Category Archives: Best Practices

Screwing up the Screw-Ups in BI

Today I’d like to welcome back Eric Strovink of BIQ [acquired by Opera Solutions, rebranded ElectrifAI].

Baseline recently put a slide show on their site illustrating “5 Ways Companies Screw Up Business Intelligence — And How To Avoid The Same Mistakes,” with data drawn from CIO Insight. The slides are an excellent example of how mainstream IT thinking misses the essential problems of business data analysis.

Let’s take the “screw-ups” one at a time:

  1. Spreadsheet proliferation (97% of IT leaders say spreadsheets are still their most widely used BI tool.)Spreadsheets are one of the most valuable business modeling tools available, and IT might as well understand that they’re not going away. The problem is when spreadsheets (and offline tools like Access) are used inappropriately, to manipulate transactional data rather than drawing it in the right format from a flexible store. The solution provided by Baseline is to “cleanse and validate your data, then migrate the information to a central server/database that can be the backbone of any BI strategy.” Bzzt! Sorry, a central database won’t solve the analysis problem, and at the end of the day you’ll have just as many spreadsheets as before. That’s because a fixed schema data warehouse is a lousy analysis tool, and might as well be on planet Neptune as far as usability for the business analyst is concerned. There’s nothing wrong with a reference dataset, but business analysts need to be able to manipulate its structure as easily as a spreadsheet, or they will simply extract the raw data from it and manipulate the data offline, with the same slow, expensive, and uncertain results as today.
  2. Systems can’t talk to each other (64% of IT leaders say integration and interoperability of BI software with other key systems such as CRM and ERP pose a problem for their companies.) Right! Except that the Holy Grail of trying to extend a “centralized” database umbrella over completely disparate systems is both incredibly expensive and nearly impossible. Baseline suggests “[partnering] with a reputable systems integrator.” Good for them — at least they dodge this bullet rather than getting the answer completely wrong. The right answer is that business analysts should be able to construct BI datasets on their own, as needed, from whatever data sources are useful/appropriate, and it shouldn’t be difficult for them to do so. Concentrating all of the information under one umbrella isn’t necessary; many umbrellas can do the job, and if they’re easy to deploy, they’re both inexpensive and provide a better and more flexible answer.
  3. No centralized BI program (61% say they don’t have a center of excellence of the equivalent of BI.)And they’d be well advised to tread carefully, because BI systems have a track record of poor performance and poor customer satisfaction. Why? Because the analyses you can do with a fixed data warehouse are limited to the views set up a priori by IT or by the vendor, and those views are largely immutable. Baseline dodges this one, too, suggesting the “[creation of] a data governance and data stewardship program.” Can’t argue with that in principle, but a governance and stewardship program doesn’t actually put any meat on the table. How about putting tools into analysts’ hands that they can actually use? Right now?
  4. Data lacks integrity (57% say poor data quality significantly diminishes the value of their BI initiatives.) Hmmm, I wonder why the data are of such poor quality. Could it be that the BI system doesn’t really provide much insight? Could it be that the fixed schemas set up by IT or by the vendor don’t have any applicability to day-to-day questions? Could it be that the inability of the BI system to re-organize and map data on the fly causes errors to persist over time? Baseline recommends spending more money on data cleansing, which might make a cleansing vendor quite wealthy, but won’t help much. It typically isn’t cleansing that’s the problem, it’s (1) the fixed organization of the data, which is guaranteed to be inappropriate for any analysis that hasn’t been anticipated a priori, (2) the ad hoc reporting on it, which has to be easy to accomplish, as opposed to requiring IT resources (see below), and (3) the fact that cleansing can’t be accomplished on-the-fly (as it should be) by the business analysts themselves.
  5. Managers don’t know what to do with results (58% say most users misunderstand or ignore data produced by BI tools because they don’t know how to analyze it.)Even when BI is in place, nobody knows what to do with it. Baseline recommends that “IT staffers… should work closely and regularly with business managers to ensure that measurement, reporting, and analysis tools are supporting business goals.” But this is precisely the problem. For business analysts, BI systems are difficult to use and set up, it is difficult to create ad hoc reports, and it is impossible to change the dataset organization. It is also politically impossible to change the dataset organization if it is being shared by hundreds or thousands of users. How are you going to get them into the same room to agree on the changes?

    So, Baseline is proposing (in essence) that IT resources sit cheek-by-jowl with business users, to ensure that they can get value out of a system that they otherwise could not use. This is certainly a “solution” of sorts, but it’s not practical. Either business analysts can use the system on their own, or the system will be of marginal value to them. It’s that simple.

Innovation Metrics for the Chief Executive, Part II

Yesterday’s post discussed “Measuring the Black Box”, a recent article in Chief Executive that made some very good points about innovation metrics. In particular, we discussed the major measurement traps that a company needs to watch out for and indicated that many of the metrics suggested by the author in the input, process, and output categories were quite good. Today we’re going to review and discuss each the suggestions, the good and not-so-good alike.

Input Related Metrics

  • Financial Resources Dedicated to Innovation
    Good. Innovation requires a constant, moderate, financial commitment.
  • Resources Focused on Innovation
    Good. Innovation requires dedicated staffing commitments. It doesn’t happen without people, and expecting them to be innovative in that five minutes of unscheduled time they have a day isn’t going to cut it.
  • Ring-fenced resources for non-core innovation
    Really Good. Establish a small, core group whose sole focus is on long-term innovation and who are constantly evaluating new technologies, markets, and ways the company can bring significant game changing innovations to existing markets. Make sure this group never gets cut, even in bad times – when you need them most.
  • Senior Management Time Invested in New Growth Innovation
    OK. What’s really important is senior management support. Sometimes a manager just needs to stay out of the way, and, more importantly, keep the other managers out of the way of the innovators so that they can be free to innovate. After all, even if you’re smart enough to get it, when you consider that there are still those that will promote someone to his or her level of incompetence, sometimes the best thing you can do is run interference.
  • Number of Patents Filed
    Neutral, at best. Patents are useless unless you can afford to legally defend them, and if we’re talking a software or business process patent, just because some dumb clerk accepted the application, doesn’t mean the fundamentals of what was in the patent was actually patentable. After all, mathematics is not patentable, algorithms are fundamentally mathematical and logical operations, almost all software is built using languages and data structures that have been in the public domain since the beginning, and just about every process you can think of has been used by business for a long time. (Auctions go back 2000 years, for example.) Furthermore, it takes a lot of time, money, and resources to file and get a patent – resources which could be better spent on innovation. And, more importantly, if you don’t make the details public – it’s trade secret, and you can still sue for IP theft if you really want to be litigious.

Process and Oversight Related Metrics

  • Process speed
    OK. Although an ideal innovation process moves quickly from conception to critical decision points (which could be a decision to kill it), not all do.
  • Breadth of idea-generation process
    Good. A good innovation generation process seeks ideas far and wide. It requires the meeting of the minds that can think broad and deep.
  • Innovation portfolio balances
    Good. Projects should range in length from short to long term, be at various development stages, vary in risk, target different domains, and so on. That way, you don’t have all your eggs in one basket and your chances of success are magnified.
  • Growth Gap
    Really Good. A company should understand the gaps between their strategic objectives and current innovation activities, because, if there is one, someone needs to get on the right track.
  • Distinct processes, tools, and metrics for different types of opportunities
    Really Good. There is no one-size fits all when it comes to innovation.

Output Related Metrics

  • Number of new products or services launched
    Good. This is a clear indication of success, but remember it’s not always the number of successes, but the magnitude. One single invention, the iPod, put Apple back on the map. A few big successes can be just as good as a dozen little ones.
  • Percent of revenues in core categories from new products
    OK. It’s nice when innovation helps the core business, but, as pointed out above, sometimes you need to change the core business.
  • Percent of profits from new customers
    Good. A decent percentage indicates that innovation is helping the business expand.
  • Percent of profits from new categories
    Really Good. A decent percentage indicates that innovation is working at your company.
  • Return on Innovation Investment
    Good. Demonstrates that innovation dollars are worthwhile!

The author concluded with a process for implementation, that made some good points. They were:

  1. Focus, Focus, Focus
    Figure out the metrics that are right for you.
  2. Remember Relativity
    It’s not how well you do on each metric, but how well you are doing overall, and in relation to your competition in particular. (Don’t forget the benchmarks!)
  3. Innovate the Metrics
    Understand that you might not get the metrics right the first time. Be prepared to adjust them as needed.
  4. Align up and down the chain
    The metrics should be aligned with the corporate metrics if at all possible. This paints a picture everyone can understand.

Again, not a bad article, especially considering the target audience.

Innovation Metrics for the Chief Executive

Chief Executive recently posted an article on “Measuring the Black Box” that had some decent advice on the design and implementation of innovation metrics, especially considering the intended audience. In the article, the author noted that the challenge for companies seeking to improve their ability to create growth through innovation is that the metrics they use to measure innovation come with a high risk of actually leading them down the wrong path.

The author noted that managers hoping to unleash the innovative potential of the firm need to be mindful of the critical measurement traps, and that if they really need metrics, that they should think about creating a widespread set of metrics. (It also said they should ensure their executive dashboard constantly matters the innovation metrics that matter most – but I have to take serious exception about the use of dysfunctional dashboards. It’s true that executives should monitor the metrics regularly, but I think a better idea would be to, I don’t know, actually talk to the underlings.) The author then outlined three of the major measurement traps, and this was the part of the article that the doctor liked.

Measurement Traps

  • Too short a list of metrics
    The nature of innovation is that there isn’t one – or even one hundred – metrics that can capture is. (After all, if you knew how to measure it, you’d already know what it was.) Many companies often focus on a single innovation metric – such as the annual rate of return on their innovation activities. Although this is a useful historic metric, it can lead companies to inadvertently prioritize easily measurable markets over difficult-to-measure ones or short-term projects over longer term ones, when, in fact, the difficult-to-measure market, emerging market, or the idea that’s five years ahead of its time could be the one that really skyrockets the company from obscurity to the top of the Fortune 500.
  • Encouraging sustaining behavior
    Many metrics implicitly – or explicitly – encourage companies to focus on close-to-the-core sustaining innovations that promise incremental returns at best. Although they might be good, they will prevent substantial growth. And considering that Bain & Co. have found that the average business life-span is now a mere 14 years and that only one third of the Fortune 500 will get through the next decade unscathed, sustaining behavior is just not sustainable any more.
  • Focussing on inputs over outputs
    A company that tracks only input related metrics runs the risk of having resources (and scientific ones in particular) working on interesting but, ultimately, low impact projects.
    Consider the 2006 study referenced by the author that highlighted companies with the largest R&D budgets, where the leader was Ford. I’m sorry, but if they were truly innovative, they would be doing a heck of a lot better than they are. Innovation isn’t about how much money you throw at the problem, it’s about what you get in return. And that, I’m afraid, requires not only giving your people the time and resources they need to be innovative, but the freedom to be innovative.

The author then presents a balanced set of input-related, process-related, and output-related metrics for those that feel the need to constantly measure the company’s innovation-related activities, inspired by the Boston Consulting Group’s suggestion that the metrics must be balanced. Some of the metrics presented are good, some of them, not so good. Thus, in our next post, we will review each of the metrics suggested and briefly discuss their relative worth.

the doctor Goes Mental on Auctions

With respect to e-Auctions, there’s a host of myths out there that need to be busted. Where-forth they sprang from, I don’t know, but to the graveyard, they must go! I’ll start with some of the more dangerous ones, and maybe the experts from e-Sourcing Forum [WayBackMachine] and Where Next will chime in with some of their personal favorites (or is that afflictions) in the comments.

Myth 1: Auctions won’t save me a single penny!
Dozens upon dozens of providers have saved hundreds upon thousands of clients millions upon tens of millions (and sometimes hundreds of millions) of dollars using e-Auctions – and sometimes saved this much on the first auction! Done right, on the right category, an e-Auction will save you money – with savings in the 5% to 35% range, depending on the category and whether or not this is your first time applying serious e-Sourcing to the category.

Myth 2: I’ll e-Auction it! e-Auctions always save money!
This myth is almost as bad as myth #1. Not everything can be auctioned – and anytime some fool starts with the one – and I mean the one – high dollar category in the company that can’t be auctioned, and gets dismal results, he all of a sudden does a 180 and decides that he was wrong, and that myth #1 is right – and won’t ever budge from that position. (Even though his stupidity costs his company tens, if not hundreds, of millions!) There are a number of requirements for a successful e-Auction. The first two are the existence of a competitive supply base and demand exceeding supply. If there are only two suppliers in the whole world for the item you need, and if demand is increasing faster than their production capabilities, even if the suppliers agree to an e-Auction, your prices aren’t going to go down. The suppliers are going to bid high and stay there. And that’s if you’re lucky! If you’re unlucky, they’ll collude and you’ll be up sh*t creek without a paddle or a way to plug that slow leak in your canoe.

Myth 3: If I don’t like the results of the e-Auction, I can just hold it again.
If you believe this, then you’re the one giving e-Auctions a bad name! Assuming you can even get any of the suppliers whose chains you jerked to even agree to another round, do you really think they’re going to give you anywhere near their best price? And do you think they’re going to want to participate in your future auctions? And do you think they don’t talk to each other? The rule is this – if you commit to an e-Auction, you commit to an award based on the result of the e-Auction – whether you like the results or not. That’s why you do your homework before deciding to do an e-Auction and make sure that the category, and market, is right for an e-Auction. If it’s not, you choose another negotiation method, such as a multi-round sealed-bid RFx with Decision Optimization to help you appropriately analyze potential awards.

To find out more about the Key Steps to a Successful e-Auction and the ethics you need to abide by to build and maintain a positive reputation in the supplier community, check out the e-Auction wiki-paper over on the eSourcing Wiki [WayBackMachine]. You’ll be glad you did.

Supply Chain Finance : You Have To Get It Right

Aberdeen and Hackett are right – Supply Chain Finance is important – and poor supply chain finance can trap millions, tens of millions, and, if the organization is large enough, hundreds of millions of dollars in the supply chain. However, the only way to free up that money is to get it right – and that doesn’t necessarily mean following someone else’s lead. A lot of the initial strategies that have been devised to free up cash are not strategies for success – but strategies for dismal failure in the long run.

And, even worse, a lot of articles, including “Where’s The Money? It’s Trapped In Your Supply Chain”, which I recently discovered over on Supply Chain Brain, don’t distinguish between the good strategies and the bad strategies. This article in particular mixes recommendations for better handling of payables, early payment discounts, extending days payable outstanding, inventory reduction, better handling of receivables, better supplier management, deployment of EIPP, better collaboration, closer cooperation with finance, VMI, consigned inventories, transit time reduction, global inventory leverage, and activity-based management, and network optimization as if they’re all good and equal – sometimes mixing recommendations for multiple options in the same sentence – when in fact some are quite good, some make little difference, and some have the potential to be disastrous to your supply chain.

Only six of these – better handling of payables, inventory reduction, better handling of receivables, better collaboration with finance, transit time reduction, and network optimization – are guaranteed to always be good if done right. Seven of these – early payment discounts, better supplier management, deployment of EIPP, better collaboration, VMI, global inventory leverage, activity base management – can be good if done right, but can be done perfect and have little effect. This leaves extending days payable outstanding and consigned inventory, two options that are generally bad decisions.

Let’s start with the good. Better handling of payables and better handling of receivables are obviously good – since they deal with the movement of cash, but as suggestions, they aren’t very helpful. How do you handle payables better? How do you handle receivables better? In the latter case, you keep track of who owes you what, when, and make sure to follow up if the payment doesn’t show up when expected. In the former case, well, that’s really a large part of what supply chain finance is all about. The most common recommendations are early payment discounts and extending days payable outstanding, but the first has to be done right to be good and the second is rarely the right decision, unless you have the habit of paying for goods before they are received.

Inventory reduction is always positive, since it costs you money to hold goods in inventory. And if the goods take up a lot of room, or have a high value and require a lot of security, a large amount of inventory can be very costly. Similarly, transit time reduction within a given carrier mode can save money since each day a good is on the truck, or ocean freight liner, adds cost. (Transit time reduction does not imply switching carrier modes as this can raise costs. It means optimizing routes and handoffs within a mode to reduce overall costs.) Collaboration with finance is probably the best thing supply chain can do. Supply chain needs to understand how much each potential buy can cost from a TCO perspective, and this includes taxes, VAT rebates, potential rebates for dealing with MWBE suppliers, and other costs only finance will have a good handle on. Furthermore, finance cannot optimize use of working capital if it doesn’t understand what commitments are outstanding. Finally, network optimization can be effective as this can lead to reduced inventory, shorter transit times, and a better understanding of costs and working capital needs. But it’s not easy – and will require some good optimization tools and a good knowledge of network planning. (In other words, it’s something that should be left to the experts and not the low-hanging fruit you should start with to see some early successes and gain support for your initiatives.)

This brings us to the middle ground where the strategy can be good, or even very good, if effectively employed or of almost no benefit at all if not employed judiciously. Early payment discounts often make a lot of sense, especially when compared to the shortsighted strategy of extending days payable outstanding, but this is only true if the supplier is not forced to take the discount and if the discount amount is more attractive from a suppliers total cost of operation when compared with the costs the supplier would incur from borrowing working capital. Better supplier management is always a positive from a supply chain perspective, but this doesn’t mean that the supplier will be capable of reducing costs. This tactic is very situation dependent.

Deployment of an e-Procurement solution will usually help in terms of speeding up invoice processing and increasing supply chain visibility, but unless checks and balances are put in place to make sure invoiced amounts equal contracted rates and that payments are made at appropriate times, it’s not guaranteed to be a win. Better collaboration always helps, but like supplier collaboration, is not guaranteed to reduce costs or free up working capital. Sometimes, all it does is improve quality and reliability.

VMI can be a good call if the vendor can manage your inventory better, but if the vendor is not experienced in 3rd party inventory management, this can actually end up costing you. Global inventory leverage sounds great, but not all banks will be willing to lend against inventory in countries they do not operate in – you’ll generally have to get a 3rd party financing solution to buy in. Finally, activity based management is good in that it helps you identify the costs corresponding to a process – but your supply chain is more than a collection of activities, so you really have to understand where this fits, and where this does not, to get any benefit out of it.

This brings us to the bad. Let’s start with consigned inventory. All this does is pass the costs on to your supply partner, who might not be in your financial position. This will force them to take out more loans, at higher rates, which will only increase their total cost of operation and, thus, the total cost per unit they have to charge you in the future in order to be sustainable. Then there’s extending days payable outstanding, which like consigned inventory, simply passes operating cost onto your supplier. But it’s even worse – because now the supplier doesn’t even have any inventory to leverage in negotiation for that working capital loan! As a result, they might be forced to take out loans at 20% to 40% interest just to pay their employees, while you fret about only making 2% in your money market investments and only having 500M in your bank account. What do you think that’s doing to do to your cost when the contract comes up for renewal, provided the supplier is still in business and willing to have you as a customer? Extending days outstanding to 60, 90, or even 120 days might make short-sighted wall-street happy, but all it’s going to do is hurt you in the long run. Winners don’t follow the market, they lead it. So do the right thing and pay your suppliers promptly, just like you expect your customers to pay you promptly.

Furthermore, if you really want to get a good handle on what Supply Chain Finance really is, what strategies you should be considering and, more importantly, what strategies you should not, start with the wiki-paper A Supply Chain Finance Primer over on the e-Sourcing Wiki [WayBackMachine]. I think it will be worth your time.