Article

beyond data: from analytics TO ACTION (part II)

By Mike Meyer
Senior Consultant

In Part I of this article, I defined “business analytics” and provided an example of how one organization successfully applied the concepts to achieve a significant impact on profitability. In this article, I offer some suggestions and tactics that will help you make the best use of analytics in your improvement programs. (To read Part I of this article, Getting the Most From Business Analytics, go to www.renolan.com/insurance/articles.htm.)

An essential component of any successful implementation of business analytics, and one central to the Nolan approach, is a deep understanding of the industry, products, marketplace dynamics, processes, business drivers, and competitive factors, among other things. In our case, that encompasses health care, insurance, banking, and financial services. Many companies have made significant investments and great strides in implementing business analytics software, but most still struggle with effective use of the resulting management information. A successful analytics program should provide a positive ROI, which in turn requires taking it beyond software and reporting and into the realm of management practices and operations improvement. Nolan’s typical approach to supporting business analytics efforts includes the following steps:

The following are some techniques we use when assisting clients with analytics effectiveness. You may find some of these helpful in your environment.

Benchmarking

Benchmarks are an element of business analytics, and they should be viewed as a means to an end. The end purpose should be to improve or validate performance, not to simply take measurements or make comparisons. If you embark on benchmarking, establish a solid link between the resulting analytics and a comprehensive activity-based management program. In other words, formally incorporate the benchmarks into your ongoing improvement initiatives. Benchmarks are often thought of as an external comparison (e.g., relative to peers, competitors, or “the industry”), but benchmarks are just as valuable when used internally to analyze different geographic locations (such as service centers or sales offices) to determine performance strengths, weaknesses, and best practices.

IT Assessment

IT costs and allocations are often not clearly understood. For example, a recent Nolan bank performance study found that the IT costs at a participant bank (IT expense as a percent of total bank income) were significantly higher than those of its peer group—but it wasn’t clear why. An IT resource allocation analysis was then conducted to isolate whether the primary issue was on the operations side or the system development side. The data indicated that on the development side, over 40% of the activities being performed were not critical and could be streamlined, consolidated, or eliminated. This provided a business case to proceed with an initiative to develop and implement a new project/portfolio management process that would result in a capacity increase of 10–15%. Ultimately, this lowered overall IT costs and recast IT cost allocations more equitably.

Cross-Functional Expense Views

Many financial service organizations view expenses from a functional or business unit perspective. Functional managers are responsible for managing these expenses within the scope of their organizational structure. Business analytics tools can provide new and different views of expenses that can in turn provide new insights into opportunity areas. Expenses that seem insignificant within a given unit can be significant when viewed more broadly. For example, expense line items such as travel can be selected and views created at various levels, such as enterprise, function, line of business, region, and office. Typically, potential opportunity areas are identified quickly. With further investigation and management action, those findings lead to more effective policies, improved consistency, and reduced overall expense.

Unit Costing

Marrying expense and volume data from different perspectives can create some interesting insights into unit costs. Unit costs are an ideal metric for measuring efficiency within an operation by simply looking at how many pieces of work the organization is getting and how much it is costing to get each piece done. The key here is to focus on the core work volume and understand its definition. If a global view is desired on the expense side of the equation, all expense line items can be included, as opposed to limiting expense scope to personnel-related costs. However, both views can be valuable, depending on the audience. Limiting expenses to personnel costs provides a more precise view of productivity management effectiveness. The global view is a bit more complex in that it requires allocations of overhead, but it can provide a true view of what a function or process costs an organization.

Product Costing

Product costs are useful for evaluating product pricing and profitability. Accurate views of product costs require a fairly sophisticated business analytics capability, but the value can be significant. Understanding costs at this level can help to ensure that products are priced effectively and profitably in the marketplace and to determine when it makes sense to underprice a product in order to gain market share. Identifying unprofitable products can lead to their redesign or elimination in order to improve overall profitability.   

Incentive Plan Financial Soundness

The key here is to determine if there is a direct relationship between business results and what is being paid to employees in variable compensation. Ideally, business result trend lines and incentive payout trend lines should match one another to a degree, with the business result line climbing at a faster rate. Business analytics data can be developed for key business metrics and corresponding incentive payouts. These become the basis of incentive plan fine-tuning or redesign to ensure ongoing financial soundness and ROI.

In Summary