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SPECIAL SECTION ON CORPORA TE INFORMA TlON:

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The Value of Business Intelligence

by lewis J. Perelman

reprintlKl from

NlIW MlllJagtllTnt

(Spring 1983)

The wireless office of the Titanic had received seven iceberg warnings the day of the disaster, one from the Atlantic Transport ship Mesabaat 9:40 p.m. Oust two hours before the Titanic was struck), which said In part It saw "much heavy pack ice and a great number of larger Icebergs" In the Titanic's vicinity. According to the Titanic Historical Society: "This warning was never given to the captain of the Titanic and yet this position of Ice was directly In front of the Titanic's course as laid out by Captain Smith." The ship had only two lookouts at the time of the collisions, and neither had binoculars.
-J. Hall, "Seventy Years Ago ...," MId-60uthM.gulne, 11 April 1982.

usiness intelligence (BUis the industrial equivalent of military intelligence. As military _ commanders are dependent on a ] constant flow of relevant and understandable infonnation to plot strategies and tactics so. too. do captains of industry need adequate information to achieve their commercial goals. In both cases, knowledge is not only an instrument of power, it is _ntial insurance against disaster. _

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The facts of the Titanic disaster are archetypal illustrations of the failure of business intelligence: Information about the iceberg ahead was not communicated to the captain, the individual with the authority to make decisions about course and speed. Because the lookouts were not properly equipped, they could not see as far ahead as the minimum distance required to maneuver the ship. The Titanic was designed to float with up to four watertight compartments flooded. The iceberg with which she collided made a gash 300 feet iong, breaching the fifth watertight

compartment by just two feet. Had the captain been inJormed of the danger, had the lookouts been equipped with binoculars, and, therefore, had the ship simply been traveling a few knots slower, the gash in the ship's hull might have been shorter, and the ship might not have sunk. The Titanic is such a painful example of mismanagement that it is tempting to believe that the incident was "a fluke," that those in charge were unusually incompetent, or that the world has made such progress since 1912 that such a thing could not occur again. In reality. the Titanic's sinking is a normal kind of industrial accident; those responsible were generally of above-averagecompetence; and the Titanic syndrome is.alive and with us today: In February 1982, the Ocean Ranger-the biggest and most sophisticated floating oil drilling rig in the world-capsized and sank in a blizzard off the Newfoundland coast, killing all 84 hands aboard. The apparent cause of the disaster was a broken porthole which allowed water to short-out the computers that controlled the rig's ballast and flotation system. The captain of the vessel had resigned 40 days earlier in protest over unsafe operating conditions. In March 1980,a nuclear electric generating unit at Three Mile Island in Pennsylvania lost its critical cooling system and began to melt. A valve had been left open which a control panel light had indicated was closed. A warning that this kind of failure could occur had been

In July 1981, the walkwaysspanning the atrium of the Hyatt Regency Hotel in Kansas City collapsed suddenly, killing 114 people. Investigation revealed that the bolts holding up the walkways were too small for the holes in the beams to which they were attached. Stress calculations which should have been performed' ; before construction had been omitted. . The failures of business intelligenceare not limited to such dramatic accidents. They can be seen in institutional crises as well. For example: The biggest New York banks poured hundreds of millions of dollars into Penn Central even though objective analysts had universally anticipated the railroad's bankruptcy. When author Martin Mayer later asked the responsible bank officialswhy they had made such injudicious loans, they each said they had done it because "other banks had made loans." Another example: Chrysler's management stolidly avoided downsizing their' vehicles despite overwhelmingevidence that 01.1 supply constraints, government regulation, and foreign competition would force the automobile market toward smaller cars. The management of Chrysler (and other U.S. car makers) mostly came from the same midwestern communities, mostly liked driving big cars, and were convinced that the market wanted what they liked. Threete end Opportunltle. Obviously, strategic management is concerned not only with avoiding disaster but even more with capturing opportunities for growth and development. A key part of the value of Bl is the identification of new markets, products, and competitive advantages. To the modem business. there is no . real difference between threats and oppor? tunities. In the past, profit and growth were the main objectives of business managment. In an increasingly turbulent business envi\ \.. ronment, though, sustainability of the \' enterprise commands at least equal , attention. Hence, the failure to identify and take advantage of opportunites for innovation is the principal threat to the survival of a modem business.

THE VALUE OF IIVtIINEII8 INTELLIGENCE Lewis J. Perelman

J.......... enisa .. oonsultant in Washington,D.C. He has served as Director of Business Intelligenceat Holiday Inns and as a planner for the Colorado State government and Ca~ech. Jet Propulsion Laboratory.His books include The GIob8ll11lnd: Beyond tile Limits to Growth and E-vY TreNltIona: Long T_ Perapectlve .
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Put another way, in a competitive economy-and the pressures of population growth, resource scarcity, and technological change make the world economy ever-moreintensely compennve--every threat is someone's opportunity and every opportunity is sorneone's threat. The threat of rapidly increasing oil prices created the opportunity for the Japanese to increase exports of small. efficient cars to the U.S.; this opportunity for the Japanese simultaneously became a threat to American car makers. High interest rates are a threat to the housing industry. but a lucrative opportunity for lending institutions. And so forth. What makes any development a threat or opportunity is how a finn positions itself to respond. The impact is only partly a matter of luck-the odds of any change being a threat or an opportunity are not simply 5O-SO. To the unprepared organization, change will usually be perceived as a threat. Thus, business intelligence is a process which increases the opportunity value and decreases the threat value of change.

The Actuarial Value of Information

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The value of BI is the value of knowledge. How does an organization determine whether it has too much or too little BI? How does it assess the benefits and costs of BI? The value of BI certainly cannot be measured simply by the amount of information generated. Few organizations suffer from a shortage of information. As the Titanic case illustrates, the value of business information is primarily its actuasia! value. BI cannot guarantee that the threat of disaster will be eliminated, but it can alter the degree of risk. Had the captain of the Titanic been informed of the iceberg hazard, and had the ship's lookouts been equipped with binoculars, the chances of the disaster would have been reduced-but not eliminated. ny increment in BI has a cost, and the cost is evaluated in relation to the resulting reduction of risk. This relationship is not linear, but is subject to "diminishing returns." Just as zero-risk is unattainable, perfect BI is infeasible, This means that the first part of creating a BI system is a managerial decision to define how much resource investment in BI is enough, This is similar to deciding how much insurance is enough. The important difference between the decision to purchase BI and the decision to purchase other forms of risk insurance is that the ordinary insurance decision is purely a financial one. That is, management need not think about the insurance policy again until it comes up for renewal. or unless a major claim is made. But BI is valueless without the continual involvement and attention of management-top management and line

management. The most critical resource that management has to allocate to BI is management's own time. The Coat of InformlltJon The cost of acquiring information on any subject rises exponentially as the research becomes more exhaustive. It the purpose of BI were that of scholarly research (that is, to add to the store of human knowledge). then the value of each increment of new information would be simply equal to the cost of acquisition. No investment in Bl would ever be superfluous. because the value of the information discovered never would be less than its cost. But the value of BI is measured not by its information content. but by its actuarial value; thus. the incremental cost of BI eventually exceeds its actuarial benefits. So. "excessive" investment in BI is quite possible (and, at least, approximately measurable). But evaluating BI is not quite this simple. Information is measured by its value, the degree of difference it makes, to the person ",ho receives it. The same piece of information which may seem superfluous in relation to a given subject may appear invaluable when the subject is revised or perceived differently. Who defines the subject-and who perceives the incremental message-largely determine the value of the information received. All this leads to a remarkable and crucial fact: The value of Bl to the corporation is highly dependent on the quality of the human resources involved in the process. Therefore. the value of BI is not absolute, but is based to a large degree on having people with: the ability to discover and define the relevant question; the skills of observation, induction, and deduction from available messages; the "know-how" information; to research and' discover new

the trained "instinct" of selective destruction or disregard of extraneous or redundant messages; and the capacity and motivation to take effective action to solve real problems.

So, the cost and value of BI are highly dependent on the talent, skill, and "intelligence" of corporate managers. Indeed. the central purpose of BI is to promote adaptive learning by the corporation. Not just learning for learning's sake. but learning that increases the ability of the organization to adapt to the threats and opportunities of change. Therefore. the mission of BI is not only to inform, but to educate.

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The ability of a corporation to learn is Finally. analysis is concerned with limited by the ability of its employees to learn. causality-with why things happen-and. The sad truth is that the human resources hence. with the crucial management problem of available to the contemporary U.S. corporation how to make or prevent things from happening. are. for the most part. inadequately prepared to Analysis includes the formulation of problems. learn. to create. and to innovate. Although this the identification of alternative solutions, and preparation should be the function of the the assessment of the value of alternative future . nation's schools, it will take decades for the outcomes. Applied to management decisions. . needed educational reforms to produce results. analysis leads to the appraisal of alternative In the meantime. private and public employers courses of action and, hence. becomes the will have to invest in developing their own backbone of planning. human resources to compensate for the The effectivenessof these four functions shortcomings of the education system. is enhanced by integration within an overall BI The Functions of Business Intelligence process. Evaluation is necessary to ensure that While training is the sine qua non the organization learns from its own experience. of business intelligence, the success of the grows in its productivity and effectiveness.and activity also depends on establishing certain does not fall into the trap of continually procedures for evaluation. scanning. forecasting. reinventing the wheel. Scanning is needed to and analysis. These functions take place in any make sure that decisions are made with well-managedorganizations. but are not always awareness of current realities. All management planned and integrated in a coherent process. decisions require some forecast of future Evaluation addresses the question conditions. since decisions necessarily aim at of what has happened within the organization. achieving some result in the future. And The focus is on bistory. and the purpose is to analysis is needed to assure that problems are measure the effectivenesswith which the realistically defined and accurately understood. organization has pursued its objectives. Of course. Bl is only a part of. and not a Evaluation consists of four parts. First. some substitute for. an overall process of strategic description of the program. project. or activity planning and management. Therefore. Bl needs being evaluated. Second. some means for to be part of a larger "plan for planning." This measuring effects of the program. Third. a is essentially equivalent to the organizational comparison of the measured effects with some development problem of building a strategic set of criteria or objectives. Finally. results of corporate culture. the evaluation are communicated to those Key Requiremtlnts of a Successful 81 responsible for making decisions. Process Scanning, or monitoring. responds to A successful BI process would have the need to know what is happening in the the following characteristics: present. both inside and outside the Process, not products. The value of organization. The primary purpose of scanning Bl is in the process of learning. not in the is to gather and sort current information. quantity of information produced. Products are Scanning includes continual intelligencevalued to the extent they contribute to the gathering activites, such as reviewing learning process, not as ends in themselves. periodicals and attending conferences. as well Two-way communication. Like good as ad hoc investigations of topics of strategic military intelligence. BI is based on two-way relevance. flows of communication. In the military setting. Forecasting (projection or futures there is no functional distinction between a researchl tries to answer the question. what will user and a supplier of intelligence. Every happen in the future? Forecasting deals with . soldier may be called upon to supply any or all of four aspects of the future. First. "intelligence; every soldier requires information the possibility of future events or trends. '" to achieve military objectives. Furthermore. in Second, the probability of future events or \ practical intelligence operations. there are few trends. Third. the conditional relations among . unilateral sources of information. Advanced events and trends-if one thing happens. then intelligence usually requires some what else will or will not happen? And fourth. exchange of information-"horse the preferences people have for various future trading"-among sources. alternatives.

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SPECIAL SECTION ON CORPORATE INFORMA nON:

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Internal and external networks. The two-way communication of BI must bridge organizational boundaries. The BI process is based on a network of information that extends outside the organization to reach vital sources, and inside the organization-crossing internal boundaries-to reach whoever can act to enhance the firm's competitive position, Focus on near-term decisions, linking tactics and strategy. Peter Drucker argues that the purpose of strategic planning is not to plan future decisions, but to make current decisions with understanding of their. "futurity." The role of BI. then, is to increase understanding of the long-range meaning of decisions made today, Just as BI must bridge internal and external realities. it must also link tactical with strategic decision-making. Focus on Improving corporate performance. The contribution of BI to corporate performance is to reduce risk by increasing decision-makers' timely understanding of threats and opportunities. In a successful BI process, every task and project is evaluated against this goal. Broad participation. BI works by acquiring strategically relevant information and by educating decisionmakers. Since most employees are both sources of information and makers of decisions which can affect the organization's performance, the broader the participation in the BI process, the more valuable the results are likely to be. Focus on line responsibility. Since BI exists only to enhance the quality of operational decisions. it is most successful where it is perceived as primarily a line responsibility, carried out with staff support. This means in practice that line personnel consciously dedicate a minimum portion of their work time to BI activities, recognizing that BI is part of, not ancillary to, their "work." This also minimizes the overhead of BI by limiting the staff role to continuous, longterm activities which are essential to build and maintain the BI process.

Pitfalls A BI process which fully satisfied all the conditions described in the preceding section would be close to ideal" If we cannot create an ideal process in the real world. the next best thing is to avoid the worst mistakes, and to create a BI process which is productive and capable of continual improvement. The followingare pitfalls which have trapped the BI process in many organizations. making it into a bureaucratic, overhead burden rather than a productive "bottom line" contributor. Insularity. Rather than developing an extensive external and internal network, the process is excessively confined to a small circle, in terms either of users. sources, subject matter. geographic location, or "worldview." Isolation from decisionmakers. Information is delivered to line management filtered through several layers of staff. or circulated in closed staff loops..Responsibility of the BI process is delegated downward and outward from centers of control. Infrequency. BI communications are annual. or biannual. or ad hoc. rather than established on a continual monthly, weekly, or even daily basis. Hence. timeliness. participation. and line management ownership are lost. Emotional override. Organizations become caught-up in wishful thinking and filter out information which challenges their optimism: alternatively. they become swamped with pessimism and paranoia, See every change as a threat. and become paralyzed. Mlsclaulflcation. Excessive secrecy and classification of information leads to a "chilling effect," chokes off debate. insulates the organization from sources of innovation and creativity. and ultimatelyends up increasing the organization's vulnerability to risk. Ritual, not process. Where BI becomes a bureaucratic ritual rather than an active part of the process of management, it becomes counterproductive. Emphasis on reports. products, and routine procedures rather than on knowledge, learning, and action are symptoms of ritualization. The corporate charm bracelet. Offices and titles become substitutes for processes and functions. Issues are edified rather than analyzed and managed. If consumer hostility is a problem, then create an Office and Vice President of Consumer Affairs; if environmental impact is a problem. then create an Office and Vice President of Environment Affairs. Business Intelligence. Environmental Scanning. Issues Management. Futures Research, or other such buzzwords similarly can become mere cosmetic charms on the organizational bracelet.

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GA THERING IT. GETTING IT TO DECISION MAKERS. GETTING IT USED

"Paradigm paralysl s." The BI process, if it exists at all. becomes a means of rationalization and reinforcement of the statusquo worldviewof the corporation. rather than a process for challenging root assumptions and renewing corporate vision. Joel Buker calls this the ''terminal disease of certainty," Conclu.lon Business Intelligence is a process which constantly seeks to answer four key strategic questions: What happened? What is happening now? What is going to happen? And why do things happen? The purpose of BI is to apply these questions to trends. events, and issues that affect the organization and its prospects for achieving its goals, here is no simple formula to determine what the ideal level of Bl is for any particular organization. The appropriate scope of effort depends on the nature of the organization, its strategic interests, and its environment; all of these will change over time. Today, the global environment is turbulent and hazardous for all organizations. Nevertheless. strategic interests vary widely. U.S. organizations whose strategic interests have required them to place a high premium on intelligence include finance institutions, the insurance industry. firms involved in international trade, industries characterized by high rates of technological innovation, and companies engaged in the manufacture or retail sale of consumer products. These are areas where a broad range of environmental factors has an impact on the organization's business, on both a short and long time scale. Also, these are organizations which are both compelled and able to make frequent, shortterm, tactical decisions in pursuit of their longrange objectives.

This is not to say that organizations involved in apparently slowly changing, stable activities can justify complacency. No comer of the world is insulated from turbulence today. Some of the most notable collapses have occurred in organizations which had long histories of stability and success. But the scope and quality of the intelligence needs of "slow-track" organizations are likely to be significantlydifferent from those of "fast-track" organizations. In any case, the quality of an organization's human resources is the most crucial determinant of its intelligence capabilities. The cost and value of intelligence depends greatly on the training, knowledge. and talent of the people involved in the process. Thus, the essential conditions of success and failure of .BIprimarily are issues of organizational development and human resource development. Good business intelligence is an essential ingredient of strategic management, but it can never eliminate the inexorable element of luck in the success of an enterprise. BI cannot guarantee success, but it can make chance more favorable to success.

"TIle _ntlel condlllon. of _ feIIu.. 01

primarily org.n_.ndhu n 01 velopment __

development ."

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