Data Drives Success in Business
A recent Bloomberg BusinessWeek article entitled “The Tech Guy Building Wearables for America’s Olympians” profiles Mounir Zok, the man in charge of the U.S. Olympic Committee’s technology and innovation. The article discusses how Mr. Zok is bringing a Silicon Valley data scientist mentality to help America’s Olympic athletes more effectively leverage data and analytics to win Olympic medals.
To quote the article:
Zok won’t say who his partners were in the development process or even which athletes are using the suits; any hints might tip off Olympic engineers in other countries, erasing the USOC’s advantage.“I call it the 1 percent question,” he says.“Olympic events typically come down to a 1 percent advantage. So what’s the one question that, if we can provide an answer, will give our athletes that 1 percent edge?
Wait a second, what is this “1% edge,” and is that something that we can apply to the business world? I wanted to drill into this “1% edge” to not only verify the number, but to further understand how the “1% edge” might apply to organizations trying to effectively leverage data and analytics to power their businesses (see “Demystifying the Big Data Business Model Maturity Index”).
Verifying the 1% Edge
To start validating this 1% edge, I evaluated single athlete sports, where focusing on the singular performer is easier than a team sport. Here’s what I found.
Professional Golf. The top 5 worldwide professional golfers (as measured by strokes per round) are only 3 percent better than players #96 – #100. Even more amazing is that while the top 5 professional golfers are only separated by 3 percent in their stroke average, from golfers #96 through #100, the golfers ranked #96 – #100 earned 89.5 percent less than the top 5 (see Figure 1)!
Figure 1: YTD Statistics, Farmers Insurance Open, January 28, 2018
The 3 percent edge is quite evident in golf. Three strokes can be the difference between victory and defeat, and it also demonstrates the disparity in earning potential.
2016 Olympics Men’s Track. Next I looked at the 2016 Olympics men’s track events: 100 meter dash, 400 meter dash and marathon. The difference between the very best and those dreaming of gold medals was again only a small percentage, specifically fractions of seconds in sprinting events.
Figure 2: 2016 Olympic Men’s 100 Meter Results
Figure 3: 2016 Olympic Men’s 400 Meter Results
Figure 4: 2016 Olympic Men’s Marathon Results
- The difference between a gold medal and no medal was between 1.22% to 2.28%
- The difference between a gold medal and 8th place IN THE OLYMPICS was between 2.40% to 3.67%
Think about the years of hard work and commitment these world-class athletes put into preparing for these events, only to finish out of the medals by approximately 2%. So while the “1% edge” may not be entirely accurate, I think a 1% to 3% difference on average looks about right for athletes (and organizations) that want to be considered world class.
Applying the 3% Edge to Become World Class
What does a 3 percent edge mean to your business? What does it mean to be 3 percent better in retaining customers, or bringing new products to market, or reducing hospital readmissions, or preventing unplanned maintenance?
While I couldn’t find any readily available metrics about world class in these business areas, I came back to the seminal research from Frederick F. Reichheld and W. Earl Sasser, Jr. highlighted in the classic “Harvard Business Review” article “Zero Defections: Quality Comes to Services” written in 1990. The bottom line from their research: increasing customer retention rates by 5% increases profits by 25% to 95% (see Figure 5).
Figure 5: Profitability Impact from a 5% Increase in Customer Retention
When these research results were published in 1990, they startled so many marketing executives that it set off a rush to acquire Customer Relationship Management (CRM) applications like Siebel Systems.
The Power of Compounding 1% Improvements
One of the most powerful concepts behind “hitting lots of 3 percent singles versus a single 20 percent homerun” is the concept of compounding. So what does a “3 percent compounding” actually look like? Let’s walk through a fraud example.
Let’s say you have a $1 million run-rate business with an annual 10 percent fraud rate. That results in $100K in annual fraud losses. What if, through the use of advanced analytics, you were able to reduce the fraud fate by 3 percent each year? What is the cumulative effective of a 3 percent annual improvement over five and 10 years?
Figure 6: 3% Compounded Impact on Fraud
While the results start off pretty small, it doesn’t take much time until the compounding and cumulative effects of a 3 percent improvement provide a significant financial return. And though it may not make much sense to look beyond five years (due to customer turnover, technology, evolving competition and market changes), even at five years the financial return is significant.
Take it a step further and consider the impact when combining multiple use cases, such as:
- Waste and spoilage reduction
- Energy effectiveness
- Preventative maintenance
- Unplanned network or grid downtime
- Hospital acquired infections
- Unplanned Hospital readmissions
- Power outages
- Delayed deliveries
A business that acquires a 3 percent compounding effect across numerous use cases begins to look like a business that can achieve compound growth.
I believe there is tremendous growth opportunity for organizations that have the data and analytical disciplines to drill into what a 3 percent improvement in performance might mean to the overall health of their business. Such analysis would not only highlight the power of even small improvements, but offer clarity into what parts of the business should be prioritized for further acceleration.
By Bill Schmarzo