What is business analytics?
The big idea behind business analytics is that managers make better decisions when they have the right information at the right time – cleaned, clearly arranged, and smartly interpreted. Want to know if you should introduce a product to a new market? Run a trial, crunch the numbers, project the next few quarters, and voila! Suspect that some of your sales personnel are..ahem…helping themselves to product? Need to know which customers you’re likely to be able to upsell to on your e-Commerce site? Run the numbers!
But wait – is business analytics a product? Is it a service? Analytics is a way of approaching business decision making – using data and empirical evidence to understand the enterprise and guide choices – along with the science, tools, and techniques that make it all possible.
If you’re thinking that’s a pretty broad description, you’re right, so let’s consider an example.
A working business analytics example
Pretend you are a small company that suspects it isn’t being paid on time by your customers.
In the analytics world, we call average invoice payment time a key performance indicator. KPI’s are measurements that help business managers decide if a portion of the business is operating as desired. Most businesses need to be paid on time to operate successfully; if you as a manager see a rise in average invoice payment time, you might have an issue to deal with.
If you’re a really small company, you may keep track of invoices on a spreadsheet and record how long your customers take to pay their invoices. Most likely, you have an accounting system– like Quickbooks – and you run a monthly, pre-built report to examine invoices and payment times. If yours is a bigger company, you have built a custom report that reads data from your accounting system and reorganizes payments in a way that makes sense for your business. As an analytics-minded manager, you will correct any internal issues slowing down customer payment or move your product to markets where customers are more likely to pay you.
Now, imagine your company is larger and you track payment information in more than one system. You might choose to bring together data from your accounting, payroll, and operational systems into a single cash flow data mart. You might then create an executive dashboard to give your leadership a concise view of all accounting operations, including your company’s current cash position, uncollected receivables, and a drilldown option to see the detail. Much larger companies and governments might choose to create an enterprise data warehouse to consolidate and store information permanently.
Note that the measurement goal hasn’t changed – we are still tracking Average Invoice Payment Time; what has changed is the size and number data sources that we include in our analysis and the tools that we use to measure them.
Okay, so through good data preparation and reporting, we know that you have a payment turnaround time somewhere, but where? How do you fix it? Should you hire more staffers, or refocus the ones you have in place?
Through data mining, you might analyze hundreds of variables simultaneously to determine where specifically average invoice payment time is unacceptable. Perhaps it is so only for a few product lines and only if the sale originates in two of your fourteen offices. You might then choose to create a predictive model to calculate the probability that a specific invoice will be paid late. You can then reach out to high risk clients or project managers to proactively manage collections. You might also determine that an internal procedure is to blame for the issue and design a business experiment to test your new processes before rolling them out.
With any luck, you will learn that the payment issue is narrowly focused on a few of your larger accounts, and a little proactive management will resolve the problem. Voila! Analytics.
Moving forward with Business Analytics
Big topic, right? The good news is that whether you choose to obtain assistance from a professional analytics firm or to go it on your own, whether you choose to buy and implement tools to help you or to press forward with tools you already own, your process will follow similar steps.
Step 1: Determine which Key Performance Indicators (KPIs) measure the health of your business. In many industries, these KPIs are well known and understood.
Step 2: Start measuring your KPI, with tools you have, buy, or build.
Step 3: Understand what your KPIs are telling you about your business, by instinct, manual review, or the techniques described above.
Step 4: Take action to change your performance.
Step 5: Go back to your measurement tools, and determine if your KPIs have changed.
I will go into more detail in future posts on tools and technique. Good luck!