If your enterprise is working with Big Data, or at least beginning to stick your toe in the water, and you're not thinking about the concept of "signal", you're about to make a big mistake. Identifying the signal is what will enable you to leverage Big Data effectively. And if you don't, you're going to spend a lot of time and money chasing red herrings.
When we rely on data for decision making, what qualifies as a signal and what is merely noise? In and of themselves, data are neither. Data are merely facts. When facts are useful, they serve as signals. When they aren’t useful, data clutter the environment with distracting noise.
For data to be useful, they must:
Address something that matters
Provide an opportunity for action to achieve or maintain a desired state
When any of these qualities are missing, data remain noise.
I like this definition. It fits hand in hand with the concept of Marketing Science that we proposed earlier this year. Insights (aka signal) are only valuable in so far as they drive business outcomes. And if you're developing insights that influence action within your enterprise, you had better make sure that what you're looking at is actually signal.
This is where Big Data is presents challenges. In his post, Few makes the absolutely correct point that data are noisy. And when data increase dramatically in volume, velocity, and variety (aka it gets BIG), that noisiness grows right along with everything else. All of a sudden, it becomes that much harder to correctly identify signal. As Few points out:
Finding a needle in a haystack doesn’t get easier as you’re tossing more and more hay on the pile.
If you listen to some of the discussion around Big Data, you could easily walk away thinking that if you can capture it, all you need to do is run it through some sophisticated analytic software and "boom" you've got new insights.
The problem with this approach is that pesky noise. As you start dealing with huge data sets, it becomes relatively easy to find "statistically significant noise". You may think you're looking at signal, but instead you're just finding random patterns in the noise that happen to look like signal. This is what can happen when analysts are given lots of data and told to go find something.
How do you combat this? Part of it, as Few points out, is having data analysts that have a deep understanding of how to detect signal and the associated challenges that Big Data presents. The other part, is in how you approach data analysis in the first place.
Again, I'll reference our Marketing Science framework and propose that by applying a scientific approach to data collection and analysis, you improve your ability to correctly identify signal. Instead of randomly looking for patterns in the data, by developing hypotheses and then testing and refining them, you're able to focus on signal that (a is more likely to actually be signal and b) will help drive the business forward.
We've seen some really interesting and impactful results internally with the Marketing Science framework. We've developed insights that both drive business outcomes and challenge conventional thinking. I'll be highlighting a few of these examples in future blog posts. In the meantime, I'd love to get your feedback on what challenges you've experienced with identifying signal within Big Data.
We hear a lot of chatter about a growing IT skills gap, both here in the US and globally. A recent New York Times article provided some statistics that were both frightening and illuminating. Approximately 20 percent of American adults don’t use the Internet at home, work, or school, and don’t own a web-enabled mobile device. While the government has funded a $7 billion effort to expand Internet access across the country, there has been little to no increase in adoption. Employment opportunities are increasingly web-based, but digital literacy rates have remained stagnant.
This gap is not only apparent in the general population, but also in the IT workforce. At the Center for Applied Insights, skills gaps often emerge in our studies as top barriers to success in specific fields. Our 2012 Tech Trends study, which surveyed more than 1200 IT professionals, found that only 1 in 10 organizations has all the skills it needs to be successful. This indicates a major gap – and when we talked to students and educators to get headlights into the future - roughly 75 percent of them report a moderate to major gap in their ability to meet the skill needs of the IT workforce. If the workforce of tomorrow and their teachers are telling us the gap is this big – clearly there’s a problem.
There is also a major skills gap in the security realm. In “Cybersecurity education for the next generation”, we addressed the need for cybersecurity-related academic programs around the world. Less than 60 percent of the students and educators surveyed believe their academic programs address the creation and development of IT security practices for emerging technologies such as Mobile, Cloud, and Social Business.
How can we close it?
Forbes, like the New York Times, wrote an article about the skills gap, emphasizing the disconnect between traditional education institutions and the current, fast-changing job market. Bottom line: institutions aren’t evolving as quickly as they should; only 42 percent of employers believe recent graduates are ready for work. Forbes’ solution? Job seekers must take it upon themselves to develop their own skills, by utilizing online resources. At the same time, companies must invest in comprehensive training programs for their diverse group of new employees, and make job requirements clearer. Noticeably absent was a suggestion for how traditional education institutions can improve. IBM has a tactic to address this. Ad Age featured a story on how IBM, in partnership with its clients, works with academic institutions to design programs that prepare students for real world IT work experience. Examples of these programs include integration with GM at Michigan State, and GlaxoSmithKline at Yale.
At the IBM Center for Applied Insights, we’ve looked at the IT skills gap from both the supply and demand sides. In terms of demand, our Tech Trends paper provides suggestions for IT leaders and practitioners on how to close this gap. For IT leaders, we suggest encouraging skill development across a range of disciplines, designing diverse teams and using social tools to assemble expertise, and extending the skills mission beyond IT, making business leaders smarter consumers of analytics. For practitioners, we suggest concentrating on integrating expertise and deepening specialized skills while broadening knowledge across new areas. Practitioners must combine areas of expertise to deliver more value, strengthen business acumen, and use social tools to solicit and supply expertise.
On the supply side, we discovered that cybersecurity education programs are entering a period of transformation. In order to work in concert with today’s demands, we suggest five key initiatives. (1) Increase awareness of security across the academic community, and produce more graduates from cybersecurity programs. (2) Treat security education as a global issue. (3) Approach security comprehensively, linking technical to non-technical fields. (4) Seek innovative ways to fund labs and pursue real-world projects. (5) Advance a “science of security”.
As technology continues to rapidly transform, skills gaps will continue to emerge. While we won’t try to tackle the 20 percent of non-Internet users in the US population, we in the Tech world have the tools to bridge the gaps in the IT workforce. We must be innovative, adaptable, and forward-thinking. What are the next skills gaps that we’ll explore? Stay tuned for more studies from the Center for Applied Insights that address this skills gap, specifically looking at IT leadership in Africa.
Senior Consultant, IBM Center for Applied Insights
Growing up, there was a very specific sandwich-making rule laid down by my dad. When making peanut butter and jelly sandwiches, you had to use the peanut butter before the jelly. Was this because of some principle which determined that the resulting sandwich held together better when the ingredients were applied in this order? No. It was because he hated the cross-contamination of jelly into the peanut butter jar which was inevitable when it was on the spreading knife first. He preferred jelly-free sandwiches, you see.
This memory of a long held rule, which still govern my actions today, came to me as I was reviewing the Center's current research into security related topics. We're talking with Chief Information Security Officers (CISOs) about their evolution and leading practices in the enterprise. We're discussing how they successfully bring security topics into the business world. Most importantly, we're examining how business priorities impact security choices.
In the realm of mobile and BYOD, you can hardly have a conversation without discussing security. It is a key inhibitor to mobile adoption and one reason companies are looking for managed security solutions rather than simply hoping for the best. Some security leaders argue for keeping personally owned devices out of the enterprise, simply due to the risk potential. Others, accepting that mobile is here to stay, fight to make its use as secure and safe as possible. It's only going to get worse and more and more connected devices enter the enterprise (see this recent Forbes article: "The Next Big Thing In Enterprise IT: Bring Your Own Wearable Tech?")
IBM's prior CISO, and current head of Security Services, Kris Lovejoy wrote about best practices for mobile implementations last year as part of our Security Essentials series:"Enabling mobility: their device, your data". For many, doing business means being mobile. As a security leader, it becomes your job to manage the risk - not just avoid it. Caleb Barlow extended these thoughts with an article this summer, "Yes, It’s Possible to Be Confident About Mobile Security", which focuses on four key ways to mitigate the risk of adding mobile to your secure enterprise:
Risk analysis - Organizations must understand what enterprise data is on employee devices, how it could be compromised and the potential impact of the comprise (i.e. What does it cost? What happens if the device is lost? Is the data incidental or crucial to business?).
Securing the application - In the pre-mobile, personal computer era, simply securing the device and the user were sufficient. When it comes to mobile devices, we also need to think about securing the application itself. As a typical application is downloaded from a store, the end user really has no idea who built the application, what it actually does with your data or how secure it is. Corporate applications with sensitive data need to be secure in their own right.
Secure mobile access authentication - Since mobile devices are shared, it’s important to authenticate both the user and the device before granting access and to look at the context of the user requesting access based on factors like time, network, location, device characteristics, role, etc. If the context appears to be out of line with normal behavior, appropriate counter measures can be taken.
Encryption: Simply put, if the data is sensitive it needs to be encrypted both while at rest as well as while in motion on the network.
What stops you from fully adding mobile to your security strategy? Hopefully it is more than just a distaste for jelly in your peanut butter. This October we'll have more to share on mobile adoption challenges when we release this year's follow up to our 2012 CISO Assessment.
The Guardian's Media Network recently hosted a live chat around the topic of how CMOs can align and use digital marketing and data analytics - two areas we've taken a close look at since the inception of the IBM Center for Applied Insights.
The Guardian notes:
Big data (and analyzing that data) means that marketing professionals are now getting even closer to the customer – they know more about audiences than ever before, with pinpoint precision. At their fingertips a marketer now has detailed facts and figures about consumer browsing habits, their favorite brands, how they use social media. It means that campaigns can be targeted, analyzed and proved better than ever.
It becomes the job of marketers and CMOs to make sense of all that data and not get lost in the noise. Doing this, takes an analytical and curious approach to data. It's easy to find the "big numbers" but more challenging to find the "right numbers." As Surjit Chana, CMO of IBM Europe, has said, the core principles of marketing haven't changed. What has changed, dramatically, is how those principles come to life in today's marketing campaigns, customer experiences, and business results. In our paper, Marketing Science: From descriptive to prescriptive, we found that only 23% of marketing professionals use tested analytic approaches to understand the vast amount of data they have access to. More traditional marketers, using data to describe outcomes but not determine actions, consistently use data at face value - without applying data models or scientific thinking.
When technology and analytic skills don't exist in the marketing teams, it makes perfect sense to build partnerships with those who do. The closest partner in most organizations is IT. Thus, the renewed focus on CMO + CIO collaboration. We're continuing to watch, collaborate, and recommend approaches to our C-Suite colleagues. Check out "Understanding leading retailers" to see how the retail industry is collaborating with IT and partners to serve customers better.
At the IBM Center for Applied Insights, we’re always searching for new best practices to share with IBM, our clients, and the rest of the world. Which is why, at a recent team meeting, we gathered to discuss a new article from McKinsey. In “The do-or-die questions boards should ask about technology”, McKinsey outlines nine questions all boards should be posing to their company management in order to be “technology winners”. You’ll probably notice that few of these questions focus on the technology – they focus on how to get business value from the technology. These nine questions fit so well with what we try to accomplish at the Center, I thought it would be a good exercise to pull key insights from some of our studies to see how we are helping to address them:
1. How will IT change the basis of competition in our industry?
As we’ve seen in many industries, technology is radically changing the competitive landscape, allowing new companies to gain significant market share from established players. In our 2012 Tech Trends report, we segmented over 1200 respondents into 3 groups based on their organizational stance on emerging IT. What we discovered was that the leaders (Pacesetters) were ahead of their competitors in the mobile, analytics, cloud, and social business spaces. These Pacesetters believe emerging technologies are critical to their business success and are using them to enable new operating and business models to improve their competitive position.
2. What will it take to exceed our customers’ expectations in a digital world?
Customer expectations are as high as they’ve ever been - customers demand an experience that is convenient, immediate and hyper-personalized. In “Why leading marketers outperform”, we found that leading marketers deliver targeted, personalized messages to customers in real-time through channels such as social media and mobile. These marketers encourage innovation, measure every customer interaction and touch point, and collaborate regularly with IT. Compared to traditional marketers, these leaders have a three year CAGR that is more than 40 percent higher.
3. Do our business plans reflect the full potential of technology to improve our performance?
Investing in technology is expensive, but it can yield incredible returns and boost performance. We asked over 1500 IT decision-makers about their attitudes in the Platform-as-a-Service space in “Exploring the frontiers of cloud computing.” We found that the leaders, or “Pioneers”, were adopting PaaS as a way to drive innovation and improve application lifecycle across the enterprise. For these pioneers, benefits included increased resiliency, efficiency, data management integration, and optimization. According to one respondent, a VP of IT, utilizing PaaS can make a company “more nimble and cost-effective, with consistent performance and faster roll outs.” Sounds like a pretty good payoff to me.
4. Is our portfolio of technology investments aligned with opportunities and threats?
A technology portfolio must clearly reflect current opportunities and threats, change regularly, and balance short and long-term technology investments. In our Sourcing study, we looked at CEMEX, one of the world’s leading suppliers of cements, as an example of company that leveraged opportunity and minimized risks with its long-term sourcing strategy. CEMEX realized it needed to accelerate its transformation and become more agile to respond rapidly to new opportunities and threats. It engaged with a strategic sourcing provider to cut costs, improve productivity, and deliver transformative innovation. CEMEX built innovation into its sourcing contract by requiring the provider to invest annually in innovative projects that helped CEMEX achieve desired business outcomes.
5. How will IT improve our operational and strategic agility?
Across industries, customers expect new customized products and services, faster than ever before. In order to decrease time to market, companies can leverage IT to improve operational and strategic agility. We studied operations strategy decision makers from financial markets firms in “Beating market mandates: How winners are re-engineering financial markets operations” to better understand the characteristics of leading companies. The leaders in the study excel at meeting both regulatory and marketplace requirements, and typically introduce new products and services in 3 months or less. These leaders are extremely agile - focusing on improving access to analytics and reducing complexity.
6. Do we have the capabilities required to deliver value from IT?
At the Center for Applied Insights, many of our studies are about identifying and understanding the groups that get the most value from IT. Whether it’s Chief Information Security Officers who have a mature security strategy, CMOs who act as Marketing Scientists and deeply understand their customers through analytics, or CFOs who accelerate performance through analysis and prescriptive insight, we want to understand the capabilities necessary to get the best possible value from IT.
7. Who is accountable for IT and how do we hold them to account?
Who “owns” IT is becoming increasingly difficult to determine. Leading organizations have clear operating models that determine accountability for IT activities - it’s not just the CIO who is accountable anymore. In “Accelerating performance: The evolving role of the CFO”, we discuss how the CFO must contribute to the company’s IT strategy as well. This study looks back at the 2010 IBM Global CFO study, to see how the 2010 leaders are performing today. The outperformers excelled in finance efficiency and business insight, and continue to outperform financially today. However, in order for these leading CFOs to accelerate the performance of their organizations, they must now expand their influence beyond financial decisions to broader, strategic choices about business and operating models.
8. Are we comfortable with our level of IT risk?
With explosive growth in connectivity and collaboration, information technology is becoming increasingly complex and difficult to manage - managing risk from IT must be an enterprise-wide priority. In our article series “Security Essentials for CIOs”, we define an approach to manage all forms of IT risk, whether it is cybersecurity risk, IT compliance, risk to the supply chain or technology impacts to business transformation efforts.
9. Are we making the most of our technology story?
The McKinsey article could not have ended on a better question. We aim to bring stories to life - to show how leaders are building and advancing their businesses with IT. We use data to identify best practices, and communicate an IT story that addresses competition, strategy, value, performance, and risk.
Time and again, we’ve identified leaders in our studies and determined that these leaders are asking and getting answers to the nine questions above. If “digital technologies are disrupting industries,” then to be a technology winner in any industry, companies need to ask the right questions about IT strategy, and, more importantly, act on the answers they receive.
Client Insights, Managing Consultant, IBM Center for Applied Insights
Today we’re launching new research of financial services that build on findings from our global cross-industry study, Why partnering strategies matter, released in May of this year. Here, I'll explore how the financial services industry compares to our global study - where they outperform, and where they have an opportunity to improve performance.
What did we find?
The financial services sector has faced a number of challenges in recent years. A global economic crisis slowed growth and put pressure on these enterprises to creatively cut costs while also facing increased governmental compliance and regulatory requirements. Client expectations and sophistication also rose. Similar to respondents in our global study, leading financial firms began a shift in sourcing motivations and execution.
As reported in our cross-industry study, leaders that source broadly and for innovation do better financially, reporting 2x revenue growth and 5x gross profit growth compared to their peers. Financial services respondents are no different. What is different for financial services companies is increased attention on agility achieved through new business and operating models, and responding better by anticipating market shifts.
Does the financial services industry partner differently?
First, we looked at how financial services compare to global respondents across four partnering strategies. When we look at extent of outsourcing and primary sourcing motivation, we find a higher percent of Enterprise Innovators and Enterprise Optimizers in financial services. What does this mean? Respondents in financial services are at the forefront of this shift in sourcing strategy - sourcing more broadly across the organization compared to their industry peers.
Are business priorities and partner capabilities different?
Enterprise Innovators in the financial services sector are similar to leaders in other industries - putting an emphasis on agility and responsiveness to achieve desired business results. However, financial services leaders differ in three areas: their focus on enabling new business models to outperform, anticipating market shifts, and creating a culture of innovation throughout the organization. Enterprise Innovators in financial services order these priorities more than 20 percent higher than their peers in other industries.
Can these leaders do more?
Financial services organizations can do more to improve the connection between shifting sourcing motivations and execution. Enterprise Innovators in financial services are aligning their services with business outcomes, but are less likely to tie metrics to business outcomes. They are on par in transforming their scope to include a broad range of delivery models, include partners in strategy, and vertically integrate contracts across infrastructure, business processes, and applications. However, when it comes to skills, they are less likely to make the required role changes to current personnel. Finally, they are moving toward integrating governance across service providers, but can improve by implementing enterprise-wide governance.
To see our full study - ’Partnering for innovation in financial services’ and to access the global cross-industry study, visit our page.
This is my third post in our series about research into changing sourcing strategy and execution. My first post looked at how leaders are taking a broader and more strategic view of sourcing relationships. In the second, I looked at the dramatic financial impact of sourcing decision-making (2x the revenue growth and 5x the gross profit growth compared to their peers!). Here, I’ll explore top business priorities and partner capabilities Enterprise Innovators are looking at to structure, scope, and govern these shifting sourcing relationships.
Priorities are shifting and capabilities must adapt to match Enterprise Innovators include enterprises which put a greater focus on innovation and sourcing for a broad set of capabilities. Agility and market responsiveness are key differentiators. If they are going to get the rapid innovation and growth they seek, they need specific capabilities from their chosen partners.
Enterprise Innovators are looking for providers that can help them wherever they want to go:
Geographic specific experience and expertise
Proven physical and IT infrastructure
Flexible, integrated supply chains
Creative approaches to existing channels
Proactive ideas for new technology
Enterprise Innovators are experimenting with new business models along the way, trying to learn quickly and driving new ideas to results. If partners cannot respond, they may be left behind.
As I’ve said, these leaders are seeking a different kind of provider, in truth, a different type of relationship. To accomplish their business objectives, they recognize the need to alter the way they structure and manage their long-term alliances. Key facets of this change is outcome visibility, a focus on transformation (not just moving capabilities), and keeping all players involved in governance.
How can we see success?
Historically, service level agreements have focused on operational or cost-centric measures like system availability or cost per service desk call. But new leaders are aligning measurements with business priorities. In the financial services sector, that might mean driving uptake in mobile banking; in the telco industry, it might be lowering subscriber acquisition cost or increasing up- and cross-sell rates; or for a retailer, it might involve meeting an aggressive roll-out schedule for expansion into a new market. This shift in thinking gives rise to new vendor valuation models – ones that can help assess a provider’s contribution to broader business objectives beyond cost reduction.
Must everything change?
Enterprise Innovators are sourcing to get capabilities they need to innovate on a broad scale. So there’s a transformative bent to their sourcing relationships. Their contracts are more likely to be vertically integrated – they may include business process, applications and technology infrastructure – to enable more holistic change.
Enterprise Innovators are more likely to engage partners for specific industry or functional expertise which they can leverage to transform the roles of their employees. If their aim is marketing innovation and they’re sourcing analytics capabilities, they want their partner to do more than just provide a basic service – they want help reshaping how the marketing function works – to drive beyond understanding customer segments to understanding individual customers, from describing what’s happening to predicting what’s next.
Can we just work together?
Enterprise Innovators are pushing faster toward enterprise-wide governance. Because they’re focused on results, they recognize the need for input and collaboration across all the business units and providers involved. If the goal is accelerating the launch of new products and services, then marketing, manufacturing, distribution and sales may all need a voice in related services sourcing decisions.
This post concludes my three part series on sourcing market shifts. Want to continue the conversation? To learn more, visit our page and download the whitepaper!
I came across this Smarter Commerce video a couple of weeks ago and I really like because it gets to the core of what Smarter Commerce is and why you should care about it. If you take a few minutes to watch it, what you’ll notice is that it keeps coming back to the customer as a central theme.
And at the end of the day, that’s really what Smarter Commerce is all about. It’s taking all of that data you’re collecting, helping you develop insights about your customer and the marketplace, and then applying all of that to every aspect of your business.
We recently conducted some research on a couple of specific areas with our colleagues from IBM DemandTec. Specifically, we looked at retail merchants and CPG sales organizations. The retail merchant research was conducted in collaboration with Planet Retail and the CPG sales org research was conducted in collaboration with Kantar Retail.
As we looked at the data from these research projects, we kept coming back to the same central theme as the video above: the customer. Everybody talks about being customer-centric. It’s almost a cliché. But what we found was that while everybody talks about it, most aren’t actually doing it.
Merchants tend to be product and category oriented, and CPG sales orgs tend to focus on their customer, the retailer, rather than the end consumer. Now we’re not saying that merchants should forget about product categories or that CPG sales teams should ignore the retailer, but we found that groups that placed a strong focus on the customer (or more specifically the consumer when talking about CPG) tended to outperform those that didn’t.
These “leaders” were customer-focused and collaborative, both within their enterprises and externally with vendors and partners. And they also made much greater use of analytics to uncover insights about their customers and the marketplace. The differences were really quite striking. For example, Leading Merchants were 1.6x more likely on average to use analytics to drive merchandising decisions, while Leading CPG Sales Organizations were more than 1.7x more likely to use analytics to improve product innovation.
When you are in the business of developing (hopefully) provocative, data-driven thought leadership, every topic or issue can seem like it is undergoing rapid, fundamental transformation. Things are faster. Things are more complex. Things are being disrupted. When setting out earlier this year to take a look at how the role of finance and the CFO is changing, I had to make sure that I wasn’t going to fall into that pattern without due cause.
There are plenty of articles, reports and other quips saying that CFOs can’t just keep the books anymore. Protecting the bottom line isn’t enough. The value that they provide needs to change. Finance leaders have to be more creative, more innovative, and more strategic, yet still maintain operational discipline and efficiency.
Is this true? Are there finance leaders who are doing things differently and succeeding because of their efforts? After research, analysis, study and conversation, I have to say that this is real, and it comes down to those who can manage three areas that are accelerating concurrently and reinforcing one another.
Accelerating technological change…
With economic uncertainty and tightening business and technology cycles it is hard to stay at the cusp of change, let alone get ahead of it. A recent article on the Forbes blog, “4 Ways Technology Is Transforming Business Strategy”, does a nice job explaining why technology is disrupting strategy. Since technology (mainly IT, but also in other areas) doesn’t change in a nice linear way, it’s dramatically reducing the shelf life of business models. The pace of change is out of whack, coming in fits and spurts, and making the job of finance executives, who like things nice and predictable, very difficult. But technology is not just a challenge; it’s also an opportunity to give CFOs and other finance practitioners new tools.
Accelerating strategic change…
Traditionally a functional role, finance has always been responsible for efficient financial operations, ensuring compliance, providing trusted information and managing cash and capital. However, things are getting harder and harder with stability and predictability becoming a thing of the past when it comes to markets, competition, and customers. What can CFOs do about this strategic shift?
In the article, “Think Functionally, Act Strategically”, the author discusses how functional roles, like finance, have to change to meet accelerating strategic change. They have to balance the basic business capabilities and competitive necessities of the past with differentiating capabilities of the future. It is not just about using the current capabilities and processes of the organization anymore – CFOs have to co-create the strategy, the tools, the processes and the implementation plans with the rest of the business.
By embracing and riding technology and strategic acceleration, CFOs can potentially unlock performance gains. We decided to go back and re-examine the results from IBM’s 2010 Global CFO Study, extend the work, and see how organizations were performing financially that were pushing their efficiency and analytical capabilities. You can read the approach and details in the report, but looking at financial measures like revenue and EBITDA, we found that those enterprises that are excelling at efficiency and insight are outperforming financially through all phases of the economic cycle. We hypothesize that this is opening them to new strategic possibilities – evolving into what we call “performance accelerators” (see graphic below).
CFOs and others in the finance function can help manage the acceleration of technology, strategy and performance. By using their current capabilities and developing new tools and processes, they can act as headlights, the gas, the breaks and the navigation system for their organization. We can’t analytically prove the existence of “performance accelerators” yet, but with further research we expect to show that strategic, growth-driven CFOs are seeing accelerating performance benefits.
Client Insights, Managing Consultant, IBM Center for Applied Insights
This is the second post in a 3-part series about our new Sourcing research. My first blog post in this series looked at current outsourcing market shifts - a broader and more strategic view of sourcing relationships. Today I am exploring the financial impact of sourcing decision-making. Enterprises that source broadly across the organization and with a primary focus on innovation perform better financially – racking up 2x the revenue growth and 5x the gross profit growth compared to their peers.
An initial look at average revenue growth and gross profit growth across segments suggested a potential correlation between partnering strategy and business performance. You can see below that respondents who are both sourcing broadly and sourcing for innovation, outperform by considerable margins (as you may recall we are calling these outperformers 'Enterprise Innovators'). However, we knew that a number of other factors – such as industry, company size, geography – could be influencing these results.
We initiated analysis to help rule out firmographic characteristics as the reason for Enterprise Innovators’ outperformance. Against a slate of financial measures, each based on 3-year 2011 compound annual growth rates, Enterprise Innovators trended higher than the average of the other segments combined. This overall pattern is statistically significant. However, since this sourcing study is observational, we could not definitively conclude that Enterprise Innovators’ approach to sourcing causes better financial performance based on this correlation. To help make that case, we used an analytical technique called propensity score modeling.
Propensity score analysis matches Enterprise Innovators with other organizations in the sample that have similar firmographic characteristics, such as industry, company size and geography. In this case, we calculated propensity scores using 68 Dun & Bradstreet variables – those which showed a significant difference between Enterprise Innovators and the other segments.
Enterprise Innovators scored higher than other businesses on all financial measures even after propensity score matching, suggesting their approach to sourcing – i.e., sourcing broadly to drive innovation – was a contributing factor to this higher performance.
My next blog post in this series will look at top business priorities and partner capabilities across the sample, and then explore how Enterprise Innovators structure, scope, and govern their sourcing relationships. Please log in and leave a comment!