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Competing on Analytics

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There are reasons to be optimistic. As sophisticated methods gain use, hard evidence of their value is beginning to surface. For example, an article in the journal Oilfield Review reported a study of 20 oil exploration companies that "established a strong positive correlation between the degree of sophistication in the companies' use of decision and risk analysis and the success of their project decisions." The same article also described another oil company study that found that "Companies that integrated workflow and used decision and risk analysis saw their performance improve shortly after the introduction of this methodology" [15]. CIO Magazine reports a survey of portfolio management in product development applications that found that companies that achieve project portfolio management excellence experienced 50% faster revenue growth [16]. A similar study released in 2006 by the AberdeenGroup reports that companies that are best in class at product portfolio management are four times more likely to achieve margin premiums of 75% or higher from new products [17]. A study focused on R&D portfolios found that companies performing in the top 20 percent had previously installed an explicit, established method of project portfolio management across the organization [18]. In a 2007 published interview, CEO John Wilder claims to have cut costs for the utility TXU by "more than $1 billion" through a series of initiatives that included bringing "analytic rigor to our portfolio decisions" [19].

Also, something new is happening. A few highly successful companies are making no secret of the fact that they have adopted superior analysis as a competitive business strategy. Thomas Davenport cites eBay, Google, Amazon, and Dell, among others, as a new breed of companies that "are oriented to a much higher level of analytics: predictive modeling, optimization techniques—than we've been used to in the business world" [20], They hire employees for their analytic expertise, provide them with the best available information, and arm them with the best quantitative tools. "As a result, they make the best decisions: big and small, every day, over and over and over."

Beat the 60% Solution!

The introduction to this paper described the concept of the "60% solution," the belief held by many that organizations only obtain about 60% of the value that could be derived from their businesses. As I have explained, I believe that choosing the wrong portfolio of projects is a major reason for lost business value.

The 60% solution can be beaten by doing a better job of choosing and managing project portfolios. It may not be easy, but it can definitely be done. The fact that optimizing project decisions is hard to do (but doable) is why organizations that successfully address the problems identified in this paper can create for themselves a significant competitive business advantage.

References for Part 6

1. 5-level maturity models have been developed for many organizational processes. The UK Government is developing a similar model as a guide for public sector organizations: P3M3 (for Portfolio, Programme and Project Management Maturity Model), Public Consultation Draft v2.0, Office of Government Commerce, United Kingdom, June 24, 2008.
2. J. Pfeffer and R. I. Sutton, "Evidence-Based Management," Harvard Business Review, January 2006.
3. R. Howard, "The Foundations of Decision Analysis Revisited," Chapter 3 in Advances in Decision Analysis, W. Edwards, R. Miles, and D. von Winterfeldt, eds., Cambridge University Press, 1999.
4. L. Buchanan and A. O'Connel, "A Brief History of Decision Making," Harvard Business Review, January 2006.
5. A. Hayashi, "When to Trust Your Gut," Harvard Business Review, February 2001.
6. G. Klien, Intuition at Work: Why Developing Your Gut Instincts Will Make you Better at What You Do. Currency Doubleday, 2002.
7. M. Gladwell, Blink: The Power of Thinking Without Thinking Little, Brown and Co., New York, 2005.
8. R. Hogarth and P. J. H. Schoemaker, "Beyond Blink: A Challenge to Behavioral Decision Making," Journal of Behavioral Decision Making, March, 2005.
9. B. F. Anderson, The Three Secrets of Wise Decision Making, Single Reef Press, 2002.
10. R. M. Grant, "Toward a Knowledge-Based Theory of the Firm," in the Strategic Management Journal, Vol. 17, 1996.
11. J. Wolfers and E. Zitzemwitz, "Predictive Markets," NBER Working Paper No. W10504, May 2004.
M. Einbinder, "Information Markets: Using Market Predictions to Make Administrative Decisions, Virginia Law Review, Vol. 92, p. 149, 2006.
12. D. M. Pennock, S. Lawrence, F. A. Nielson, and C. L. Giles, "Extracting Collective Probabilistic Forecasts from Web Games," Proceedings of the 7th ACM SIGKDD International Conference on Knowledge and Data Maining, pp. 174-183, ACM, New York, 2001.
13. M. Einbinder, "Information Markets: Using Market Predictions to Make Administrative Decisions, Virginia Law Review, Vol. 92, p. 149, 2006.
14. J. Nocera, "The Future Divined by the Crowd," The New York Times, March 11, 2006.
15. W. Bailey, B. Couet, F. Lamb, and P. Rose, "Taking a Calculated Risk," Oilfield Review, Autumn 2000.
16. Pittiglio, Rabin, Todd & McGrath (PRTM), "Product Development Benchmarking Series, PRTM, Performance Measurement Group, 2000, as reported in L. Cosgrove, "Analyzing Product Development," CIO Magazine, March 1, 2002.
17. The Aberdeen Group, "The Product Portfolio Management Benchmark Report," August 2006.
18. R. G. Cooper, S. J. Edgett, and E. J. Kleinschmidt, "Portfolio Management for New Product Development: Results of an Industry Practices Study," R&D Management, pp 381-389, October 2001.
19. "An Interview With TXU's CEO: C. John Wilder Describes How Economic Thinking Helped him Lead TXU Out of a Regulated Mind-Set Toward Competitive Success," The McKinsey Quarterly, Feb, 2007.
20. T. Davenport, "Competing on Analytics," Harvard Business Review, January 2006.

Why Isn't Everybody Doing This?

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