MIT study: Data-driven decisions mean higher productivity, profits

Initial findings from new MIT research show that companies with data-driven decision making environments had 4% higher productivity and 6% higher profits than other businesses did.

Ironically for a data-driven market, there is almost no comprehensive data showing that implementing business intelligence (BI) and analytics tools makes a difference to the bottom line. That’s about to change, according to Andrew McAfee, a principal research scientist at the MIT Center for Digital Business.

McAfee and his team recently released the initial findings of a study measuring how companies -- from retail, manufacturing and beyond -- are using technology to make data-driven decisions, and how that technology may impact productivity and profit margins.

“The extent to which a company describes itself as being data-driven is strongly associated with performance,” he said.

In fact, organizations driven most by data-based decision making had 4% higher productivity rates and 6% higher profits, according to the study.

The results may not be surprising, as anecdotal evidence has existed for years, but the research quantifies the philosophy on a wide scale that cuts across industries.

McAfee and his team, which includes the center’s Director Erik Brynjolfsson, examined 330 American companies. Surveys, conducted primarily through phone interviews, tapped an organization’s CIO and a second executive or manager, usually a member of the human resources department, about their technical and organizational practices. All businesses surveyed are publicly traded, allowing the researchers to also take advantage of annual reports as a source of information.

“We can look at the actuals, at the profitability and other measurements of performance and health,” McAfee said. “We don’t have to rely on what they tell us about performance.”

Leaders and laggards on making data-driven decisions

The MIT survey asked businesses to rate their data-driven decision making tendencies on a scale of 1 to 5, with 5 being “extremely data driven.” The results run the gamut, he said, from claiming to be dependent on analytics to just the opposite -- relying instead on intuition, experience and expertise. Most organizations, according to the data, rated themselves between a 3 and a 4. But many rated themselves below a 3.

These results reflect a gap that appears to exist between purchasing BI technology and deriving business value from it. Just last month, Gartner Inc. released findings that the BI software market grew by 13.4% in 2010, reaching $10.5 billion. While McAfee agrees the numbers show an appetite for BI tools, he said BI projects can go awry at the outset if good decision-making processes aren’t in place.

 “We’ve observed that companies are spending money without a huge amount of great guidance, without knowing how to make the best out of those products,” McAfee said, adding that vendor and consultant promises may not materialize once the product is in place.

But, McAfee said, the problem is more complicated than that. Developing a data-driven environment often means a culture change within an organization. Resistance to that can arrest any reliance on technology altogether, but it can also become a hurdle for adopting and adhering to best practices. The survey results show that most companies feel they struggle with consistent business practices and, even more so, describe themselves as having poor IT governance.

“Becoming data-driven requires not just an investment in technology, but a lot of training as well,” McAfee said.

‘Hey, do I need a car?’

McAfee recommends organizations take a more scientific approach toward decision making. A perspective that embraces data as a valuable asset can encourage the practice of theory, research and even experimentation, helping to bring analytic capabilities deeper into the organization, he said.

When deciding to acquire new technology, McAfee said there are two broad ways to think about the investment: “Inside Out” vs. “Outside In.”

Using the “Outside In” approach, companies spend time listening to claims of what different products can provide. From there, a company would decide what product to purchase.

“I don’t like that approach,” McAfee said. “None of us would go about buying a car by asking ‘Hey, do I need a car?’”

Instead, he recommends the “Inside Out” approach, or embarking on a technology purchase by first evaluating where needs exist and how technology can help resolve those needs.

He also called for companies to be consistent in their business processes enterprise-wide while at the same time decentralizing data-based decisions.

“People on the front lines can take advantage of what they know by responding to local conditions and making decisions locally,” he said. “The cool thing about technology is that it allows you to stay on top of those local decisions and see if they’re successful or not.”

And he even recommends the idea of self-organization, pointing to Wikipedia as an example of how creating an environment for people to come together and interact can benefit an organization.

“Self-organization is a scary one to managers because, after all, the way many managers became successful is through orchestration,” he said.

Finally, he said, be externally focused. Stay on top of the market, seek out the latest trends and be proactive when bringing new people into the company.

“Scan the labor market and bring in the best people instead of going through a quick-and-dirty process,” he said. “Spending more time on hiring appears to be linked to better performance.”

While an explosion of BI tools have taken hold of the market in the last few years, McAfee predicts more to come with advances in mobile technology, social media and even artificial intelligence, all of which he believes can make an impact on the leaders who figure out how to take advantage of them.

Ultimately, the center’s research shows “digitization is not a great equalizer,” according to McAfee. Instead, because organizations can struggle with management, consistency and implementation of best practices, it is creating a chasm between organizations forging ahead in a data-driven environment and those that are not.

“Technology is separating the leaders from the laggards,” he said. “You can opt out, or you can become one of the leaders rather than one of the laggards.”

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