How can benchmarking be used effectively to measure performance and identify the scope for improvements in efficiency? What are the challenges of conducting and applying benchmarking in an incentive-based regulatory regime?
Our benchmarking and performance assessment work
Benchmarking and performance assessment are core areas of Frontier’s expertise. We have provided advice on the measurement of efficiency and productivity across a number of industries including electricity, water, gas, local government, charities, schools, hospitals, and police patrols.
Our advice on economic benchmarking has been applied in a number of different contexts. In the context of incentive regulation, we have assisted with the estimation of comparative efficiency to set catch-up targets and base-year cost reductions, as well as with productivity analysis and the estimation of ongoing efficiency to set X-factors. We have assisted regulators, regulated businesses, and industry associations during regulatory control reviews, as well as private sector clients with regulatory due diligence advice. Our advice on benchmarking has also been used outside of regulation to help companies monitor performance and identify and estimate the impact of operational levers for improvement.
Frontier has expertise in the application of a range of performance assessment techniques including total factor productivity (TFP), corrected ordinary least squares (COLS), stochastic frontier analysis (SFA) and data envelopment analysis (DEA) to benchmark operational (cost, production and profit) performance. We have used these techniques to assess the efficiency in operational expenditure (opex), capital expenditures (capex) and total costs (totex), and the account for tradeoffs between different cost categories. This includes both top-down analysis as well as bottom-up benchmarking and category-analysis. We have experience with both national and international benchmarking.
Owing to our extensive experience in the area of performance assessment, we understand the strengths and limitations of the various techniques that are available and data that is used to measure performance. Clients often seek our advice on the ways in which uncertainty should be accounted for when applying productivity and efficiency analysis in practice.