"Big data” (a buzz word) is a term that more and more businesses know. It's essentially a term that signifies large and complex amount of data sets — structured and unstructured — that are notoriously hard to process and analyze with traditional applications. What's important isn’t the quantity but what organizations DO with “big data”. A major problem with big data (or data in general) is that companies are not focused on analyzing data for insights; they simply don't know where to start or what to do with it!
Companies nowadays must have projects that address data transformation in order to support decision making and planning. Although businesses are gathering a huge amount of data, the game isn’t about who has more data — it's about who can use the data in such a way that makes a difference (business impact).
Most companies in the manufacturing world and beyond have already invested in ERPs. Now, it's time to look to the future. With massive ERP implementations occurring over the last few decades, companies are now in a great position to take that base of Business Intelligence data and look toward analytics capabilities, like prescriptive, that can impact financial performance in a drastic way by:
- Providing forward-looking insights
- Aligning the enterprise to the optimal course of action
- Quantifying trade-offs fast and with a low cost of ownership
- Increasing the ability to communicate and collaborate across functions
Accessing the above capabilities — as simple as they seem — will lead to significant performance improvements. With prescriptive, businesses are embracing such technology to predict trends and prescribe the proper course of action to optimize the enterprise’s core objective - profit.
Prescriptive Analytics: The finance function metamorphosis
The finance function is facing major challenges, mainly around the question – “How can the finance function continue delivering value for critical business actions?”
With ERP implementations across so many industries, the finance function was left with gaps:
- Data from ERPs used in decision-making is backward-looking
- Decision-making is silo-based and supported by silo-based technologies
- Planning is sequential:
- At the strategic level, it starts with a financial model and translates to operations and demand.
- At the operational level, it starts with demand and translates to operations and financials.
New technologies like prescriptive bring transformation to the finance function by bringing to life the ability to dynamically model the entire business by providing a holistic perspective that considers constraints and consequences that impact every decision. We now have technology that can optimize the entire enterprise and significantly improve performance.
Prescriptive analytics can now deliver deep visibility into the business — offering the ability to predict change and giving companies the agility to react. Further, these forward-looking insights give the ability to quantify trade-offs realistically in order to drive strategy, all before any decisions are actually made and implemented!
How to take your strategy to a good end
The answer is simple: companies need to combine the CFO's knowledge with the kind of technology that can provide visibility into where the business is today, where it needs to go, and what the best way is to get there. Many refer to prescriptive as a GPS for business — it allows the agility to self-correct when and as needed on an ongoing basis.
The finance function can’t ignore the data
Those companies who use their collected and stored data in a comprehensive way are able to fly above the competition, most importantly when it comes to financial constraints and objectives. Prescriptive models take the CFO beyond the income statement, balance sheet, and cash flow statement — it takes them beyond the numbers required to simply manage the business effectively — like fixed/variable costs and contribution margins of products or services. It provides both two things. First, a combination of quantifying the contribution margin. Second, understanding how changes to the fixed and variable cost structure of the business impacts their income statement, balance sheet, and cash flow statement before any action is taken by the business at a strategic, operational, or tactical level.
Prescriptive analytics IS the optimal action
What action should be taken? This is the billion-dollar question. Most businesses function as a complex set of nonlinear relationships with constraints across demand, supply, and financials. Senior management’s job is to gain clarity and determine the best actions that need to be taken at all levels, across all functions. They must determine where to allocate capital, decide which products to fund and cut, establish policies across the business, and create operational schedules. These actions all have the same purpose — to maximize the company’s primary objectives.
Prescriptive analytics is not statistical modeling, it is deterministic. The purpose is to quantify trade-offs and understand the impact of various decisions before action is taken. With the ability to apply optimization to the many scenarios a business needs to consider in its decision-making process, the Office of Finance can uncover significant value.
As River Logic's President, Carlos Centurion, points out:
“Companies gain tremendous value when applying prescriptive analytics to make better decisions. First, users gain accuracy by modeling business processes and constraints in greater detail. Second, the decisions improve as the software will deal with complexity to find a better answer and support what-if analyses. Finally, the business gains agility by spending time analyzing only the best scenarios and through deeper organizational learning.”
These themes — accuracy by modeling, software to handle business complexities, and business gains by analyzing hundreds of targeted scenarios — are central to an organization’s finance function. Other departments often look to the finance function for its expertise in these areas. So, ask yourself: Why are you not empowering your Office of Finance with these types of capabilities?
In a few years, the application of prescriptive analytics will no longer become a "nice to have" — it will be a "must have". As a colleague of ours says, “It’s never a perfect time to get started until it’s too late.”
*This post is inspired and adapted from Financial Executives International (FEI) and Grant Thornton white paper (available below) where you can find several prescriptive analytics use cases.