The Power of Information

1. The Power of Information Making Analytics Strategic Sept 23, 2008

2. Objectives • Share with you our real world experiences. • Give you some concrete ideas how you can energize your organization and lead the way to profit growth

3. Content • The current business paradigm (my simplistic observations) • How information can be leveraged to drive change • Information Age business management • Incentives • Why Now? • Good reading

4. Business Models • Every $1 Billion business has at least one Balance Sheet item or P&L cost item which is $100’s of millions • These items are the core operational costs to execute the business model • In Finance and Insurance it is working capital plus losses • In Retail it is merchandising (COGS plus distribution) • In Telco it is network costs • In Manufacturing it is production cost (equipment, raw materials, logistics) • … • In some large businesses sales and marketing costs are also very large

5. Operational Efficiency • In the past dramatic improvements in profitability have been driven by new ways to execute the operational model • In each industry segment every company executes the same business model with approximately the same level of inefficiency • As one player finds some way to drive efficiency every other player follows or dies

6. The Strategic Role of Technology • Technology (hardware, software and applications) has been used to enable an operational process • E.g. a large bank, large telco or large retailer cannot exist without transaction processing systems • In each industry segment, all companies have a similar cost per transaction

7. Decision Making • Most organizations make decisions to upgrade or improve their operational processes once per decade • The processes are then “run into the ground” and when they break or are about to break the next version is created • The risk involved with these decisions is bundled into a short period of time once per decade

8. ~10 years Risk of Operational Failure The risk not to act grows A new operational process (application) is put in place and the cycle repeats

9. The Current Paradigm - Summary • Operational process efficiency drives corporate profitability • Transaction Processing technology runs most critical operational processes • Within industry segments all companies have similar cost per transaction • Organizations are not proactive

10. The Information Age • Basic Assumptions • The transaction/event data every company collects about it core operational processes can be utilized to create information which will improve operational efficiency • A 1% improvement in operational efficiency will drive large bottom-line gains. I believe 20% to 50% is possible in every corporation.

11. How information can be used to improve operational efficiency? • Every event is not created equal • Some are more risky than others • Some are more valuable than others • Some are more likely to be fraudulent than others • Some are less costly than others • … • Can we find patterns to allow us to re-allocate resources? • At the transaction level, account level, customer level, household level … • At the transaction level, account level, location level, regional level …

12. What does average mean? If a statistician told you a river had an average depth of 3 ft and flow rate of 3 ft/s would you walk across it?

13. How to optimize a metric(Hopefully a leading one) Re-allocation of resource to high value events cause the average to go up Opportunity for Operational efficiency Average performance

14. The new paradigm • Use information to find opportunities to re-allocate cost • Test and Learn, constantly “tweak” your operational processes • This requires a proactive management approach like balanced scorecard • This lowers your overall risk of failure and smooths out the business cycles

15. process • Map out and understand the existing business processes and identify how information interacts with them • Define use cases for information • I.e. if the fraud indicator is above 0.8 investigate the claim • Change your processes to include your new use cases

16. organization • Identify the individuals responsible for executing the information based activities that are part of your business processes • Ensure these people have the required skills to review analytical output, assess it and make recommendations for action

17. A new business paradigm … test and learn …Become proactive. Find the patterns and re-allocate costs Test to see if it works. Analyze the “spin off” effects Adjust cost allocation

18. A New Risk Profile A constant lower level of risk of failure Constantly “tweak” your operational processes based on the best information you have at hand

19. IncentivesOutside of business • Set up incentives so that individuals might change their behaviour • Create a currency (loyalty points, tax breaks, cash etc.) that has zero total value. “Zero sum currency” • Examples: Futures markets. Futures contracts have a zero total value. Their existence reduces overall market risk. Some individuals take on the risk that others don’t want. (speculators vs. commodity producers) • If you want to lower a specific metric make the people who have a higher than average contribution pay the people who have a lower than average contribution • This will change behaviour and lower the average

20. Additional Benefits • If we assign a measurement based objective and create incentives to change it we create accountability and transparency. • Two key elements required for change

21. Why Now? Why Not!

22. Good reading • Competing on Analytics • Freakonomics • Super Crunchers • Conrad Black Letters in the National Post or Globe and Mail? A good one this past week about his views on the knowledge economy

23. makeplaingsaarenvirta@makeplain.com • We offer • Insurance • Pre-payment focused fraud detection solution appliance for insurance (group benefits dental, medical, drug and propert and casualty • Retail • appliance solutions for merchandise optimisation (price, inventory, markdown, size/pack) • Location analytics • CRM Analytics • Loyalty Program management consulting • Data Warehousing, Business Intelligence and Data Mining consulting services • Data Warehouse appliances • Full-life cycle development • Management Consulting