The BI Crystal Ball

Aberdeen Group’s David Hatch explains the business benefits of predictive analytics.

Companies are beginning to reap the benefits of tapping into data about their customers, products, risk management strategies, strategic initiatives and process efficiencies in order to become more predictive about their businesses. Increasingly, companies are realizing the value of using data and information to align their current actions with their future objectives. Organizations are under pressure to predict the future more accurately than ever before, both in terms of becoming more proactive within shifting market dynamics, and achieving improved performance through a better understanding of customer behaviors and attitudes, assessment of risk, improvement of process efficiencies and planning for product development, pricing and market positioning.

In April and May of 2008, Aberdeen Group investigated the spectrum of predictive analytic capabilities through a primary survey research program for its newly published report, Predictive Analytics: The BI Crystal Ball. This study, based on survey responses from over 280 organizations, uncovers the strategies, actions, technology investments and services that best-in-class companies are utilizing to improve performance through gaining predictive knowledge about their business.

Aberdeen asked respondents to reveal information about three key performance criteria to distinguish best-in-class companies from all other respondents: return on marketing investment (ROMI) during the past 12 months; change in the ability to detect and act upon harmful events before company performance is affected during the past 12 months; and percent change in customer retention rate in the past 12 months.

Figure 1: Top five business pressures driving predictive analytic capability focus

Source: Aberdeen Group, May 2008

Best-in-class companies – the top 20% of responding organizations based on the metrics described above – are not focusing on any one method or technology specifically, but are taking multiple approaches to becoming more predictive and improving performance. These approaches include several areas of the business: customer management, risk management, process management, growth management and product planning

Survey results show that the firms enjoying best-in-class performance shared several common characteristics, including improved visibility of predictive analytic measures to management. Best-in-class companies achieved a mean average rate of 36% increase in the past 12 months, versus 9% among industry average companies, and -1% among laggards. Time-to-information is also critical to achieving best-in-class results. Best-in-class companies receive information for 59% of predictive analysis within a business day or less from actual business activity, versus 45% of all other respondents combined.

Respondents were asked to identify the top two business pressures driving investment of time and resources into predictive analytics projects. Aberdeen’s analysis of the findings shows that companies are focusing efforts on achieving improved customer performance with 30% of all respondents identifying ‘elevate customer satisfaction/loyalty’ as the top business pressure driving predictive analytic projects. Improvement of market leadership is also a top business driver.

The improvement of customer interactions and the resulting benefits of achieving gains in customer loyalty and retention are among the top drivers for companies that are currently or planning to invest in predictive analytic capabilities. Interestingly, while 40% of respondents see the ‘improved ability to detect harmful events before they affect the company’ as a top-three business benefit expected from predictive analytic initiatives, only 19% view this as a top business pressure to be dealt with. This indicates a potential disconnect between what companies are expecting from investments in predictive capabilities and the actual business pressures driving the initiatives in the first place.

In addition to the specific recommendations in the full report, to achieve best-in-class performance, companies must consider several areas of the business as potentially being addressed by predictive analytics. Best-in-class companies have identified several areas where they have already started projects (Figure 2).

Figure 2: Top 10 business areas addressed by the best-in-class companies

Source: Aberdeen Group, May 2008

Best-in-class companies are far more likely to be actively seeking a 360-degree view of the customer. This concept pertains to the ability to gain knowledge about customer interactions, perceptions, and behavior from both internal and external data sources, and integrate it to establish a more complete view of the customer across all aspects of the relationship. Best-in-class companies seem to have already established a greater ability to capture information from customer interactions than all other respondents, and are now more heavily focusing on managing customer interactions across all channels and integrating data relating to customers, processes and human resources. These two strategies indicate that a best-in-class approach includes an understanding of how company processes, and the people who manage them, impact the overall ability to become more predictive.

Bottom line

Mastery of predictive analysis is an elusive goal fraught with a complex mix of organizational capabilities and technology management and utilization. Best-in-class companies have started to invest in building the capabilities necessary to become more predictive in several areas of the business. The emphasis of efforts so far has been on customer-focused activity.

Interviews with respondents revealed that customer interactions are an area that companies feel they can gain the most benefit with the least amount of change to their existing business processes. Still, many process oriented environments are also being addressed with predictive analysis, particularly manufacturing and supply chain environments where small tweaks to processes can yield major cost and resource savings over time.

Finally, risk identification and mitigation is also high on the lists of respondents’ expected areas for improvement, yet the level of activity and investment toward meeting these goals does not seem to be at the same level as customer and process focuses. This represents an opportunity for organizations to further investigate the applicability to predictive capability in order to identify and take action to reduce harmful events before they affect the business.

To find out more about Aberdeen Group’s report, Predictive Analytics: The BI Crystal Ball, visit: http://www.aberdeen.com/summary/report/benchmark/4875-RA-predictive-analytics-bi.asp

Case in point: outperforming competition through predictive analytics

At the beginning of 2004, an online retailer of consumer electronics and specialty products was struggling to manage marketing spend and determine which activities and product package offers were driving profitability, and which were bleeding the organization of its diminishing marketing budget. The company's Director of Database Marketing began to search for ways to obtain more frequent updates on campaign performance in order to improve predictability and efficiency of resources spent on marketing efforts.

“Without changing our behavior, we were not going to be able to improve performance. And without access to real-time data about campaign performance, our behavior was not going to change,” said the company's Director of Database Marketing.

That’s when the marketing team began to search for real-time campaign management capabilities. What they found was a predictive analytics solution that incorporated a combination of capabilities that the organization identified as being critical for success, including: access to campaign response information within the same day (or less) from site visits; aggregated view of site activity sorted by campaign; sell-through data for each campaign by product and selling price and; automated price/offer adjustment based on incremental step approach and on-hand inventory levels.

Since implementing the solution, and developing the business rule calculations that drive automated actions, the company has seen positive results. “Our most important advantage is the ability to have immediate access to sales and web activity information, and relate it back to the on-line promotional campaigns. Visitors to our site experience these actions as they navigate to our site. This allows us to analyze performance on a much tighter timeline, and optimize promotions as the campaign draws response.”