(FORTUNE Magazine) – WHEN HE WAS in charge of General Motors' highly profitable European operation, John F. Smith Jr. always asked the same question before approving a major investment: ''Have you benchmarked?'' By that he meant, Have you looked at how other companies have built a similar plant? Sometimes, after seeing how competitors did it, his staff found they could build parts of the plant for 30% less than their first estimate. In one of his first acts after the board installed him as president of all GM this spring, Smith bolstered the use of benchmarking throughout the company. Benchmarking should not be confused with industrial espionage. Rather, it is the art of finding out, in a perfectly legal and aboveboard way, how others do something better than you do so you can imitate -- and perhaps improve upon -- their techniques. It may or may not involve tearing down a competing product to see how it's built. Through research and field trips conducted by small teams, you can compare your products and processes with those of competitors -- yes, they sometimes cooperate -- or with those of noncompeting companies in your industry or enterprises in completely different businesses. When a company as insular as GM once was employs benchmarking so widely, the practice has clearly arrived. Although a few U.S. corporations have benchmarked for a decade or more, the technique came into widespread use only in the past couple of years. AT&T, Du Pont, Ford Motor, IBM, Eastman Kodak, Milliken, Motorola, Xerox, and other leaders in the drive for quality and productivity now use the technique as a standard tool. When Ford decided to build a better car back in the early Eighties, it compiled a list of some 400 features its customers said were the most important, then set about finding the car with the best of each. Then it tried to match or top the best of the competition. The result: the hot-selling Taurus. Updating the Taurus for 1992, Ford benchmarked all over again (see photographs). In a survey of 580 organizations worldwide from four industries -- computers, autos, hospitals, and banks -- the American Quality Foundation and Ernst & Young recently found that 31% of the U.S. enterprises regularly ^ benchmarked their products and services; only 7% never did. That is more than either Japanese or German companies do. IBM's new benchmarking office records 500 studies performed by the corporation, mostly in the past two years. AT&T, with 14 consultants in its benchmarking office, has run 120 studies in the past couple of years and has 20 under way now. Roger Milliken, chairman of the textile company that bears his name, cheerfully admits: ''We borrow shamelessly.'' Successfully too. Milliken won the coveted Malcolm Baldrige National Quality Award in 1989. The award was established in 1987, and during the past three years, in the scoring the Baldrige judges have increased the emphasis on benchmarking. Xerox undertook what is widely regarded as the first benchmarking mission in the U.S. in 1979. Up to then, the Japanese had been copying assiduously, mainly by traveling around, watching what others did, and checking with related companies in their keiretsu. Taiichi Ohno records a brilliant precursor of benchmarking in his book about the Toyota production system, which he created. On a trip to the U.S. in 1956, he visited the automakers as a matter of course but got his best idea from looking at American supermarkets. They provided an impressive variety of products because they replenished foods rapidly in response to sales. Customers ''pulled'' the goods through the stores. Picking up on the practice, Toyota started pulling parts through its production system at precisely the time and in exactly the quantities needed. That's when just-in-time manufacturing was born. AS XEROX got into benchmarking it learned techniques that have since become standard. What first drove it to benchmark was the shock of finding Japanese manufacturers selling midsize copiers in the U.S. for $9,600 each, considerably less than Xerox's production cost. Management at first assumed the Japanese were dumping. Frank Pipp, an earthy onetime GM foreman who had just been called home from Europe to become Xerox's manufacturing chief, thought there was more to the Japanese performance than that. He decided to find out what. In a crucial decision, Pipp took a team of line managers rather than staff people to Japan to make a detailed study of the competition's costs and processes. When competitors are that much better, line managers who will have to make the changes just won't believe the findings unless they have seen for themselves. The team got most of its information from Xerox's own joint venture, Fuji-Xerox, which knew its competition well. What the team found, Pipp says, was ''shocking and nauseating.'' When he brought the news back to headquarters in Stamford, Connecticut, Chairman Peter McColough said, ''We can't be that bad.'' Pipp replied, ''We are.'' Facing up to those facts marked the beginning of Xerox's recovery, and benchmarking has served the company as a key tool ever since. Xerox's next step with the technique harkens back to Ohno's imaginative borrowing from the supermarkets. In the early Eighties, Robert Camp, Xerox's benchmarking manager and author of a text on the subject, read a magazine article about L.L. Bean, the firm that outfits the outdoor set. Among other virtues, Bean is known for fulfilling orders quickly and accurately. Why, Camp asked himself, should Xerox benchmark only other office equipment companies? Business practices are business practices. Besides, companies that are not direct competitors are more likely to open up. A mission to Bean's hometown of Freeport, Maine, revealed that warehouse workers there could ''pick and pack'' items three times as fast as Xerox's. The secret lay not in high technology but in intelligent planning and the right kind of computer software. Items are stored in Bean's warehouse not according to category but according to velocity: The items that sell the fastest are shelved closest to the desk where the pickers get their order sheets, and the slowest-moving items the farthest away. That saves steps. Orders come in randomly, but the software sorts them so that the pickers can combine trips for, say, a whole batch of red flannel shirts ordered during the day. These and other techniques helped Xerox redesign its warehouses -- and started a procession of benchmarkers to Freeport that soon became something of a burden to Bean. AMONG THE LESSONS Xerox and others have learned is how the process can go awry. Consider what happened when Xerox decided to check out a suspicion that it was spending too much processing orders for relatively small-ticket items, from toner to typewriters, that it sold through retailers. Six years ago the unit handling these commodity-type products put together a steering committee of five vice presidents and a benchmarking team of five people who worked on the project full time. The first step in benchmarking is to understand your own process in detail. So the team took over a conference room in the Rochester, New York, offices, covering the walls with flow charts on how Xerox processed orders. Then they picked 14 other companies that handled similar products to study, among them Digital Equipment, Hewlett-Packard, IBM, Spectrum Office Products, and United Stationers. Knowing that the best practice is sometimes just down the hall, they added two internal divisions as well. The team whittled the companies down to six that seemed best at order processing (confidentiality agreements forbid Xerox from identifying which), and they visited each. Camp says ideally you send out three people at a time -- while one asks a question, another takes notes, and the third thinks of the next question. A visit should take a day. Among other things, the team discovered that Xerox wasted effort tracking the goods by serial number as if they were big-ticket items. Other companies didn't bother. Eighteen months after beginning its work, the group came in with devastating conclusions -- Xerox spent $80 to $95 processing each order, vs. $25 to $35 for the companies it benchmarked. If Xerox could bring the cost down to the others' average, says Camp, it could save tens of millions of dollars. Then benchmarking's nemesis struck. Just as Pipp had encountered disbelief years earlier, Camp sensed strong resistance to change in upper management. Xerox called in several consultants, who verified the findings. Finally, after two years, the study became moot: Xerox's product lines and organization changed while the personal computer killed its typewriter business. Now another team has started looking at order processing all over again, this time spanning the whole corporation. ''You may be delayed,'' Camp warns benchmarkers. ''The size of the changes are such that it takes time to internalize them.'' Fred Bowers, manager of benchmarking at Digital Equipment, characterizes typical management attitudes this way: ''We want improvement, but not that much improvement.'' Both the scope of Xerox's study and the time it took militated against its success. TO OVERCOME these kinds of problems, Westinghouse believes in a much less elaborate approach. ''We use benchmarking quite a lot,'' says Carl Arendt of the Westinghouse Productivity and Quality Center. ''But we have seldom found the need for long, drawn-out studies. We prefer continuous improvement in small steps. By the time you have finished a two-year study, the competition is ahead of you.'' Instead of a whole staff, the company assigns one engineer, Paul Adam, 33, to advise benchmarkers both inside the company and at outside clients like Mellon Bank in Pittsburgh. Westinghouse tries to complete studies in five to eight weeks. Many, Adam says, can be accomplished with a few phone calls. Mellon took its first step into benchmarking in August 1991 and has already felt the effects. For its initial target, it picked credit card billing disputes, the Achilles' heel of most banks. Poor service in general probably sends more furious customers off to look for another bank than any other irritant. With Westinghouse's help, Mellon appointed a team of eight people from different departments, including four who ordinarily handle these disputes, and gave them the power to make changes. The highest-ranking member was Lina Edmonds, 34, a section manager one rung below vice president. Working part time and meeting once a week, the team benchmarked seven companies, most of them credit card operations but also an airline and a competing bank. The team visited three and talked to four on the phone. It picked up several ideas about how to solve disputes quickly. When a customer called with a complaint, for example, a Mellon clerk had to look in several places to find the necessary documents, which sometimes took three to four days to collect. Equipped with better software, the other companies' clerks could see all the documents together on a terminal. And they could bounce a complaint to a ''help'' desk staffed by an experienced employee who could tell the customer precisely where a dispute stood. After adopting these and other improvements, Mellon cut complaints outstanding from 5,200 in December to 2,200 in June, resolving them in an average of 25 days, vs. 45 days before. The study took five months, and the changes started being made immediately. THE EXPLOSION of interest in benchmarking is producing associations, councils, and consultants that spout their own jargon, follow different methodologies, and issue codes of conduct. The American Productivity and Quality Center, a nonprofit group in Houston, established the International Benchmarking Clearinghouse in February as a font of conferences, courses, and data. More than 100 members, among them the biggest names in American business, have ponied up fees ranging up to the $60,000 paid by ''founders.'' Many Clearinghouse members also belong to a smaller rival, the SPI Council on Benchmarking, established in 1990 by the Strategic Planning Institute, a nonprofit research organization in Cambridge, Massachusetts. About 50 companies have enrolled at $8,000 apiece to attend four conferences annually and to use the council's database of case studies. ANDERSEN CONSULTING, A.T. Kearney, and Towers Perrin have set up groups of companies that benchmark each other regularly. Since the members often compete, these groups pass information through the consultant so members can find out about the best practices without the sources being identified. Specialized consulting firms like Best Practices Benchmarking & Consulting Inc. of Lexington, Massachusetts, are also springing up. While these organizations can be helpful, leading benchmarkers remain the most influential models for their peers. Ford says 50 companies have visited within the last year alone to see how its benchmarking improved a single process -- the handling of accounts payable. Ford's breakthrough came courtesy of its partly owned Japanese partner, Mazda. Ford managers knew that 500 employees processing accounts payable were far too many. But they couldn't believe Mazda's claim that it did the job better with fewer than ten people. When they overcame their disbelief, Ford benchmarkers found their own accounts payable staff spending most of their time trying to match often- conflicting data in a mass of paper -- purchase orders, invoices, and receipts. Following Mazda's lead, Ford created an ''invoiceless system.'' Invoices no longer trigger payments to suppliers; the receipt does the job. Ford's staff is now down to about 200, still a lot more than Mazda's, but a huge improvement. More cuts are coming. In the days before benchmarking, Ford would simply have made an internal study and decided that maybe a 5% or 10% cut was appropriate. But when you find that another company is twice as good as you are, or in this case 50 times as good, you can't just chug along making minor improvements. You are forced to go for the breakthroughs. Benchmarking is not for the half-hearted.