Have you created an analytical function to drive your intelligence out of your data? If not, then you are not a Datavore - you are just a data store. David Reed looks ar the new research which explain the difference between being data-rck and enriched by data.
Is your business collecting data from its online activities? Chances are it is, since you have to work quite hard not to create data stores from any web site these days. But does that data get analysed and then put to use in your decision-making? This is less commonplace than might be assumed. When Nesta carried out a research project among 500 UK companies last year, it found that just 18 per cent fell into the category it dubbed “Datavores”.
At the heart of what makes these practitioners different from the general body of data owners is a suite of practices, including business intelligence, data visualisation, A/B testing and data mining. These are what distinguish an online business that has some data from one that is gaining competitive advantage by leveraging that asset.
But just how much advantage is there to be had from investing in analytics in this way? To answer that question, Nesta has drilled further into its survey data - and carried out a supplementary research project - which has now revealed some compelling findings.
Take note: Nesta estimates that data analysis and reporting has the strongest effect on performance – according to its model, firms that are one standard deviation above the mean in their levels of online data analysis and reporting (16 per cent of firms in the sample) are almost 15 per cent more productive. A single point increase in online data use is associated with an 8 per cent higher level of productivity.
The key word is “use” - data collection on its own appears to have no effect. By combining insights from its research with indicators of financial performance and productivity, run through properly-constructed econometrics models, the charity has been able to prove that there really is a positive return on investment from analytics.
Juan Mateos-Garcia, economics research fellow for creative and digital economy at Nesta and co-author of the report, explained to DataIQ: “Datavores do more of all of those things - they collect data more comprehensively, they are more thorough in their analysis of that data and they apply those insights to their decision-making more widely than other businesses. The co-efficient in the model tells us that companies that are more analytical in their approach to data experience higher levels of EBITDA.”
By comparing companies which had been identified as Datavores in the first report with the broader sample of businesses, then applying controls to filter out what was really making the different, Nesta has convincingly shown that being a Datavore is a question of culture and practice, not just one of possession of data. “The message from the research is for everyone - it is not isolated to a particular type of company,” says Mateos-Garcia.
Nesta found high correlation coefficients between indicators of online data activity: firms that are more comprehensive in their data collection also tend to use more tools for its analysis and reporting, and also deploy data for decision making in different parts of the business. “In other words, firms tend to carry out different online data activities at the same time – consistent with the idea of a ‘data value chain’,” says the report.
“There is a sense in which data is now considered as part of the structure of the company, in how it is able to generate superior profits and create attractive propositions. Data is seen as an integral consideration when making decisions. It will be inevitable that this becomes part of due diligence to consider what plans are in place for data and analytics,” he said.
There are competing approaches to how this data resource gets analysed and those insights distributed, however, and they are not equal in their outcomes. According to Nesta, firms will best be able to reap the benefits if they allow their employees to act upon its insights without necessarily first having to clear their actions with their managers.
This is a critical finding in the report. “We interpret this result as suggestive that those firms which are more willing to reconfigure – and perhaps even disrupt – their production processes in response to the opportunities created by the increasing availability of online data enjoy higher productivity gains,” it notes.
Data has become ever easier to capture from core business systems, which might be taken as an argument for decentralisation of decision making. Yet the authors note that, since it is easier and less expensive for that information to be captured and transmitted to managers, this could push ownership of analytics towards the centre. “If online data analytics lead to an increased ‘quantification’ of knowledge across firms, it could conceivably result in higher levels of centralisation in decision making,” says Nesta.
That would be a mistake. Firms that intensify their data analysis and reporting while granting their employees autonomy experience a boost in productivity almost four times as high as those that are similarly intense in their data analysis and reporting, but who have centralised decision making (18.6 per cent compared to 4.7 per cent), according to Nesta.
It found that firms which are one standard deviation above the average in their data analysis and reporting measure generate an additional operating profit of £3,180 per employee. Companies that are more intensive (ie, one standard deviation above the mean) in their data analysis and reporting generate a return on equity 4.3 percentage points higher than the average.
This finding was carefully teased out of the data and is therefore reliable. Says Mateos-Garcia: “Is it the case that empowerment is good for a company regardless of whether they are data-driven or not? We controlled for empowerment against IT investment to identify the effect that is gained from empowerment and data activity. It is not just companies where they are encouraging employees to become more data-driven - it is the way they think about data and how it is interpreted by analysts that is changing their corporate strategy.”
Using the data that has been collected to drive analytics at the front line becomes a virtuous circle. Analytics for the empowered makes them more productive, according to the report. “Online data analysis and reporting - that is, how many techniques a firm deploys to analyse its data (ranging from basic descriptive analysis and customer segmentation to controlled experiments or data and text mining) and how they report the insights (through reporting, dashboard and visualisations, reporting of trends, etc.) - is very strongly associated with higher productivity,” says Nesta.
The benefits of becoming an “analytical firm” can no longer be doubted. But getting to that state continues to be a challenge. As Nesta points out, “only a small minority of 18 per cent – the Datavores – say that they primarily rely on data and analysis when making decisions aimed at growing their sales, while 43 per cent say that they prefer to use intuition and experience when making these decisions.”
Gut feel is still the manager’s best friend, it seems, even when it does not deliver the benefits which might be believed. But adopting data and analytics is no simple matter. “It may include disruptive - and therefore possibly controversial - changes to their organisational structures and business processes,” says Nesta. For many managers, that is just too difficult to contemplate.