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The Profit Impact of Business Intelligence
By Steve Williams Nancy Williams
Copyright © 2007 Elsevier Inc.
All right reserved.
Chapter One The Business Value of Business Intelligence
"The social responsibility of business is to increase its profits." —Milton Friedman, Nobel laureate economist
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.
Business intelligence (BI) is a response to this need. It is the next logical progression 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, other companies have gone beyond this and demonstrate the true potential 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, product lifecycles, and customer relationships. BI enabled the company to reduce operating costs by 50%.
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.
Continental Airlines, a U.S. airline company that was near bankruptcy in the 1990s, invested $30 million in BI to improve its business processes and customer service. In the following six years, Continental reaped a staggering $500 million return on its BI investment for a return on investment (ROI) of more than 1,000%.
CompUSA, a major retailer of computer equipment and software, uses BI to analyze 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 performance. 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.
But what is BI? In this chapter, we provide a practical working definition of BI and 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, BI is not a product that can be bought and installed to solve all your problems "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.
A methodology. Although a powerful methodology (such as the our BI Pathway) 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
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
To illustrate this practical working definition of BI, consider how the hotel and casino 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 a startling improvement from Harrah's solid but not spectacular performance only a 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 airline frequent-flyer programs. However, Total Gold was too similar to the customer-loyalty programs offered by other casinos to give Harrah's a killer edge, but it did prove to be a rich resource of data for Harrah's subsequent BI efforts. In particular, the Total Gold data warehouse provided valuable business information about Harrah's customers:
Total Gold cardholders were spending only 36% of their gaming dollars in Harrah'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-rollers wearing cowboy boots stepping out of limousines, the customers who 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 personalized 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, whether to check into the hotel, get their cars parked, or be seated in one of Harrah'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-level card holders received a slightly lower level of service, while gold-level card holders were essentially "flying coach." Harrah's succeeded in structuring its services to motivate customers to try to qualify for higher-level Total Rewards cards.
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 and business analysis is used by Harrah's and many other successful organizations to make more structured and repeatable business decisions about the features and targeted recipients of direct marketing offers. Because motivating and retaining its most valuable casino customers is a key driver of profits, Harrah's has refined its customer relationship management process, a core business process. The process explicitly embeds the use of the above-described business information and business analyses 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, because BI is primarily about profit. That's not a technical term and it's not about bits and bytes; it's about your bottom line. And it's what you should expect 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, the freight industry, in which measures such as "revenue per ton-mile" are the norm. More broadly, to get the most out of BI, you must adapt it to each specific company 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 must be specifically determined for each company. That's the only way to get the best 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), and will help differentiate BI uses from other IT uses. It's also important 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 organizational quest for BI is not new. Approaches to BI have evolved over decades of technological innovation and management experience with IT. Two early examples of BI are
Decision support systems (DSSs): Since the 1970s and 1980s, businesses have used business information and structured business analysis to tackle complex business decisions. Examples include revenue optimization models in asset-intensive businesses such as the airline industry, the hotel industry, and the logistics industry, as well as logistics network optimization techniques used in industries that face complex distribution challenges. DSSs range from sophisticated, customized analytical tools running on mainframe computers to spreadsheet-based products running on personal computers. DSSs vary enormously in price and sophistication and are application-specific. Accordingly, they have not systematically addressed integration and delivery of business information and business analyses to support the range of BI opportunities available to companies today.
Excerpted from The Profit Impact of Business Intelligence by Steve Williams Nancy Williams Copyright © 2007 by Elsevier Inc.. Excerpted by permission of MORGAN KAUFMANN. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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