Author(s): Randall Gibson, Managing Principal – Diamond Head Associates Inc.
Appeared In : Innovations Newsletter Vol 1, Diamond Head Associates
To help clear things up, here’s a brief overview for organizations looking to understand and benefit from business analytics.
What is business analytics?
We’ll define business analytics as the “skills, technologies, applications and practices for continuous iterative exploration and investigation of past business performance to gain insight and drive business planning”. Business analytics “can make extensive use of data, statistical and quantitative analysis, predictive modeling, and fact-based management” to drive decision-making. This can span the range from strategic planning (e.g., a consumer products company who needs to integrate and streamline the distribution networks for multiple products from various acquisitions), to operational support (e.g. risk management for a financial services firm, to differentiate between customers based on credit risks).
The goal of business analytics is to answer the questions: why is this happening? what if these trends continue? what will happen next?…and to predict and optimize the outcome.
In a recent white paper published by IDC (“The Case for Investing in Business Analytics Technology”, sponsored by SAS; Feb. 2009), they discuss the trend toward evidence-based decision making in commercial, nonprofit, and public sector organizations, driven by the need to retain customers, uncover cost-cutting opportunities, and automate or support decision-making processes. They divide the subject into three primary functions of 1) query and reporting, 2) advanced analytics, and 3) data warehousing technology and services. They note that while business analytics is not new (it’s been around since the late 1960’s when computers were first used in decision support systems), it is only now entering the mainstream. This is likely driven by the development and adoption of sophisticated enterprise resource planning (ERP) systems, data warehouses, optimization and simulation, and the variety of other software tools and applications. Let’s not forget easy access to fast, very affordable computing resources on your desktop that are now capable of handling the large databases and computation requirements.
We see several key components of business analytics:
- Data – lots of it
- Software – applications that sift, organize, store, analyze, and present trends in the data
- Models – computer programs to predict (and optimize) future performance
- Consulting – assistance to quantify needs, design processes, select appropriate software, develop models, and institute practices to make use of the results.
As is often the case, success – achieving promised benefits- depends on the ability to properly integrate and make the components playtogether.
What benefits should I expect?
Research cited in the IDC white paper suggests a direct link between investment in business analytics solutions and organizational performance. In their 2003 study “The Financial Impact of Business Analytics”, IDC evaluated the ROI of business analytics projects at 43 leading organizations in North America and Western Europe. The study showed, for the group as a whole, a median ROI of 112%, and for projects incorporating predictive analytics a median ROI of 145%. Of particular interest, the study found that 96% of the benefits were in the productivity and business process enhancement categories, as opposed to only 4% for new technology adoption. The main benefits in predictive analytics projects were attributable to business process enhancement.
The Principals at Diamond Head Associates have been using the core analytical software tools now involved with business analytics – simulation and optimization – for over 20years (business analytics is nothing new to us!). Many of these projects have immediate payback of 1x to 10x their cost, and can be instrumental in proving/improving the design of systems or processes, or in avoiding critical mistakes (how do you calculate the payback of not installing anautomation system that was critically flawed?). It is not uncommon to see supply chain network redesign projects show order-of-magnitude improvement in performance and cost reduction.
Who is providing business analytics services?
IDC estimates that the worldwide business analytics software market in 2007 was $22 billion. This broad suite of software products today includes data integration, data warehousing, query and reporting, advanced (planning) analytics, even event monitoring and intelligent process automation. The large market potential may account for the list of firms announcing new business analytics products and services that reads like a “who’s who” in the consulting and ITsystems vendor world, including HP, IBM, Oracle, SAP, SAS, even Microsoft to name just the larger players. These firms want to sell software products to help automate the business intelligence and data-mining functions. But, along with a myriad of smaller consulting firms, they also want to sell business-process optimization consulting services to help you design and implement solutions, and improve your operations.
An interesting illustration of the importance that business analytics – and, the related revenue – is going to play is IBM’s entry into the field. In a recent Business Week article (“ IBM Roars into Business Consulting”, Business Week, April 14, 2009), they discuss IBM’s “biggest foray in business consulting since it acquired PricewaterhouseCoopers Consulting in 2002” – the launch of their new 4,000 consultant business unit, Business Analytics and Optimization Services (BAO). Several recent acquisitions of key software tools companies, such as $5 billion for Canada’s Cognos (business intelligence) and $340 million for ILOG (French company, which itself recently acquired LogicTools, the maker of one of the premier supply chain network modeling and optimization products), play into this strategically important move for IBM. They also recently unveiled Blue Insight – a massive internal business analytics cloud computing environment that will be the basis for future external services.
What should I be looking out for?
The most important factor in being prepared for analytics, other than understanding what it is and can do for your organization, is data. Historical data for several years worth of transactions needs to be available, processed, filtered, and put into a format suitable for use by the analytical and predictive tools in order to achieve the benefits.
What are the applications to supply chain planning and operations? Operational improvement for procurement, logistics, inventory, manufacturing, distribution, and optimal network configurations, just to name a few. Finally, developing robust strategies for integrating these critical functions together into a cohesive, reactive, competitive organization.
Are there issues? Many. Understanding the breadth and scope of the offerings, selection of components and functions appropriate to your organization, implementation planning and required effort, and implications of how to make use of these capabilities and actually realize the potential benefits.