The importance and benefits of operational decision making

This chapter from Smart (Enough) System discusses why it's vital for today's companies to be flexible and adjust to strategic, business and economic changes and how companies can get a competitive edge by automating decisions. In this section, you'll learn the importance of operational decisions and different strategies that influence decision making. You'll also read about key business intelligence (BI) terms and definitions including business agility, strategic alignment and decision support.

Table of contents:

The importance and benefits of operational decision making
How to make operational decisions and data corporate assets
Benefits of operational, real-time capabilities in smart systems
How to create automated operational decisions

The world is changing fast, and well-documented business and economic changes, such as the growth of outsourcing and Internet retailing, are increasingly affecting the way organizations must operate. Some organizations will see these trends as creating opportunity and adapt to take advantage of them. Others will try to deal with these trends with a minimum of change but will still have to face competitors that are using these trends to their advantage. Given the importance of information systems to most organizations, all organizations need systems smart enough to handle their operations effectively in this new environment.

Copyright Info Smart (Enough) Systems by James Taylor and Neil Raden ISBN 0132347962 First printing June 2007 Prentice Hall Professional

The Importance of Operational Decisions
Smart enough systems deliver effective automation of the decisions that drive organizations' day-to-day operations. Although organizations have automated standard processes with enterprise software, these operational decisions haven't been the focus of investment. They are overwhelmingly made manually or automated poorly, which is a mistake. Embedding business processes in systems to streamline operations but not managing and improving these decisions leaves half the opportunities for improvement untouched. The means and the resources are now available to close that gap.

For more than a decade, organizations have strived to make their operations more efficient by rationalizing business processes, eliminating the handoffs between people that added latency and cost, driving down the cost of support with software standardization and data center consolidation, and outsourcing. None of these efforts, even the most successful ones, provided much more than a short-term competitive advantage, because they attacked the problem from the denominator—revenue per employee, sales per store—always focused on taking out cost but not emphasizing the numerator: benefits. Unfortunately, this approach is what's known as a "Red Queen" exercise, a reference to the Red Queen observing to Alice in Wonderland, "In this place, it takes all the running you can do, to keep in the same place."

For more than a decade, organizations have strived to make their operations more efficient by rationalizing business processes, eliminating the handoffs between people that added latency and cost, driving down the cost of support with software standardization and data center consolidation, and outsourcing. None of these efforts, even the most successful ones, provided much more than a short-term competitive advantage, because they attacked the problem from the denominator—revenue per employee, sales per store—always focused on taking out cost but not emphasizing the numerator: benefits. Unfortunately, this approach is what's known as a "Red Queen" exercise, a reference to the Red Queen observing to Alice in Wonderland, "In this place, it takes all the running you can do, to keep in the same place."

In 2004, an Opinion Research Corporation survey of executives found a clear opportunity to automate and improve decisions. Operational decisions were high-impact, but only a fraction had been automated, and maintenance cost and time to market were real problems. Specifically, the findings included the following:

• More than 90 percent felt that front-line operational decisions affected profitability.
• About half had not yet automated about 25 percent of these decisions, and nearly 80 percent still lacked automation for more than half of them.
• Making the right decisions with a high degree of accuracy and precision was very important to more than 90 percent of respondents. More than 60 percent also rated consistency of decision making and effective management as important.
• 85 percent expressed difficulty in changing decision-making criteria in their systems, with more than 50 percent saying it took months to get business changes implemented in production.
• 60 percent felt that automated decisions were carried out inconsistently or they were forced to deal with redundant logic in multiple systems to prevent this problem.
• 70 percent of chief information officers/chief technology officers (CIOs/CTOs) didn't believe they were getting the most value they could from their data. The most common reason was that their inability to blend business rules with data prevented them from maximizing the value of their data.

In a survey by Teradata in 2004, 75 percent of the senior executives of top U.S. companies said that the number of daily decisions has increased over the past year, and more than 50 percent said that decisions are more complex this year than last year. The overwhelming majority of respondents, more than 70 percent, said that poor decision making is a serious problem for business. The top casualties of poor decision making are profits, company reputation, long-term growth, employee morale, productivity, and revenue.

For many organizations, the only way information technology has been applied to decisions is in the form of business intelligence or decision support—analyzing of data to help someone make a decision. Decision support as a discipline has always been aimed at the small segment of the population that uses data to make important decisions in organizations: managers and knowledge workers. It hasn't been effective at more fine-tuned, operational decision making that's just as crucial to the organization's well-being, if not more so. In addition, current enterprise data architectures are cleanly divided between operational systems and those that support the analytical and reporting processes behind decision support. This division leads to excessive duplication of data, latency in its accessibility, and usually a high degree of mismatch between analytical and operational data. Coupled with the rapidly increasing volumes of data being generated and the increasing rate of disparity as data arrives from external sources, the situation needs a better solution.

What's needed is a blueprint for orienting data, systems, and people to manage operational decisions more effectively and a way to automate decisions when appropriate and streamline those that still require some level of human intervention. Smart enough systems are computer applications that have enough intelligence to make these kinds of decisions without intervention. These systems offer a true strategic advantage. To understand why, you need to consider what "strategic" advantages involve, as discussed in the next section.

Strategy Drives Decision Making

"The essence of strategy is choosing to perform activities differently than rivals do."
—Dr. Michael Porter, Bishop William Lawrence University Professor at Harvard Business School

Dr. Porter's quote is more relevant today than ever. With fewer geographic barriers and always-on connectivity, your organization must behave differently to stand out from the crowd. You might choose to perform activities that your competitors don't perform, not perform activities your competitors do, or (most likely) perform the same activities but perform them differently.

Critical to behaving differently is an ability to decide differently. Deciding when to omit or add an activity and when and how to change the way you perform an activity are essential. A strategic advantage must make an impact on strategy, which means it must change your decisions.

The decisions you must change could be occasional strategic decisions, such as whether to acquire a certain company or enter a new market. Or they could be more tactical and operational, focused on how you treat a customer the next time he calls your call center or how you price a product on your Web site. All these decisions must be driven by your strategy if you are to deliver effectively on that strategy. Although your organization probably focuses on getting major strategic decisions correct, you might struggle to keep your operational activities—the way front-line members of staff and applications behave—synchronized with your strategic plans. For example:

• You might want to treat all gold customers a certain way, but you have a selfservice application that doesn't differentiate between customers.
• You might want to get more aggressive about retaining customers who are likely to leave, but your call center representatives have too many campaigns to remember, so they treat everyone the same.
• You might want to offer dynamic pricing to suppliers, but the software that drives your Web site does not use the pricing algorithms sales representatives use.

Unless your operational activities reflect your strategy accurately, your organization can't succeed. You can't even be said to be implementing your strategy.

Strategy Is Not Static
The problem of ensuring that your operational activities match your strategy is exacerbated by the need for business agility. Business agility is critical to survival in a rapidly changing world, so your strategy can't be static. You must constantly refine and update it to keep up with competitors, market shifts, and consumer preferences.

Most executives say their companies are facing a more competitive environment than they were five years ago; in fact, 85 percent say "more" or "much more." Organizations that want to compete effectively must change continuously and base those changes on feedback about what is and isn't working. Those unwilling or unable to do so must recognize that they will soon be competing with organizations that have changed, if they aren't doing so already. No organization can remain immune; all will have to change somehow.

Not only must your strategy change more rapidly, but you also have more information about why and how it must change than ever before. The growth in business intelligence and performance management systems means you have more insight into how well (or poorly) you are doing. To respond effectively to this new understanding, however, delivering new processes, skills, and expertise rapidly to front-line workers and information systems is essential.

For instance, if your analysis of last week's sales shows that a competitor is eating into your sales, and you decide a new pricing model is required, many factors influence how quickly you can respond. Your cultural willingness to change, for example, or your escalation and sign-off processes determine how quickly you go from recognizing a problem to intending to respond to it. The key issue, however, is likely to be how quickly you can move from that intent to a change in the operational behavior that implements your new strategy. After all, if your operations haven't changed, no customer or other associate is likely to notice—they won't detect the change in your pricing or how it affects them.

However, changing your operations means changing the way your operational information systems behave. Your information systems characterize your operations in such a fundamental way that you can no longer separate them from your business—your systems are your business. The time it takes to change your operational systems determines how fast you can modify your operations and is the ultimate determinant of your business agility.

Agility also contributes to strategic alignment—how well your strategies are reflected in your business operations. Without agility, your organization can't consistently carry out a new strategy without an extended period of change. Indeed, you risk never achieving strategic alignment if changes to the strategy occur faster than the organization can respond.

Often this alignment, or lack of it, can be seen in the organization's operational or front-line activities. Indeed, divergent agendas and miscommunication between those working on an organization's strategy and those carrying it out operationally are chronic problems. These disconnects can hinder executive leadership's access to information about what's really going on and their ability to effect change in organizational behavior when they see the need. A recent study included the following statement:

"Most devastating, 95 percent of employees in most organizations do not understand their [organization's] strategy."

Many things contribute to these disconnects between strategy and operations. Among them are a lack of agility (the strategy has changed too often for the employees to keep track), execution problems (the decisions made by front-line employees aren't affected by the strategy), and secrecy (the strategy is confidential, proprietary, and a competitive advantage, so fear that it will "get out" prevents its dissemination). You must solve these problems to ensure that your strategy is carried out continuously and effectively, top to bottom, by both people and information systems.

Therefore, a dynamic, agile strategy means being able to decide to act differently and then being able to apply that decision to the way your operations work. However, to change the way your operations work, you have to change the way you make operational decisions.

More on accessing data:

• Read the next section — How to make operational decisions and data corporate assets
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