But Wales' open-side flanker believes the rest of the world can close that gap over the next nine months - and he is confident his team can lead the way.
"New Zealand are head and shoulders above everyone else," Williams, 31, said.
"Ninety per cent of the time we are there or thereabouts when we play sides but on Saturday it was just another step up.
"I would rather have played New Zealand than not. Now we know exactly where we are, and we have learned a lot.
"Behind New Zealand there are five or six sides on an even keel.
"I think it is difficult to see them getting any better and, hopefully, they have mistimed it again and peaked too soon.
"But the other sides could get 20% better between now and the World Cup and could have timed it just right.
"We have bags of talent but perhaps we have let our standards slip over the last 12 to 18 months and it's something we've got to work on, little things off the field as well as on it.
"I am sure come Six Nations time and the World Cup we will be there or thereabouts again.
"We know we are not the finished article, but we are working very hard and hopefully we will peak at the right time."
Wales head coach Gareth Jenkins admitted they were taught a harsh lesson by the All Blacks in their 45-10 defeat on Saturday, particularly at the breakdown.
Jenkins wants the Welsh players to start taking regular judo lessons after seeing the All Blacks use martial arts techniques to redefine the dynamics of the breakdown.
New Zealand are renowned for pushing the laws to the limit - Richie McCaw and Andrew Hore were both caught and sin-binned on Saturday - and Williams admits Wales must do the same.
"They get away with a lot and that's their job," said the Cardiff flanker.
"They get penalised sometimes, but they seem happy to do that. I think that's what we've got to do as well.
"Perhaps we've got to be a little bit more cynical there. We all push the laws as far as we can, but they don't do it in isolation.
"They do it in numbers and you get away with a lot more things if there's three or four of you doing it, rather than just the lone guy. That's where they are so good."
Jenkins will hold urgent meetings with the four regional coaches in the next week in the hope of exposing his players to the new techniques - such as judo - on a weekly basis.
Williams agrees that things must change at club level if Wales are to enjoy any effective long-term development.
"From one to 15 New Zealand's whole mindset is making it hard work for you to win that ball. It's not just the back rows' job, it's everyone's," he said.
"That's probably a mindset we are not quite in touch with here yet. The back row and the centres are left to do a lot of the work at the contact area in the northern hemisphere.
"It's just a mental thing really. It's not something you can criticise our boys for.
"It's just we are not used to that level week-in, week-out at regional level or probably when we play other international sides. I think that's why the Blacks are streets ahead of everyone.
"It's another lesson learned for us and we've got to try and catch up there."