Marc Andrews Observations On Demand

Key Challenges Managing Risk

There's a great article in the March issue of Harvard Business Review that talks about the Six Ways Companies Mismanage Risk.  What's interesting is that, while a portion of it comes down to the governance and processes some organizations have in place, the majority of the issues seem to be related to having the appropriate information and doing the right type of analysis and reporting.

I culled from this article what I thought were the challenges that could be addressed through better use of information:

Relying on historical data

• Rapid financial innovation of recent decades made historical data less useful
• Never re-examined or updated risk models

Lack of integrated view

• Not understanding correlations across asset classes and portfolios or relationship of different types of risks – hedging typically focuses on one type of risk, while ignoring others
• “It is critical to measure risk in ways that cut across organizational silos” to truly understand all the material risks to which a firm is exposed

Narrow measures of risk

• Traditional daily measures don’t capture full exposure
• Requires increased metrics

Unreported risks

• Lack of transparency/visibility into all activity and related risks

Accelerating rate/pace of change

• Requires real-time/intraday visibility and adjustments

Steve Mills Talks to Forbes About the Need for an Information Agenda

Steve Mills was recently interviewed by Forbes magazine to talk about how organizations can deal with all of the information now being captured, and use it more effectively to improve their business.  You can read the full transcript in their article Drowning in Data.

He talks about the opportunity for companies to change how they do business and use information for competitive advantage.  He also raises the issue most organizations are facing, which is navigating information overloads to figure out what information they need, and what information is right.

He references an interesting example in banking:

If you look at a large bank, they have a whole set of product offerings ranging from retail banking to brokerage. They have various private customer relationships--trust, annuities and insurance. You may have a variety of accounts, but do they know you as one person? Do they have a master customer view of you so they can up-sell and cross-sell? For most major banks, the answer is, "No, that's a work in progress." Therefore, they miss opportunities to leverage the capacity of their integrated financial institution. In most cases they have a road map to fix that, but they're struggling to get there.

In this article, he suggests that establishing an Information Agenda can help companies get started, and ensure they are investing in the appropriate infrastructure to support more effective use of information.

IBM Named One of the Most Influential Vendors in Enterprise IT

No surprise that IBM was named one of 'The Dozen' most influential vendors in enterprise IT in the Intelligent Enterprise 2009 Editors' Choice Awards. What's more important is recognition that IBM has "the most comprehensive information management portfolio in the business" and the reference to IBM's focus on helping companies build a "trusted information layer." These are some of IBM's key differentiators...along with its unique ability to understand the business of its customers and help them drive more business value from their information.  Here is the full statement from Intelligent Enterprise on IBM:

BI, business process management, content management, event processing, relational database, in-memory database, information integration, mashup technologies, master data management, enterprise search " you name it, and IBM undoubtedly has it in the most comprehensive information management portfolio in the business. The company also has the vision to bring all the pieces together. Cognos was a particularly nice, overlap-free fit for the company, and in 2008 IBM added Business Viewpoint for flexible dimension management in BI, OLAP, analytic and master data management activities. IBM has stayed maniacally focused on helping companies to build a "trusted information layer." What's more, it adds technologies whenever they emerge as important differentiators.

I'm sure that these differentiators are also part of the reason that IBM was able to "defy the economy" with better than expected profits in the last quarter of 2008 and project stronger than anticipated growth for 2009.

Financial Darwinism - How Can Financial Companies Survive?

Financial Darwinism is quite a catchy phrase. And how appropriate in our current economic environment to highlight the need for financial services companies to evolve.  I just began reading Leo Tilman's book on Financial Darwinism. I'm only about halfway through, but you can fairly quickly discern some good insights into what financial companies must do to survive.  The two most significant ideas I've gotten from this so far are that financial organizations must:

1. make changes to their underlying business models to survive
2. begin incorporating risk management as an integral part of their enterprise-wide business decisions, not just as an after-the-fact policing or compliance function

One of my favorite quotes comes from W. Edwards Deming in an attempt to stress the importance of having the appropriate information

before making decisions. "In God we trust; all others bring data." Once again, W. Edwards Deming provides some great perspective which Tilman uses to stress the importance of change for financial companies.  "It is not necessary to change. Survival is not mandatory."

The need for change though is not necessarily what is illuminating.  It is the type of change that companies must start to make.

No one will deny that financial companies have been making some significant changes over the past several years to deal with factors such as increased competition, reduced net interest margins, compression of banking fees, limited global inflation, the global savings glut, and other pressures to maintain the growth rates investors and shareholders had come to expect.  However, what Tilman argues is that the primary reaction of finance companies was to pursue a variety of corporate finance activities to reduce the cost of captial, increase fee-based business to supplement earnings, and pursue alternative investments and complex financial products, which inherently involved higher risks necessary to provide the higher returns.

Tilman suggests that banks and other financial services organizations must begin to make more full-scale transformations to their underlying business models.  Only then will they be able to adapt to the new economic reality.  And this ability to evolve from their current, static business model to more dynamic business models is the core driver of Financial Darwinism.

As organizations move to more dynamic business models, the ability to understand and take into account the associated risks of any business pursuits will become that much more critical. For example, companies need to move beyond understanding customer profitability to take into account risk-adjusted profitability.  To date, risk management has primarily been driven by regulatory and compliance requirements, such as Basel II.  It has provided organizations with a view into risk, but even that now appears tainted. 

However, if organizations can figure out how to more effectively incorporate risk management directly into their core business processes, there could be signficant benefits. I've already seen a harbinger of this at a large Korean bank. As part of a Basel II project, they chose to perform the analysis of risk data at the beginning of their credit review process. As a result, they were able to reduce credit application processing errors by 30% and dramatically improve the overall quality of their loan portfolio...in addition to becoming compliant with the Basel II regulations.

Of course, these suggestions will not ensure the survival of financial companies in today's environment. But they should at least improve the chances for success and help banks start thinking about how to create the competitive advantage they need.

Why BI Deployments Won't Be Slowed Down by the Recession

With everyone finally admitting that we are in a recession, now the speculation has turned to where spending will be cut. Just as important though, is where it should NOT stop.

Analyst Mike Schiff, from Current Analysis, provides some great insight into why BI deployments will continue to be critical for organizations hoping to come out of this recession ahead.  Specifically, in his report on Business Intelligence: How Will the Recession Affect Its Deployment? he claims that, "While in times of economic growth companies may seek to upgrade their operational systems in order to accommodate expected increases in customer demand, during an economic slowdown these efforts may be delayed in order to fund analytic, BI-based projects for the purpose of identifying new revenue opportunities, retaining existing customers, and finding areas where expenses can be reduced."

He also cites government usage of BI technologies on areas like national defense and homeland security as areas that are not likely to see cutbacks...although I'm not as sure about this with coming change in administration.

However, the fact is, business intelligence tools are critical for organizations to make better, faster business decisions, with a greater level of confidence. Whether it is about which customers to focus on, identifying new revenue opportunities that require minimal additional investment, where to reduce costs with the least impact on revenue, or how to better identify and reduce risk.

You can bet that executives want to be more confident in their business decisions than ever before. And that will lead them to want more information, and accurate information, upon which to base those decisions. There is also increased scrutiny on regularly monitoring business performance so that executives can stay ahead of the curve. This will lead to increased demand for the Performance Management aspect of business intelligence.

In this environment, companies will need to generate new intelligence to survive, let alone create competitive advantages. And Business Intelligence and Performance Management tools are one of the best ways to accomplish this.

Analyst Predictions for Information Needs in 2009

The end of this past year left more for speculation than probably any other year in most of our memories. We're experiencing the most challenging financial crisis we've seen since the Great Depression, plummeting retail sales that will likely change the landscape of the retail industry as much as the banking world has already been changed, continued exponential increases in health care, distrust in our banks and financial markets which has only been compounded by Madoff and what is being described as the largest Ponzi scheme ever, and increased turmoil in the Middle East with terrorism reaching Mumbai and renewed fighting over Gaza.

Of course, this has also led to increased uncertainty. The Dow seems to go up and down by hundreds of points on a daily basis with no clear rhyme or reason. Gas prices continue to fluctuate back and forth. And consumer spending...and investing...is seeming unpredictable. Maybe that's why so many analysts are predicting that companies will need to increase their investments in information in 2009.

IDC, in their report on Worldwide Information Access, Analysis, and Management Software 2009 Top 10 Predictions, talks about the importance of solutions that can "unify access to multiple types and sources of information" and "put better information access and analysis capabilities in the hands of more users." IDC recognizes that IT budgets will be impacted, but suggests that "the economic turmoil will also increase the need for insight into operations, finance, and sales processes." Some of the business drivers they cite include "compliance requirements, the need to compete effectively while keeping down costs, the enterprise information glut, and the recognition that unifying access and management of all types of information improves business processes, increases knowledge worker productivity, and decreases the risk of not understanding the real status of an enterprise because of an imperfect view of its internal information."

Of the top 10, the three I thought were most relevant were:

1. Need for tools to increase the performance and competitiveness of organizations
2. Corporate events (e.g. M&A, executive turnover, staff reductions) will trigger need for investment in capabilities to automate "knowledge" processes with reduced staff
3. Increased need to manage ALL types of information spurred by stricter regulatory compliance and needs for better, more intelligent business monitoring and decision making

Gartner Can't Say Enough About the Need for Enterprise Information Management and Business Intelligence
Gartner has also been jumping on this bandwagon. In fact, in the beginning of December, Gartner release five separate reports, all about this topic.  They started off by introducing a new EIM Maturity Model.  In this report, Gartner claims that organizations cannot implement enterprise information management (EIM) as a single project, but must implement it as a coordinated program that evolves over time. They introduce an EIM maturity model to help organizations identify what stage of maturity they have reached and what actions to take to reach the next level. IBM had actually put together a maturity model almost a year ago, based on experience from several hundred customers that are trying to establish their own information agenda. There is even an information agenda checklist that companies can fill out and submit to get help assessing their own information agenda needs.

Gartner also issued a report on Enterprise Information Management Revisited: Foundations, Progress and Futures, in which they suggest focusing on information governance as a first project for those that are new to EIM, and stress the importance of "defining and socializing" the relationship of enterprise information management to the business and the business role and the benefits that they can expect, as there is still a great deal of misunderstanding as to what "enterprise information management" really means and how it can provide business value.

In Predicts 2009: Enterprise Information Management Will Prove Itself, Gartner makes predictions on the value of EIM and claims that enterprises that adopt EIM can outperform rivals in areas such as operational efficiency, product development and customer service. And in How to Really Do the Five EIM-Related Things Everyone Else Just Thinks They're Doing, Gartner highlights how enterprise information management can yield measurable business benefits, such as increased efficiency of critical cross-company processes and greater information transparency. In fact, IBM's Information Agenda initiative is all about providing guidance on how to realize these benefits and get results you can measure.

Finally, in Predicts 2009: Business Intelligence and Performance Management Will Deliver Greater Business Value, Gartner claims that the current economic crisis shows the importance of trust and transparency in the information that organizations use to run their business. They suggest that companies need to integrate the analytical insights derived from this information into the decision-making processes throughout the organization.

So, it seems that the overwhelming message here is that 1) we're in for some challenging times ahead, and 2) companies need better access to better information to make better business decisions so they can improve their business performance and create a competitive advantage in the market.

Banking's Increased Need for BI in Uncertain Times

There have been many arguments about the increased need for business intelligence in challenging economic environments.  As expenses get increasingly scrutinized and businesses face budget cuts, the decisions they make become all the more important.  And organizations need to make sure they have the right information and tools to help them make better decisions, faster.

And now banks are finding themselves at the center of this magnifying glass, faced with increased pressure to provide greater visibility into risk, and understand their true potential performance, adjusted for that risk.  Unfortunately, most banks do not trust their current view on this, which is why they turned from lending too freely, to not lending at all.

Business intelligence tools, along with access to accurate, trusted information, can help banks get back on the road to profitable growth.  Mike Schiff wrote a great piece on Financial Markets' New Demands and BI and identifies some specific areas where BI usage is likely to come into play.

Top 100 Focused on Delivering Intelligence to More Employees

InformationWeek just published their 2008 InformationWeek 500 report, revealing IT strategies from the 500 best and brightest companies in North America.  There are some interesting findings in this report, including an analysis of how the "Top 100" compare the rest of the companies in the study.

One of the most interesting is that the Top 100 are less focused on lowering costs and increasing efficiency than the rest, but are instead investing more in initiatives that have the potential to increase revenue and build business by finding new ways to engage their customers through technology and delivering more timely business intelligence to employees.  This is pretty much in line with my comments about the importance of leveraging information in today's unique economic environment.  Another interesting tidbit is that when asked what steps these organizations are taking to optimize the efficiency of their business processes, 89% said they are improving data integration between systems or departments (80% of the rest of the companies were doing the same).

It seems like these investments are driving productivity gains too.  Deploying business intelligence tools and new types of collaboration software were identified as the two most effective steps managers have made in the past 12 months to raise company productivity.  In fact, 34% of the 500 companies surveyed said that they are disseminating better business intelligence to more employees faster - a significant jump up from 18% last year.

There is also an intriguing view into the disparity of BI usage across different industries.  90% of retail companies claim wide deployment of BI tools...100% of general merchandising retailers!  Other high users of BI tools were companies in hospitality/travel, logistics/transportation, distribution and consumer goods.  What surprised me was that banking/financial services organizations were towards the bottom of the list!  Could this be a reason for the financial crisis we're facing now?

Overall, it seems that the leading organizations have realized that the key to competing in today's market is to make your employees smarter by giving them more intelligence.

Leveraging Information in Today's Challenging Economic Environment

So, given all of the challenges we are seeing companies face in today's economic environment, is now the right time to be making technology investments?  In a recent webcast, John Haggerty, from AMR Research, spoke about the challenges companies are facing in today's unique economic environment and what they are doing to address those.  He also specifically talks about "why investing in business intelligence and performance management makes sense...especially now."

The fact is, especially in challenging times, it becomes increasingly important for organizations to make better business decisions.  When times are good and companies are going through high growth, there is a lot more room for error.  However, when some companies are struggling just to survive, it is critical that you make the right business decisions across the enterprise - from strategic decisions around where to take the business, to everyday decisions, such as which loans to approve, how to pay out claims, and how to best respond to customer inquiries.  You cannot afford to make the wrong bets, and you cannot afford to alienate customers.

And the key to making better business decisions is to have the right information.  Have all the relevant information.  Have information that is accurate and can be trusted.  Have information available when and where it's needed.  This is the reason why it is important for companies to make the investments required to establish information as a strategic asset.  And the way to accomplish this is to begin creating an Information Agenda for your organization and focus on how you can better use information to address your key business challenges.

The Effectiveness of IT Investments Challenged

I heard an interesting story today about how IBM funded some research by several economists approximately 8 years ago which ended up finding that IT investments were having a positive impact on company performance.  By happen stance, the same week IBM published that report, McKinsey was cited in the Wall Street Journal saying that based on some studies they conducted, there was not a positive increase in value coming from corporate IT investments!  How, and why, did these two different pieces of research indicate such different results?

Luckily, IBM got the economists and the McKinsey team together to sort through this, and the answer was quite intriguing.  It was explained to me as a difference between a glass being half empty vs. being half full view of the world.  But basically, the economists did indeed find several companies that saw a positive impact on performance from their IT investments.  And the McKinsey team did find several companies that saw NO increase in performance from their IT investments.  What's probably more interesting though is to look at the differences between those companies.

What they found was that their were three critical factors that were characteristic of the companies that saw the positive results.  These were:

1) They tailored their IT investments to industry-specific business processes and linked them to key performance drivers

2) They deployed technology in a sequence that built up capabilities over time, as opposed to trying to tackle too large a project (reminds of a Jonathan Kozol quote I heard today - "Pick battles big enough to matter, small enough to win")

3) They co-evolve IT deployments with managerial innovation - in other words, IT investments are part of a broader innovation effort

In a follow up report in 2004 by McKinsey, entitled Next Generation CIOs, they indicate that "CEOs say that IT isn't meeting their (admittedly high) performance expectations."  Even more interesting though is the fact that the CEOs attribute the gap between expected and actual performance mainly to "insufficient involvement of business units in IT projects" and/or "IT's inadequate understanding of their business requirements."

These lessons still hold true today.  And it highlights the importance to make sure that your IT investments are aligned with your business needs.  IT investments can help an organization make significant performance improvements...don't think otherwise.  But I guess the lesson is that you must make sure it is focused on addressing specific business challenges, whereby improvements will result in increased enterprise value.  In other words, innovation that matters!