Keeping Up with the Quants:

Analytics for Business Leaders

Featuring analytics expert
Tom Davenport, author of Competing
on Analytics, Analytics at Work, and
the just-released Keeping Up with the
Quants

AUGUST 14, 2013

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OCTOBER 17, 2012

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Keeping Up with the Quants:

Analytics for Business Leaders
Todays Speaker
Tom Davenport
Presidents Distinguished Professor,
Management & IT, Babson College
Author, Keeping Up with the Quants

AUGUST 14, 2013

Keeping Up with the Quants

Harvard Business Review Webinar

Tom Davenport
Babson College, IIA, MIT, Deloitte
August 14, 2013

Problem-Solving with Quantitative Analysis

Jennifer JoyCigna

Runs a call center for Cigna customers

Nursing background, with an MBAnot a quant, but
appreciates quantitative thinking
Key problemdo telephone interventions make
customers more likely to avoid re-hospitalization?
Got lots of reportsfigures up, figures down, no meaning
Worked with quant group to do Smart Innovation
matched-pair tests
Found that calls only worked for some diseases
Reduced length of calls for other diseases
Redeploying workers to other problems
Now testing no calls at all

Problem-Solving with Quantitative Analysis

Joe CassanoAIG
Financial Products

Ran a small (400 person) unit for AIG specializing in

credit default swaps
Dramatically accelerated the amount of CDSs sold
Cassanos predecessor, Tom Savage, was a
mathematician who understood models behind CDSs,
was conservative in selling them, and debated models
with staff
Cassano knew a lot less math and had much less
interest in debateMichael Lewis
Patient Zero of the global economic meltdownMatt
Taibbi
Lost approximately $85 billion (to be repaid by US
taxpayers)

The Planets Are Aligned for Analytics

Powerful information technology

Data critical mass
Skills sufficiency
Business need for process optimization, differentiated
products and services, better decisions

Analytical Decisions Are Not a New Idea!

George W. Bush
elected

Level of
Accuracy/
Precision

Freud-Decisions are
subconscious
Descartes-Decisions by
reason
Decisions by
entrails analysis

Prehistory

Bacon-Induction in
science

McNamara in
Viet Nam
McNamara
In WW2

Barack
Obama
Blink
elected
published
Global
financial
crisis

Gauss-Normal
distribution

Time

The Present

The Modern History of Analytics

WW2 military analysts focus on supply chain and
targeting optimization
UPS starts analytics group in 1954
Michael Scott-Morton, Peter Keen, Tony Gorry and
others at MIT and elsewhere describe decision
support systems in the 70s
Jack Rockart at MIT advances executive support
systems and critical success factors in the 80s
Howard Dresner at Gartner defines business
intelligence in 1988
Companies begin to compete on analytics after
2000
Analytics begins to blend with decision
management and big data in the 2010s
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Deciding on Analytics versus The Gut

Forty percent said a recent important business decision was

based not on data and facts, but on gut instinct
2009 Accenture survey of U.S. and UK managers
Statistical predictions consistently outperform gut based
predictions
Extensive evidence that having experts is good, but experts
using analytics is much better
Expert intuition is best only when there is little time, limited
data, and few variables

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What are analytics?

Degree of intelligence and value

Predictive and prescriptive analytics

Optimization

What is the best that can happen?

Predictive modeling

What will happen next?

Randomized testing

What if we try this?

Statistical models

What are the causes and effects?

Alerts

What actions are needed now?

Query/drill down

Where exactly is the problem?

Scorecards

What information really matters?

Standard reports

What happened?

Descriptive analytics

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Quantitative AnalysisThree Stages, Six Steps

Framing the problem

Solving the problem

1. Problem
recognition

3. Modeling 4. Data
collection

2. Review
of previous
findings

Communicating/
acting on results

5. Data
analysis

6. Results
presentation
and action

Framing the Problem

1. Problem recognition
The least structuredbut most importantstep
Usually starts with a broad hypothesis
Were spending too much on marketing
Must eventually become much more specific and testable
What type of story do you want to tell?

2. Review of previous findings

Has anyone solved a problem like this before?
Internet search
Talk to decision-makers and analysts in your company
Go to meetups of analytical people
Might suggest data, method, specific algorithm
Poisson distribution for bomb clusters in WW2 London

Types of Analytical Stories

CSI: Analytics
Solve a tactical problem with analytics
Expedia
Eureka!
Solve a long-term strategic problem with analytics
Zillow
Mad scientist
Do a rigorous experiment to establish causality
Sears, Food Lion, Red Lobster
Survey
Observe, codify and analyze something that has already
happened
Prediction
Use data about the past to predict the future
What happened?
Straightforward reporting
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Solving the Problem

3. Modeling/variable selection
A purposely simplified representation of reality
Variables can be objective or subjective
Should I get a pet?
Were still in intuitive hypothesis territory

4. Data collection
How much precision measurement in your variables?
Binary, categorical, ordinal, numerical
What type of data would be most useful?
Primary or secondary
Structured or unstructured

5. Data analysis
Method driven by various factors
Type of story, descriptive vs. inferential analysis, level of
measurement, number of variables
Many data analyses involve regression

Communicating and Acting on Results

6. Results presentation and action
Not normally focused on by academics, but beginning to
change
A problem throughout history
Florence Nightingale vs. Gregor Mendel
Need to tell a story with narrative or pictures
Modern analytical communications include:
Interactive graphics
Automated narrative generation
Related videos
Games, simulations, walk-throughs

A Great Analytical CommunicatorDr. John Gottman

Measured and modeled key behaviors between 700 couples in conversation
Humor: +4
Agreeing: +4
Joy: +4
Affection: +4
Interest: +2
Anger: 1
Domineering: 1

Sadness: 1
Whining: 1
Belligerence: 2
Defensiveness: 2
Stonewalling: 2
Disgust: 3
Contempt: 4

Need 5:1 ration of positive to negative behaviors

Model was very effective at predicting relationship failure
Published the model with Dr. James Murray
Expanded study to 10,000 couples in randomized clinical trial
Wrote scholarly and popular books, created videos
With Julie Gottman, developed workshop for couples and therapists
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Quantitative Analysis at
1. Problem recognition: A general feeling from Transitions parent
companies (Essilor and PPG) that the company was spending too much
on marketing, with no evidence of its success or ROI

2. Review of previous findings: None at Transitions. The CMO knew that

this sort of marketing mix analysis was possible, so he contacted a
consulting firm that specialized in it.
3. Modeling/Variable selection: Typical approach with marketing mix
models is to find the weekly or monthly advertising, promotion, and
pricing levels that maximize revenue or profit margin. They
involve variables of marketing response, marketing costs, and product
margins, and control for factors like macroeconomic performance and
weather.

Quantitative Analysis at
4. Data collection: Most difficult step for Transitions. They went through
a multi-year effort to collect customer data from channel partners. The
data came in in 30 different formats, and was eventually stored in a
customer data warehouse.

5. Data analysis: Consultant did the data analysis, which were

based on linear and non-linear programming (optimization) models.

6. Results presentation and action: Transitions hired new employees

to interpret the models and lead discussion and action on them. The
models led to substantially higher levels of marketing spending and
TV advertising.

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What Non-Quants (Deciders) Should Expect of Quants

Learn the business process and problem

Communicate results in business terms
Seek the truth with no predefined agenda
Help to frame and communicate the problem, not
just solve it
Dont wait to be asked

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What Quants Should Expect of Non-Quants (Deciders)

Form a relationship with your quants

Give them access to the business process and
problem
Ask lots of questions, particularly about assumptions
Focus primarily on framing and communicating the
problem, not solving it
Ask for help with the entire decision process
Establish a culture of honesty and self-examination,
and admit your decision errors

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Improving Your Analytical Decisions

Pick a problem thats important but manageable,

and for which data exists
Hire or consult with a quant
Go through the six steps
Work on relationships, not just math
Measure the decision outcome before and after
Repeat and expand!

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Questions?
To ask a question
click on the
question icon in
the lower-right
corner of your
screen.

OCTOBER 17, 2012

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AUGUST 14, 2013

Thank you for joining us!

This webinar was made possible by the generous
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