IBM Center for Applied Insights

Outperforming in a data-rich, hyper-connected world

2 Outperforming in a data-rich, hyper-connected world

We live in the era of “big data” and connectivity.

Collectively, our planet generates fifteen

petabytes of new information every day1 –

about eight times the information housed in

all the academic libraries in the United States.2

People are connecting and communicating more

than at any time in human history. In 2011 alone,

an estimated seven trillion text messages

were sent.3 There are almost six billion mobile

phone subscriptions.4 Today, two billion people

worldwide are plugged into the Internet,5

interacting and sharing information on sites

like Facebook and Twitter.

Systems, devices and physical objects are “talking” to one another, too. There are upwards of a trillion connected and instrumented things: cars, appliances, cameras, roadways, pipelines…even pharmaceuticals and livestock. Today, there are a billion transistors per human, each one costing one ten-millionth of a cent.6 Add to that roughly 30 billion RFID tags embedded into our world7– more than four for every man, woman and child on the planet– and you get a sense of how big “big data” is.

It’s exciting in theory – but leaders everywhere are wondering how to harness the power of all this information to improve the effectiveness and efficiency of their enterprises and institutions. CMOs want to understand their customers better and connect on a personal level. CIOs are looking beyond efficiency, to how technology can enable game-changing business models. CFOs want to improve profitability today and use what they know to make the best moves tomorrow. Mayors are looking to improve their citizens’ safety, prosperity, health, transportation, education and lifestyle – and their cities’ competitiveness in a global market for talent and investment.

All of these leaders want to know how the world’s best forward thinkers are using data to understand their environment, anticipate what it means and drive action. Are leading enterprises seeing measurable economic benefits? Can they actually anticipate outcomes and even shape their environment?

The IBM Center for Applied Insights, in cooperation with the Economist Intelligence Unit and the IBM Institute of Business Value, recently surveyed 1,168 executives (two thirds of which were CxOs) across nine industries in 64 countries. We investigated their ability to capture data, share insights and take actions based on what they learn, and used a binary logistic regression analysis to understand the statistically significant correlations with financial performance.

About the Study

Corporate Marketing 3

Revenue growth EBITDA growth Stock price appreciation

8.2%

9.0%

7.4%4.0%

3.0% 1.4%

HighConsistency

across the enterprise

or full value chain

LowLimited to silos

in specific departments or functions

9.8%

9.3%

List

en

Anticipate

HighConsistency

across the enterprise

or full value chain

LowLimited to silos

in specific departments or functions

2.5x

10.8%

6.7%

1.6x

12.0%

5.8%

2.0x

Figure 1: Listen and Anticipate capabilities consistently deployed across the enterprise or the full value chain correlated to higher compound annual growth rates (5-year CAGR, 2005-2010).

Using data better: A differentiator for leading enterprisesThe answer is yes. It turns out that the ability to listen and anticipate correlates to long-term financial performance. A new study of more than 1,100 executives worldwide, conducted by the IBM Center for Applied Insights in cooperation with the Economist Intelligence Unit and the IBM Institute of Business Value, indicates that enterprises that do this best outperform their peers.

Consider the implications of the study findings in Figure 1, which show the correlation between the underlying unique capabilities deployed and financial performance.

These capabilities, which enabled enterprises to listen and anticipate across their own enterprise or full value chain, were correlated to stronger revenue and EBITDA growth. A third of the enterprises surveyed were outperformers. They are able to learn from every interaction and share insights across all their relationships. As a group, these outperforming enterprises illustrate that they can grow the top line while controlling and even cutting costs. That’s a direct challenge to the old maxim that accomplishing both at the same time is not possible.

A third of the enterprises surveyed were outperformers.

4 Outperforming in a data-rich, hyper-connected world

Figure 2: Unique capabilities that correlate to financial outperformance and comprise the Listen and Anticipate competencies.

Average adoption of unique capabilities across the enterprise or full value chain

BigData

Listen

Anticipate Predict impact of future outcomes 46%

Capture real-time data using automated devices 46%

Model best outcome based on unknown conditions 45%

Integrate data using common data definitions 57%Integrate data usingend-to-end processes 49%

Trigger alerts based on potential impact 50%

Corporate Marketing 5

What unique capabilities give outperforming enterprises the ability to listen and anticipate better? They capture data effectively, turn it into information and insight, share those insights broadly and act upon them. Most enterprises have deployed one or more of the capabilities shown in Figure 2. What sets these outperformers apart, however, is that they have consistently deployed all of them across their enterprise or full value chain to turn the chaos of big data into competitive advantage. They are drawing on new capabilities to be active, rather than reactive – to influence events positively. They have moved beyond just sensing and responding to their environment.

The relative maturity of enterprises varies both across the capabilities and by industry. On average, the ability to listen is greater than the ability to anticipate. For some industries, this maturity gap is wider (see Figure 3). How outperformers use these capabilities and competencies is a key differentiator. When it comes to listening, outperforming enterprises are, on average, 1.7 times as likely to capture data at every customer interaction. Not surprisingly, outperformers in some industries, like retail and banking, are over twice as likely as their peers to capture data this way.

The best-performing enterprises also recognize the value in new forms of interaction and new sources of data. Outper- formers in banking, chemicals and petroleum, healthcare and retail are at least 1.5 times more likely than their peers to capture and work with unstructured data such as social media, web pages, books, journals, health records, audio and video.

Figure 3: Adoption of Listen and Anticipate competencies across the enterprise or full value chain by industry.

57%

56%

54%

51%

61%

53%

59%

59%

58%

46%

44%

31%

31%

39%

39%

33%

27%

29%

17%

Banking

Telecommunications

Electronics

Healthcare

Energy and Utilities

Average

Chemicals & Petroleum

Government

Retail

Travel & Transportation

Listen Anticipate Have Both

75%

56%

52%

50%

42%

38%

25%

45%

42%

44%

54%

The difference leadership makesThe key is leadership. The power to outperform comes from within– from the forward-thinking leaders who excel at absorbing information of all kinds. They listen to the facts, their peers and their customers, and they have learned how to take advantage of what they’re hearing, how to see patterns and anticipate trajectories. They also create an analytical culture that is more likely to share insights across the full value chain, because they know the value of fact-based decisions.

For example, outperformers in healthcare, along with energy and utilities, are at least 2.5 times more likely than their peers to share information with collaborators such as government entities, equipment vendors, infrastructure suppliers and fellow researchers. Outperformers in retail are more than twice as likely to share information with customers. This runs counter to the “gut instinct” or intuitive decision-making that governs many enterprises.

How important is this leadership? Consider the stories of Circuit City and Best Buy, two U.S. electronics retailers. Circuit City went from chronicled in Jim Collins’ 2001 Good to Great to unplugged when the company declared bankruptcy in 2009.8,9 The media and analysts at the time cited Circuit City’s failure to listen to its employees, customers and market. Meanwhile, the leadership of competitor Best Buy cites listening in old and new ways as part of their corporate culture and consistent growth year-on-year.10

Three enterprises. Three questions. Three powerful results.

What do listening and anticipating do for enterprises?

TelecommunicationsQuestion: How can customer insights drive additional revenue?Answer: A mobile communications company implemented a system to provide personalized recommendations for smartphone applications and other services based on analysis of customer references. The average adoption rate of value-added service (VAS) offerings has increased by 10 percent.11

HealthcareQuestion: How can sharing and analysis of data improve both the effectiveness and cost of healthcare?Answer: Premier Healthcare Alliance implemented a technology platform that enables sharing of decision- support analytics, helping doctors to make better treatment choices. This enabled 157 participating hospitals to save lives and reduce healthcare spending by US$2.85 billion.12

BankingQuestion: With tighter regulations, can compliance lead to higher revenue and profitability?Answer: As a part of breaking down data silos and applying holistic rules, a national bank anticipates customer loan issues. This helped the bank achieve a 35 percent decrease in non-performing loan ratio.13 “The right question is ‘How am I going to

deepen my relationship with customers and employees? Right now social networks are an important part of the answer.” – Brian Dunn, CEO Best Buy14

Corporate Marketing 7

Southwest Airlines is another example in which listening and anticipating can help make the critical difference. From 1998 to 2008, Southwest’s fuel hedging saved the company an estimated $3.5 billion compared to the average cost of jet fuel. That was equal to about 83 percent of the company’s profits for the period.15 The airline’s finance leaders kept their ears open to what was happening in its industry, in the fuel markets and in world events ... and used what it heard to prepare for what was to come.

The makings of a leaderBy asking and answering the right questions, all enterprises in this hyper-connected, data-rich world have the opportunity to improve their performance. You have to think as big as your data.

Ask yourself these questions:

• Are you looking at all of your data? Today, much of what’s most valuable is unstructured data. Being able to analyze this data can unlock significant new value.

• Do you have the tools to turn data and information into insight? That’s the starting point, built on a solid foundation of information.

• Can you share and act on your insights? A culture of analytics and collaboration at every level is key to success – using and sharing what you learn to drive the best business outcomes each day, across the whole enterprise.

The best enterprises, like the leaders who drive them, use information and insights intelligently – learning, improving and outperforming their peers by creating long-term competitive advantage. To learn more, join us for an ongoing discussion about the findings, implications by industry and impact on leadership at the Center’s blog.

For additional insight, visit the IBM Center for Applied Insights (ibm.com/smarter/cai/value) and the IBM Institute for Business Value (ibm.com/iibv).

About the authorsSteve Rogers is the Director of the IBM Center for Applied Insights (CAI). Steve has over a decade of strategy consulting, market research and thought leadership experience. Prior to starting CAI, he was the key architect and author behind the IBM CFO Study series as well as other financial management thought leadership. He can be reached at rogers.s@us.ibm.com

Kevin Thompson is a Senior Manager at the IBM Center for Applied Insights. He has nearly a decade of global strategy, brand management, communications and corporate citizenship experience. In 2007, Kevin created the award-winning IBM Corporate Service Corps program. He is a First Mover Fellow with the Aspen Institute and frequent speaker at conferences and leading business schools. He can be reached at kbt@us.ibm.com

ContributorsIBM Center for Applied InsightsDerek Franks, Sarang Ghatpande, Veena Gupta

IBM Institute for Business ValueSteve Ballou, Eric Lesser, Carl Nordman

Strategic and Executive CommunicationsMike Wing

About the IBM Center for Applied InsightsThe IBM Center for Applied Insights integrates deep industry and analytical expertise to help chart the course to new value for clients. The Center develops research and tools with pragmatic guidance and tangible outcomes to provoke organizations to action.

“We widened our scenarios ...you have to understand what the extremes of those outcomes can be and just make sure you have contingencies in place.” – Laura Wright, CFO, Southwest Airlines16

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1 Barrera, Clod and Wojtowecz. “Cloud Leads Five Storage Trends for 2011.” CIO. January 27, 2011.

2 “Data Powers of Ten.” Cal Tech Concurrent Supercomputing Facility. 1999

3 “More than Seven Trillion SMS Messages Will Be Sent in 2011.” ABI Research. December, 2010.

4 “Key Global Telecom Indicators for the World Telecommunication Service Sector.” International Telecommunications Union. http://www.itu.int/ITU-D/ict/statistics/at_glance/KeyTelecom.html

5 Internet World Stats: Usage and population. December 2011. http://www.internetworldstats.com/stats.htm.

6 Franssila, Sami. Introduction to Microfabrication, 2nd ed. John Wiley & Sons, Ltd. 2010.

7 Palmisano, Sam. “A Smarter Planet: The Next Leadership Agenda.” IBM. November, 2008.

8 Collins, Jim. Good to Great: Why Some Companies Make the Leap... and Others Don’t. Harper Business. October 2001.

9 “Circuit City, unplugged.” The Wall Street Journal. December 21, 2007.

10 Annual revenue data from Best Buy Annual Reports from 2005-2011.

11 IBM case study.

12 Premier healthcare alliance: How a healthcare alliance transformed itself through informatics for improved operations and patient outcomes. IBM Leadership Series case study. http://www.ibm.com/smarterplanet/us/en/leadership/premier/

13 IBM case study.

14 Dunn, Brian. “How I Did It: Best Buy’s CEO on Learning to Love Social Media. Harvard Business Review. December, 2010.

15 Reed, Dan. “Can fuel hedges keep Southwest in the money?” USA Today. July 24, 2008.

16 Alpern, Peter. “Q&A with Southwest Airlines CFO Laura Wright.” BusinessFinance. November 8, 2011.

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