Will Predictive Analytics Be the Next Breakthrough?

Performance management - defined as the integration of multiple managerial, customer, operational and financial methodologies - embraces all of the above advances. Performance management integrates methodologies and their supporting systems in order to produce a synergy that's not present when they are implemented in isolation.

Professor Tom Davenport of Babson College authored a January 2006 Harvard Business Review article proposing that the next differentiator for competitive advantage will be predictive analytics. Davenport coined the phrase "competing on analytics." His premise is that change at all levels has accelerated so much that reacting after-the-fact is both too late and too risky. He asserts that organizations must anticipate change and be proactive -and the primary way is through robust quantitative analysis. This is now feasible thanks to massive amounts of economically stored business intelligence combined with powerful statistical software that can surface previously undetected patterns and produce reliable forecasts.

In a recent study sponsored by SAS and Intel, Davenport and two colleagues researched 32 organizations that were leveraging analytical activity. They found that the highest performers were those that: 1) captured and managed large volumes of transactional data; 2) combined it with other public domain data; and 3) had a culture of fact-based decision-making. These organizations have a "test and learn" approach to business changes. As an example, Capital One, the credit card company, conducts more than 30,000 experiments per year to identify desirable customers and price credit offers.

As another example, customers can be finely micro-segmented using multiple factors - such as age, income level, residence location and purchase history - and recognizable patterns can predict which customers are likely to leave for the competition, providing an opportunity for companies to attend to such customers with a deal, offer or higher service level in an effort to retain them. And as an additional example, minute shifts in customer demand for products or services can be monitored in real time, and projections of changes in actions or spending can be used to induce customer behavior.

Davenport 's study validated that predictive analytics can produce substantial benefits. Those companies using predictive analytics reported double the rate of innovation, competitive advantage and agility compared to those respondents not leveraging predictive analytics.

In conclusion, performance management is not just about better managing performance, but improving performance. Integrating systems and information is a prerequisite, but applying predictive analytics is quite possibly the critical element necessary to achieve the full vision of performance management.