last couple of years and in so doing have started to look at how the impact of the organisations they fund can be measured and benchmarked. The PHF publication Assessing Impact gives a good indication of the future interests and direction of this funder and can be expected to set the tone for many other funders over the next few years. Meanwhile DCMS is keen for public funders to make their data more accessible and publicly available.