Monday, January 16, 2012

Power of Analytics

I was reading this book “Competing on Analytics –The new science of winning”; It is a must-read for number crunchers and ambitious bankers in particular. The authors (Davenport & Harris) have delightfully brought out how analytics can turn a company into a winner. According to the authors (Davenport & Harris) the following four factors are vital for successful “analytical companies”
Supports a strategic capability
Enterprise wide
Commitment of senior management
Company makes a strategic bet on analytics

Analytics – as any number-cruncher knows – has always played a key role in decision making in banks and financial services. It is not something new. However, more and more companies are leveraging this today to propel themselves into big league.

The obvious example of use of analytics in banks and financial services is in the development of custom scorecards to predict default. The larger banks have dedicated “decision sciences” teams to handle this. While smaller banks buy credit scores from the credit bureaus, the larger banks develop and deploy a  wide array of  score cards that are designed to serve specific business purposes.

But the larger more prevalent deployment of analytics is in performing ad-hoc analytics to find answers to specific business problems. These vary in complexity and the type of problems they are trying to address.
For example credit risk departments in retail banks have used the power of analytics in approving/providing lines of credit to customers.  In making these loan decisions, banks usually compute debt to income ratios, number of other loans, regularity of repayments, any unpaid and past due loans,  membership on rewards databases, loyalty to the bank etc.  to help make prudent credit decisions.

Marketing also is a key user of analytics. An example is how banks monitor existing customers who shop to refinance their mortgage or auto loans. This is helped by “triggers” from credit bureaus. So if you have your home mortgage financed by bank A but would like to shop for better rates, Bank A will get a trigger from the credit bureaus that your credit was pulled by Bank B;  Now Bank A , using analytics can and provide a counter offer to you.

Technology impact on analytics
Analytics is now helped in a big way by new developments in IT and Business Intelligence. The new buzz words in technology - Big Data, Cloud, Social media & Mobility have greatly impacted analytics.  For example new BI tools that leverage the 64-bit architecture can help process huge volumes of data in-memory that has not been possible earlier. This enhances the speed and depth of analytics.  

Mobility adds a key dimension to delivery of analytics. It can now reach top management 24/7. The iPad is rapidly changing board meetings by providing depth and ease to business leaders. New visual analytical tools can help managers perform scenario analysis during meeting and provide useful insights almost instantaneously.

Social media analytics is now emerging as a new discipline by itself. For example bankers are finding out that people with similar credit risk “like” similar friends on Facebook.  While this definitely needs more empirical data to be broadly accepted, it is making significant inroads and will be closely watched in the coming months.
The US economy is slowly emerging from recession.  I think analytics will be a key player in helping Banks to find their way back to profitability.