The Profit Impact of Business Intelligence

221 Pages·6.457 MB·English

by  Steve Williams and Nancy Williams (Auth.)

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Preface
Since founding DecisionPath Consulting in 1999, Nancy and I have had the privi-
lege of working with great clients and colleagues. We have always approached our
engagementsinthespiritofpartnership:webringourgeneralbusinessknowledge,
enthusiasm, and expertise in business intelligence and data warehousing, and our
clients afford us an opportunity to help them succeed. In the process of achieving
those successes, we’ve observed a variety of challenges that can derail even the
most promising BI opportunities. Simply put, most of these challenges are business
challenges.
This experience has led us to conclude that if companies are going to fully
realize the profit potential of business intelligence (BI), there needs to be a better
understanding of BI in the executive and managerial ranks. That is the reason for
this book.
At the enterprise level, BI has demonstrated its ability to improve profits by tens
or hundreds of millions of dollars annually, depending on the size of the company.
Accordingly,BIshouldbeakeytoolformanagingandimprovingperformance—and
profits—atjustaboutanycompanyinjustaboutanyindustry.Itshouldcertainlyrank
alongside of management tools and techniques such as Strategic Planning, Bench-
marking,Pay-for-Performance,Outsourcing,CustomerSegmentation,Reengineering,
Balanced Scorecard, and Total Quality Management.
That being said, many large companies tend to see BI as primarily a technology
play. Thus, they fail to focus on the business challenges of leveraging business
information and analytical techniques to drive better performance and improved
profits. Some of the typical business challenges we have seen include:
• Misalignment between business strategies, core business processes that drive
performance, and the BI program or initiative
• Lack of clarity about how BI will be used by the business to improve profits
• Insufficientleadershiptodrivechangestohowthecompanyusesinformationand
analytical tools to drive results
• InsufficientrecognitionbyITmanagementthatBIneedstobemanageddifferently
than transactional systems
• Weak business sponsorship and lack of accountability for the BI program or
initiative
• Under-investment in developing BI and data warehousing core competencies
In addition to observing these business challenges first-hand in many different
companies,wealsohearthesethemesechoedbytheBIprofessionalswemeetwhen
we teach at industry conferences. On the flip side, we serve as judges for TDWI’s
annualbestpracticescompetition:akeyaspectofwinningcompaniesistheirability
to overcome such challenges. More broadly, by improving business performance,
BI helps companies compete successfully in an increasingly global economy, which
protects local jobs, economies, and communities.
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xiv Preface
Given the mission of building a better understanding of BI in the executive and
managerial ranks, we have written The Profit Impact of Business Intelligence from
a perspective that blends general management and technology strategy thinking.
By doing so, we hope to engage an audience that includes business and IT leaders
and managers as well as BI and data warehousing project managers, architects, and
analysts.Wealsobelievethatthebookcanbeasourceofreadingsforundergraduate
and graduate-level MIS courses. The general organization of the book is as follows:
Part 1: Identifying and Leveraging BI-Driven Profit Opportunities
OurgoalinPart1istopiqueyourinterestinBIandpointoutingeneraltermswhatit
takestoleverageBIforimprovedprofits.InChapter1,weprovideexamplesofhow
well-known companies in a range of industries use BI to improve profits, and we
describe the prerequisites for ensuring the targeted ROI. In Chapter 2, we describe
and illustrate a proven, straightforward method for identifying how your company
canexploitBIforimprovedbusinessperformance.InChapter3,wepointoursome
of the key barriers—or risks—that must be overcome to capture the full payoff of
your investment in BI. In our view, the chapters that compose Part 1 should be of
interest to the broad audience the book hopes to engage.
Part 2: Creating the BI Asset
Our goal in Part 2 is to provide a business and technical overview of what it takes
todesign,build,deploy,andleverageaBIenvironment—theBIAsset.InChapter4,
wedescribeourBIPathwayMethod,whichisacompletestrategicapproachtothe
business and technical activities that must be accomplished to inject BI into your
business and use it to drive business performance. The treatment in Chapter 4 is
at a high level, and we would refer readers interested in a more detailed treatment
to our full-day course for more of the “how-to” of the BI Pathway Method. In
Chapter 5 we discuss the leadership and general management challenges of using
BI to drive increased profits, which are business challenges that go beyond the
sometimes complex technical challenges of building the data warehouse and the BI
applications. In Chapter 6, we discuss how BI fits in the broader IT environment,
which is important because IT policies and procedures optimized for day-to-day
transaction processing systems are sometimes barriers to BI success. In our view,
parts of Chapter 4 may be too technical for business executives and managers, and
parts of Chapter 5 may be too business-oriented for the more technically inclined
members of the BI team.
Part 3: Leveraging BI for Profit Improvement
One key goal in Part 3 is to delve more deeply into the different ways companies
haveusedBItodriveincreasedprofits,whichwedoinChapter7.InChapter8,we
discuss common mistakes companies make with BI initiatives, and in Chapter 9 we
takealookaheadtowhatcompaniescanachievewithBIiftheyreallyembraceitand
use the technologies to push the envelope of business performance management.
In our view, the chapters in Part 3 should be of interest to the broad audience the
book hopes to engage.
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Preface xv
Appendices
Appendix A provides a glossary of common BI terms, including terms used in this
book.
Appendix B builds on the material in Chapter 3 by providing the BI Readiness
Assessment instrument that DecisionPath Consulting uses to assist companies in
identifyingpotentialbarrierstosuccess.Withtheassessmentinstrument,youcanfind
outtodaywhereyourstrengthsandweaknesses,assetsandrisksareforimplementing
BI.ThatinformationhelpsyouplanaBIprogramthatisprimedforsuccess,whether
defined in terms of increased profit, better service, higher product quality, or other
keysuccessfactors.Visitwww.decisionpath.comtotakeanonlineversionoftheBI
Readiness Assessment to see how your organization stacks up.
Special Features
Throughoutthebook,wehavemadeliberaluseofgraphics,tipboxes,pitfallwarn-
ings,andcheckliststohelpspotlightthekeypointsyoumaywanttoremember.We
hope you will find these helpful.
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Acknowledgments
After a couple of decades in business, it becomes difficult to recall all the specific
influences on one’s thinking, which makes it a challenge to properly acknowledge
everyone who has influenced this book. That being said, we would certainly be
remiss if we failed to mention how much we have learned from our opportuni-
ties to work with major organizations in a range of industries. Companies such as
McCormick,Marriott,LeggMason,andPrincipalFinancialGroupareeachleadersin
theirindustries,andwehavegottentoseearangeofchallengestoBIsuccess.Many
of the business-driven methods and perspectives shared in the book are a direct
result of what we have learned as we worked with these clients to overcome their
specific challenges.
Our thinking has also been influenced by our colleagues at DecisionPath
Consulting. As we have employed the BI Pathway Method on client engagements,
ourcolleagueshaveprovedtobeasteadysourceofimprovementideasandinnova-
tiveusesoftoolstosupportprojectexecution.Theresultisabettermethod,proven
in practice, and readily taught to new BI teams. Among our colleagues, Dr. Jim
Thomannwarrantsspecialrecognitionforhiscontributiontothedevelopmentofthe
BIPathwayMethod,thetechnicalportionsofwhicharebasedondatawarehousing
fundamentals that Jim has been teaching at TDWI conferences for years.
We have also enjoyed learning from our colleagues in the business intelligence
and data warehousing industry. Most notably, we are indebted to Dave Wells at
TDWI for his encouragement, insight, and constructive feedback as we developed
the BI Pathway Method. Many of the data warehousing fundamentals that serve as
the technical foundation of the BI Pathway have been taught in TDWI courses that
Dave developed. We have also benefited from the lively conversations we’ve had
with the leading practitioners who serve as faculty at TDWI conferences and who
serve as fellow judges for TDWI best practices competitions.
Another source of the learning that is reflected in The Profit Impact of Business
Intelligence is—perhaps ironically—our work with the U.S. Social Security Admin-
istration (SSA). While we speak in terms of “profit” and “business performance”
throughout the book, public sector managers are increasingly embracing business
performance management techniques, and SSA is a leader in this regard. Our work
with Skip Hardy at the Social Security Administration has allowed us to see this
in action, and, in the process, it has enriched our understanding of the complex
tradeoffsinvolvedinestablishingaresponsiveBIenvironmentinaworlddominated
by mission-critical transaction processing systems.
As to the book itself, it has been a challenge to juggle our commitments to
our clients, our responsibilities as executives at DecisionPath Consulting, and the
demands of writing a book. That challenge has been made much more manageable
by our colleague Scott Palmer, whose experience as an author of technical books
has enabled him to “show us the ropes.” Scott’s knowledge of the process and the
publishing industry was instrumental to keeping us on schedule. The book has also
benefited tremendously from the comments of our reviewers—Barron Penner of
PrincipalFinancialGroup,SidAdelmanofSidAdelman&Associates,WayneEckerson
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Acknowledgments
xviii
ofTDWI,andBarbWixomoftheMcIntireSchoolattheUniversityofVirginia.Last,
butcertainlynotleast,oureditorsatElsevier—DianeCerraandAsmaPalmeiro—have
provided excellent comments and suggestions throughout the project.
Thanks to everyone!
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1
Chapter
The Business Value of
Business Intelligence
“The social responsibility of business is to increase its profits.”
—MiltonFriedman,Nobellaureateeconomist
The past decade has witnessed an arms race in American business: a wholesale
deployment of information technology (IT) to the point at which some experts
estimate that half of capital spending by business is invested in IT. The growth of
companies such as SAP, Oracle, Microsoft, IBM, Cisco, Dell, and Siebel—and their
consulting company partners—attests to the magnitude of this race.
Most of that investment has been in what amounts to better plumbing, better
systems for managing day-to-day operations, and more frequent and voluminous
reports. There is little debate that these investments are necessary to operate many
modern business enterprises. That said, our experience working with and talking
to business and IT leaders at major companies in a variety of industries suggests
that these companies are still data-rich but information-poor. In other words, these
enterprises lack the kind of actionable information and analytical tools needed to
improve profits and performance.
Businessintelligence(BI)isaresponsetothisneed.Itisthenextlogicalprogres-
sion in management thinking about IT. The goal of our book is to show you how
to follow the lead of companies who have capitalized on the potential of BI to
improve profit and performance. While many major companies have implemented
data warehouses, very few have used them to achieve BI. In many companies, data
warehousing (DW) efforts have largely been limited to producing more reports,
with a vague understanding of how this information will benefit the organization.
However,othercompanieshavegonebeyondthisanddemonstratethetruepotential
of BI. For example,
• Western Digital, a manufacturer of computer hard disk drives with annual sales
of more than $3 billion, uses BI to better manage its inventory, supply chains,
productlifecycles,andcustomerrelationships.BIenabledthecompanytoreduce
operating costs by 50%.
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2 1.TheBusinessValueofBusinessIntelligence
• Capital One, a global financial services firm with more than 50 million customer
accounts, uses BI to analyze and improve the profitability of its product lines as
well as the effectiveness of its business processes and marketing programs.
• ContinentalAirlines,aU.S.airlinecompanythatwasnearbankruptcyinthe1990s,
invested$30millioninBItoimproveitsbusinessprocessesandcustomerservice.
Inthefollowingsixyears,Continentalreapedastaggering$500millionreturnon
its BI investment for a return on investment (ROI) of more than 1,000%.
• CompUSA,amajorretailerofcomputerequipmentandsoftware,usesBItoanalyze
its sales trends. The company earned an ROI of more than $6 million in the first
phase of the project.
Done right, BI has tremendous proven potential to improve profits and perfor-
mance. Done wrong, it’s a waste of time and money. The bottom line? Make sure
that you do it right. This book gets you started.
ButwhatisBI?Inthischapter,weprovideapracticalworkingdefinitionofBIand
examples of how well-known companies in a variety of industries use it to improve
their performance. This will stimulate your thinking about how you can use BI in
your own business.
1.1 What Is Business Intelligence?
Let’s start with what BI isn’t. BI is not:
• A single product. Although many excellent products can help you implement
BI,BIisnotaproductthatcanbeboughtandinstalledtosolveallyourproblems
“out of the box.”
• A technology. Although DW tools and technologies such as relational databases
ETL tools, BI user interface tools, and servers are typically used to support BI
applications, BI is not just a technology.
• Amethodology.Althoughapowerfulmethodology(suchastheourBIPathway)
is essential for success with BI, you need to combine that methodology with
appropriate technological solutions and organizational changes.
If that’s what BI is not, then what is it? BI combines products, technology, and
methods to organize key information that management needs to improve profit and
performance. More broadly, we think of BI as business information and business
analyses within the context of key business processes that lead to decisions and
actions and that result in improved business performance. In particular, BI means
leveraging information assets within key business processes to achieve improved
business performance. It involves business information and analysis that are
• Used within a context of key business processes
• Support decisions and actions
• Lead to improved business performance
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1.2BusinessIntelligenceinAction 3
FIGURE1-1 Whatbusinessintelligencemeansinpractice.
For business, the primary focus is to increase revenues and/or reduce costs,
thereby improving performance and increasing profits. For the public sector, the
primary focus is service to citizens, coping with budget constraints, and using
resources wisely in support of an agency’s mission. Figure 1-1 illustrates this
definition.
1.2 Business Intelligence in Action
ToillustratethispracticalworkingdefinitionofBI,considerhowthehotelandcasino
operator Harrah’s Entertainment uses BI to improve revenue and profit through
customer relationship management.
Harrah’s runs not only its flagship hotel and casino in Las Vegas, Nevada, but
more than two dozen casinos in a dozen other states. Its BI investment enabled
Harrah’s to enjoy 16 consecutive quarters of revenue growth. In 2002, it earned a
$235 million profit on more than $4 billion in revenue (Loveman, 2003). That was
astartlingimprovementfromHarrah’ssolidbutnotspectacularperformanceonlya
few years earlier.
Harrah’s invested in BI to help it win and consolidate the loyalty of its best
customers. Its first effort was the “Total Gold” program, which was modeled on
airlinefrequent-flyerprograms.However,TotalGoldwastoosimilartothecustomer-
loyalty programs offered by other casinos to give Harrah’s a killer edge, but it did
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4 1.TheBusinessValueofBusinessIntelligence
provetobearichresourceofdataforHarrah’ssubsequentBIefforts.Inparticular,the
Total Gold data warehouse provided valuable business information about Harrah’s
customers:
• TotalGoldcardholderswerespendingonly36%oftheirgamingdollarsinHarrah’s
casinos. Harrah’s wanted that percentage to increase.
• Twenty-six percent of Harrah’s casino customers generated 82% of its revenues.
• Those “high value” customers were not the people Harrah’s expected. Instead of
high-rollerswearingcowboybootssteppingoutoflimousines,thecustomerswho
brought in the most revenue were dentists, schoolteachers, office workers, and
the like. They didn’t spend huge amounts of money in any one visit, but—week
in, week out, month after month—they stopped at Harrah’s after work, in the
evenings, or on weekends to relax in the casino or have a meal.
That business information, combined with business analysis, enabled Harrah’s
both to know who its most valuable customers were and to offer them personal-
ized service. Harrah’s evolved Total Gold into the “Total Rewards” program, which
divided its gaming customers into three levels of service (gold, platinum, and
diamond) based on their long-term revenue value to the company.
In addition to identifying its most valuable customers, Harrah’s also used BI to
analyze what those customers wanted and what measures might win their loyalty.
Diamond-level card holders would seldom if ever have to wait in line for anything,
whethertocheckintothehotel,gettheircarsparked,orbeseatedinoneofHarrah’s
restaurants. If they called to reserve a room, they might qualify for special low
rates based on predictions from BI about their probable value as casino customers.
Platinum-levelcardholdersreceivedaslightlylowerlevelofservice,whilegold-level
card holders were essentially “flying coach.” Harrah’s succeeded in structuring its
servicestomotivatecustomerstotrytoqualifyforhigher-levelTotalRewardscards.
BI from the data warehouse even provided insight about how Harrah’s should
arrange the floor plans in its casinos and how to make slot machines look more
attractive. Real-time analytics enabled on-the-spot personalized service for valued
customers, such as an instant grant of $100 credit to a loyal customer who’d hit a
losing streak. All these factors helped motivate customers to come to Harrah’s and
stay there to spend their gaming dollars. And this program would not have been
possible without BI techniques applied to data warehouse information.
The combination of business information
Tip
and business analysis is used by Harrah’s
BI investments are wasted unless
and many other successful organizations
they are connected to specific busi-
to make more structured and repeatable
ness goals, analyses, decisions, and
business decisions about the features and
actionsthatresultinimprovedperfor-
targetedrecipientsofdirectmarketingoffers.
mance.
Because motivating and retaining its most
valuablecasinocustomersisakeydriverofprofits,Harrah’shasrefineditscustomer
relationship management process, a core business process. The process explicitly
embeds the use of the above-described business information and business analyses
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1.3TheOriginsofBusinessIntelligence 5
so that business decisions about whom to target with what measures are fact-based,
analytically rigorous, and repeatable. These decisions are implemented through
actions from Harrah’s front door to its casinos, restaurants, rooms, and telephone
services. Those actions have improved Harrah’s business performance, resulting in
increased profit.
The above example defines BI from a business perspective, not from a technical
perspective,becauseBIisprimarilyaboutprofit.That’snotatechnicaltermandit’s
notaboutbitsandbytes;it’saboutyourbottomline.Andit’swhatyoushouldexpect
from BI. It may also have occurred to you that BI needs to be highly specific to your
industry and to how your company competes in that industry. Measures such as
“Revpar” and “stays” are specific to the hotel industry and have no meaning in, say,
thefreightindustry,inwhichmeasuressuchas“revenueperton-mile”arethenorm.
Morebroadly,togetthemostoutofBI,youmustadaptittoeachspecificcompany
and situation. The kinds of business information, business analyses, and business
decisions that BI must deliver or enable, and the way that BI creates business value
mustbespecificallydeterminedforeachcompany.That’stheonlywaytogetthebest
possible return on your BI investment. Given this, we see that business information
and business analyses are components of BI that can be combined in a wide variety
of ways to create the right BI approach for your organization. Table 1-1 shows
examples.
1.3 The Origins of Business Intelligence
Now that we have a better understanding of what BI is, let’s take a brief look at its
origins. This examination will help show where BI fits with other parts of the IT
portfolio, such as enterprise transactional applications like enterprise requirements
planning(ERP),andwillhelpdifferentiateBIusesfromotherITuses.It’salsoimpor-
tant to understand that enabling BI technologies are mature, low-risk technologies
that have been used successfully by major companies for more than a decade.
Although recently the term BI has become one of the new IT buzzwords, the
organizationalquestforBIisnotnew.ApproachestoBIhaveevolvedoverdecadesof
technological innovation and management experience with IT. Two early examples
of BI are
• Decisionsupportsystems(DSSs):Sincethe1970sand1980s,businesseshave
usedbusinessinformationandstructuredbusinessanalysistotacklecomplexbusi-
ness decisions. Examples include revenue optimization models in asset-intensive
businessessuchastheairlineindustry,thehotelindustry,andthelogisticsindustry,
as well as logistics network optimization techniques used in industries that face
complexdistributionchallenges.DSSsrangefromsophisticated,customizedanalyt-
icaltoolsrunningonmainframecomputerstospreadsheet-basedproductsrunning
onpersonalcomputers.DSSsvaryenormouslyinpriceandsophisticationandare
application-specific. Accordingly, they have not systematically addressed integra-
tion and delivery of business information and business analyses to support the
range of BI opportunities available to companies today.
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