What's Really Driving Business Intelligence?
Written By: Christopher Kenton
Published On: March 11 2005
Finding the Deeper Trend in Business Intelligence
If you follow the logic of the major analysts covering the business intelligence (BI) market, the market drivers for business intelligence software are based on fairly simple environmental factors. The most commonly cited market drivers are the following:
Information Overload—Having invested heavily in CRM, ERP, and SCM systems, many businesses are awash in data, but short on actionable intelligence. Being able to aggregate, mine, and analyze data in order to prepare for and respond to business and market events is the next step in making IT investments pay off.
- Increasing Regulation—New laws in both the US and Europe are requiring companies to make their external reporting more transparent, forcing business to develop better systems for storing and retrieving the most current and detailed information on operations.
Demand for Accountability and Metrics—A slow economic recovery has forced many businesses to continue trimming budgets, while requiring greater accountability for every area of spending. Business intelligence, and its associated data-mining, analytics and scorecards, provides the tools necessary to track performance metrics tied directly to strategic corporate goals.
Need to Improve Competitive Responsiveness—With markets exposed to increasing competition, customer demand and pricing pressure, businesses need to reduce cycles by accelerating processes that support aggressive competitive strategies. BI initiatives provide real-time information that can help businesses eliminate process delays and streamline management to improve decision-making and market response.
There's nothing wrong with these descriptions of existing market conditions. Each of them is a correct and compelling reason for businesses to support BI initiatives. However, they don't tell the whole story. In fact none of these market drivers, taken individually or taken as a whole, are enough to explain the level of investment being made in business intelligence software.
Think about it. Businesses have found ways to skirt or delay the impact of increasing regulations for decades. Why would they suddenly respond so rapidly to new regulations today? While information overload is acute, many businesses took a soaking in IS investments over the past few years. What smart CEO would throw good money after bad to try and rescue a previous investment? Metrics and accountability are certainly in high demand while budgets are tight, but how many businesses would invest millions of dollars just to be confident their million-dollar investments are sound? That kind of long-term thinking doesn't move markets in our quarterly-driven world. And finally, yes, businesses are being compelled to be more efficient and effective in order to compete, but that battle has been shaping up for decades among TQM, Six-Sigma, lean production methodologies—does anyone really believe the end of the rainbow is only a dashboard away?
While, each of these market drivers is accurate, they're only symptoms of a much deeper drive—a drive that is shaped by a concern far greater than the threat of regulation, information overload, accountability or competitive response. It's a drive that reflects the deepest fears of a CFO. It's a drive that shapes the search for CEOs that can move the businesses that move markets. It's a drive that cuts straight to the bottom line of the corporation, because it's about the single, all-important factor that defines the success of every business today.
It's all about how the value of a business is measured.
Measuring the Value of a Business
To understand how the value of a business is measured, you need to know what investors look at when they assess a company's worth. Investors consider three things above all else: profitability, growth, and risk. A business needs positive cash flow, clear potential for increasing it, and some hedge against the uncertainty of achieving growth in the face of volatility.
Investors, typical of most people involved in finance, like their money easily counted. They like the kind of value that shows up on a balance sheet—concrete worth that lends itself to crisp calculations showing money in the bank. It's a mentality that relies on relentless consistency, structure, and predictability. The fundamental concepts of valuation, concepts like net present value, are conceived as formulas that everyone, everywhere, in every situation writes the same way.
So when people started talking about "changing fundamentals" during the dot-com boom, a lot of financial people just snickered. Sure, a lot of companies were being sold at values ridiculously inflated over the value shown on the balance sheet, but all that meant was an impending correction—and boy did that correction come. The boom turned into a bust, and many of the highest-flying companies went broke. Markets change, fundamentals don't.
But a few quarters into the recovery, some financial analysts found an interesting trend in the post-bubble numbers. Those market-to-book ratios that had been so inflated during the bubble—the difference between what a business is worth on its balance sheet and what the market would be willing to pay for it—did indeed correct, but not as much as many expected. Since 1982, the businesses making up the S&P 500 had been growing in market value over and above what they appeared to be worth. After the bust, the trend didn't reverse, it merely corrected to the curve that had been steadily increasing for two decades. According to Jonathan Knowles of Brand Finance, a consultancy that specializes in the valuation of businesses, the tangible assets that used to account for 75 percent of a company's stock market value in the 1980s now only accounts for 22 percent of market value.
What on earth does this have to do with BI, you ask? Let's cut to the chase.
Turning Intangibles into Value
We've just seen that the way markets value a business is growing increasingly disconnected from the hard assets of the balance sheet. No one is certain why business valuations keep climbing above assets, but there is a good hypothesis. The theory is that businesses are realizing an increasing level of value from intangibles—things that help a company create value, but that don't show up on the balance sheet. Identifying those intangibles so they can be modeled, measured and optimized is a powerful market driver that is sending managers scrambling into every corner of business operations.
There are lots of intangibles that have the potential to create value, including intellectual property, business processes, specialized training, skilled employees, customer intimacy, corporate culture, brand equity, and too many others to mention. The question for businesses and investors is how to get your arms around intangibles. How do you identify the intangibles that contribute to the creation of value? How do you measure those intangibles to understand the nature of the value they create? How do you improve the value of those intangibles to measurably grow the bottom line?
If, as the trend line of market-to-book ratios shows, the value of intangibles is on a growth curve, these are important questions indeed. The need to identify, quantify and optimize the underlying mechanisms that are driving an increasing portion of a business's value is far more compelling than concern over things like information overload or increasing regulation. Sure, BI is evolving to help you get more intelligence out of your data, faster, to support better decision-making with real-time responsiveness while keeping your business in compliance with new regulations. But don't "miss the forest for the trees". Beyond the drumbeat of short-term pressures, there are more sustainable advantages to be gained from a solid understand of BI tools. Perhaps the most important advantage is the most intangible: the knowledge of what adds value to your company's bottom line.
BI Technology and Beyond
Business intelligence tools provide tremendous utility in running a more responsive and streamlined business. But they also provide the power to learn what dials can be turned to tune your performance in generating market value. Remember taking chemistry in school? BI tools are like a lab full of chemistry equipment: it's all good for measuring and reporting information from events, but if you don't have a hypothesis to test, you can be incredibly efficient in measuring events and still learn nothing about how things really work.
Along with the growing trend in BI initiatives, many businesses are developing parallel programs for modeling and testing their intangible assets, particularly business processes. Some of the more popular programs, like the balanced scorecard, facilitate the identification of value-creating intangibles directly linked to corporate strategy. Like a scientific experiment, it's all about developing a hypothesis about how things work, and using the tools to prove assumptions right or wrong. The ultimate goal is to develop a model that can help you not only measure important events, but to predict results and repeat specific outcomes on demand.
The first place to start is by identifying the intangibles that add value to your business, and how they function. How does your company's corporate strategy shape the business processes of your department? What business processes in your department create real value for your company? How do those processes function, and how can they be best measured for performance? How can they be optimized to provide greater value?
If you're not familiar with concepts like the balanced scorecard, it's a good introduction to the concept of value-creating intangibles. A recent book released by the creators of the balanced scorecard, called Strategy Maps, gives a decent overview of the process of reducing corporate strategy to supporting business processes and their underlying intangibles. It's heady stuff, but if you want to understand what's really driving the BI trend, you need to move beyond information into real knowledge.
About the Author
Christopher Kenton is president of Cymbic, a San Francisco (US) marketing agency and consulting firm specializing in marketing management for technology companies. He is a regular columnist for Business Week Online, the editor of Marketonomy.com, and a frequent author and speaker on emerging marketing trends, including competitive intelligence, analytics, marketing effectiveness and accountability.
He can be reached at firstname.lastname@example.org.