This article originally appeared on the BeyeNETWORK
Business intelligence (BI) initiatives take place in company-specific business contexts where they must compete with other IT projects for resources. Business intelligence is downstream from day-to-day transactional systems and enterprise applications; and as a result, BIinitiatives often must live with technical decisions that have already been made. Finally, business intelligence is affected by a company’s IT strategy and IT operating policies. These and related factors affect what business intelligence can accomplish, how long it takes, how much risk it poses, how much reward it offers and how much it costs.
The mission of IT is to support the business. While this is simple in concept, it is complicated in practice: supporting the business can mean many different things. It can mean relatively straightforward activities, such as providing and managing Internet access for the company. But it can also mean highly complex endeavors, such as migrating a global corporation to a common enterprise resource planning (ERP) system. The latter often entails substantial changes to existing business processes or substantial customization of the packaged ERP software application – both of which have serious risks and life cycle cost implications.
For the modern company of any size, managing IT amounts to making a series of investment decisions (bets) about technologies, productivity improvement and ultimately about profit and business performance. To complicate matters, many business executives in large companies are not well-versed in IT. While an effective chief information officer can help, these business executives are called upon to make multi-million dollar investment decisions that have substantial risks and substantial impacts on the business capabilities of the firm. Also, IT and business executives often speak different languages. IT concepts that have a very specific meaning to IT people often have little resonance for business people, and vice versa.
In the face of such complexity and risk, leading companies have adapted portfolio management techniques to the task of managing IT. The IT portfolio can be thought of as all the IT needed to support the business. It can range from basic infrastructure like networks and computers, to transactional systems such as point-of-sales terminals and ERP systems and finally to BI systems. A depiction of the IT portfolio is shown as Figure 1 below. It is adapted from a book on IT strategy written by Peter Weill and Marianne Broadbent called Leveraging the New Infrastructure – How Market Leaders Capitalize on Information Technology. (Weill and Broadbent, 1998).
Figure 1: Structure of the Corporate IT Portfolio (adapted from Weill and Broadbent, 1998)
The foundation of the IT portfolio is infrastructure, which can be thought of as a utility that promotes a company’s ability to leverage IT. The utility provides many of its services as shared services, which is both a cost-optimization strategy for an agreed-upon level of service and a way to ensure that all the foundational elements of the infrastructure work together. A familiar example of this approach is the plumbing and wiring of a house, where we want all the pipes to fit together and all the wires to support standard appliances.
The next layer of the IT portfolio is composed of transactional applications (transactional IT) that allow the company to conduct its day-to-day business. Transactional IT has evolved from “home-grown” custom-developed software to packaged, standardized applications that tackle various aspects of the business. Those aspects include sales force management, customer interactions, order processing, inventory management, supply chain management, purchasing, warehouse management, manufacturing execution and financial reporting. The general motivation for investments in transactional IT is operational efficiency and effectiveness, though in some cases having stronger transactional IT capabilities can confer a “first mover” advantage. Two companies that reaped this advantage are Dell and Cisco, whose transactional IT systems integrated their entire supply chains and allowed them to offer differentiated customer service combined with lower prices.
The top layer of the IT portfolio consists of strategic applications and informational applications. Strategic applications are those that result in competitive advantage to first movers and early adopters. The classic example is revenue optimization applications developed in high fixed-asset businesses such as the commercial aviation and hotel industries. The combination of computing power and complex operations-research models allowed early movers to dynamically balance supply and demand by adjusting prices to fill airline seats and hotel rooms instead of leaving them vacant. Done well, business intelligence has the potential to deliver strategic applications.
Informational applications, on the other hand, aim to provide business leaders and managers with the information they need to effectively address strategic, tactical and operational business challenges. In our view, this part of the IT portfolio is populated by a wide range of tools and techniques, including:
- Spreadsheets and spreadsheet-based databases, sometimes referred to as “spreadmarts”
- Desktop databases for workgroups or departments
- Desktop query and reporting tools
- Desktop domain-specific packaged software, such as linear programming software
- Server-based query and reporting tools
- Server-based online analytical processing tools
- ERP-based reporting tools
- Packaged management information systems, such as human resources information systems
- Packaged analytical applications (for example, supply chain analysis and customer analysis)
- Packaged analytical applications for business tasks such as budgeting or activity-based costing/management
- Data mining software
- Customized data marts and data warehouses
In practice, there are a lot of different ways that companies use IT to provide useful information. In fact, it’s reasonable to say that information usage at many companies is ad hoc and idiosyncratic. BI methods and tools exist to bring order, efficiency and consistency to informational IT so that companies can manage their affairs with a single version of the facts. Further, business intelligence can do more than just make information available. By providing better analytical tools and more structured, information-rich decision processes within core business processes, business intelligence can improve profits.
In addition to its role in informational and strategic applications, BI methods and tools are also being used to enhance transactional applications. The classic example of this is the way that Amazon.com uses transactional history, data warehousing, data mining and business intelligence to display individualized recommendations of additional items a shopper might wish to purchase. Other potentially fertile uses of BI methods and tools in operational contexts can be found in manufacturing, customer service and order fulfillment contexts, where highly profitable customers can be given preferential treatment based on business rules and access to transactional history and customer lifetime value calculations.
As just one of the types of potential IT investment within the IT portfolio – albeit an increasingly important type – BI investment opportunities are affected by each company’s IT strategy and IT budget. IT strategy can be thought of as the set of choices a company has made around key questions such as:
- What is the scope of IT capabilities and services needed to support our business strategy?
- Which of those capabilities and services should we provide internally and which should we purchase or outsource?
- With which of our customers and suppliers must we collaborate and how will we use IT to do so?
- How do we create value for our customers and how can IT help us do that?
- Where do we want to be on the risk-reward spectrum when it comes to IT? Are we leaders, fast-followers or late adopters?
- How can IT help us compete? Where do we want to stand in relation to IT use by our competitors?
- What strategic opportunities can IT enable for us?
- Are parts of the IT portfolio vital to our business? If so, which ones, and which can/should be outsourced?
- Do we see IT as a cost to be minimized or as a competitive weapon?
Based on the answers to these and related business questions, a company can then set about determining its IT budget, which includes capital and operating budgets.
Coming back around to BI investment, we see that BI initiatives must compete with other IT investment opportunities for funding, and this often entails navigating the IT capital budgeting process. Whether the BI initiative is at the functional, business unit, or enterprise level, it must typically develop a business case, return on investment analysis, cost-benefit analysis or similar document.
The basic business case for any potential BI investment is profit improvement and (especially for government agencies and non-profits) more cost-effective achievement of the organization’s mission. The specifics for any organization can be developed via BI opportunity analysis. The BI opportunity analysis provides a cogent description of how business intelligence would be used to improve business performance and what business process changes would be involved. We can discuss risks and rewards with some level of empirical rigor; and depending on how much cost analysis has been done, we may be able to define the level of investment required at a reasonable level of specificity. Whether we are developing the business case for BI-driven profit improvement as an enterprise initiative, or for a BI portfolio for a business unit or for an individual BI investment, a reasonable amount of structured analysis will leave us in a very good position to discuss the business benefits (business value capture mechanism) and the order of magnitude of costs that must be incurred to achieve those benefits.