Analytics in Financial Services - Keynote TDWI and NY Tech Council - New York 2011
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Transcript of Analytics in Financial Services - Keynote TDWI and NY Tech Council - New York 2011
Architects of Fact-Based Decisions™
Analytics in Financial Services:A Competitive Imperative
Keynote Presentation: March 30, 2011
Inaugural Event on Practical AnalyticsPresentation Outline
1. Quick Intro
2. The Challenge ("The Gap")
3. A Solution to The Challenge ("Bridging the Gap")
2Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
3. A Solution to The Challenge ("Bridging the Gap")
4. Application to Your Business Models
5. From Opportunities to Results
6. Key Takeaways
Inaugural Event on Practical AnalyticsIntroduction
Jaime Fitzgerald,Founder @ Fitzgerald Analytics
Professional
Mission:
To help clients find and unlock opportunities
via data, technology, and processes, while
always remembering the crucial role of people.
3Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
� Writing a book about the role of “thought-style” in the
information-era
� Collaborating with others in Analytics, Info Mgt, Data Mgt, &
Tech Innovation via Groups like TDWI, NYTC, DAMA, AIIM…
Easier Ways to
Find Opportunities
Better Ways to
Unlock That Potentialand
To Achieve
my Mission
I Focus On:
Other
Projects:
Inaugural Event on Practical Analytics
Retail Financial Services
Commercial/Business Banking / FS
Business Model Focus for Today
2
1
4Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Trading
Investment Banking
3
4
Inaugural Event on Practical AnalyticsWhat Led to Today’s Event: “The Gap” Between Buzz and Reality
On the subject of data analytics, a gap has emerged between
buzz/hype and reality
� Best-selling books on Analytics(Competing
on Analytics, Supercrunchers, etc.)
� Entire new business units & teams
(e.g. IBM Business Analytics)
1. So Much “Buzz” About Analytics…
� Execs not yet satisfied with results
� Many professionals still not benefitting in
their roles and teams
� Lots of new tech efforts launched to meet
demand for analytics. Results vary.
2. …is not Proportional to Results
5Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
demand for analytics. Results vary.
Our goal today is to help to bridge that gap.
� Select firms use analytics unusually well,
and their profit growth shows it!
� I am a “witness” for 15 years of results
3. Analytics Does Have Potential
� You can’t deposit buzz into the bank!
� For more of us to benefit, we need:
� Simpler ways to identify opportunities
� Efficient ways to plan and execute analysis
� Transparent methods (less black boxes)
4. But This Potential Needs to Benefit YOU
Inaugural Event on Practical AnalyticsToday’s Themes
Based on our mission for today, we are guided by 3 themes
Getting Practical
� Share a Practical Methodology ...
� Explained via Real Examples…
� with Reference to Work of our
Panelists
Key Theme Therefore We Will
1
6Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Takeaways
You Can Use
2� Be explicit about how concepts
apply to your businesses
� Review key takeaways at the end
“Bridging the Gap”
3 � Address both business context and
technical implications
� Show how the method helps bridge
the gap between business goals and
technical preconditions to those goals
Inaugural Event on Practical AnalyticsDefining a Few Terms I Will Use
To ensure clear communication, let me define up front a few terms I
will use today.
1. Point of Opportunity
Term
� An opportunity for improvement within YOUR
business model
� Defined because it impacts key drivers of your
results
Intended Meaning
7Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
2. Causal Clarity
3. Causal Model
� Clear Definition of key drivers, cause + effect in
your business model, business unit, etc.
� Easy to Explain to others, preferably visually
� A visual representation of “what drives results” in
your business model
� Create this, and you have achieved “Causal Clarity”
Cause Effect
PriceRevenue
Txns
Inaugural Event on Practical AnalyticsPresentation Outline
1. Quick Intro
2. The Challenge ("The Gap")
3. A Solution to The Challenge ("Bridging the Gap")
8Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
3. A Solution to The Challenge ("Bridging the Gap")
4. Application to Your Business Models
5. From Opportunities to Results
6. Key Takeaways
Inaugural Event on Practical AnalyticsThe Challenge: Closing the Gap between Hype and Reality
As we began to discuss… there is a “performance gap” here!
� Best-selling books on Analytics (Competing on Analytics, Supercrunchers, etc.)
� New efforts (business units, teams, roles, initiatives)
1. So Much “Buzz” about Potential of Analytics
� Selected firms have made analytics a source of competitive advantage
2. When Analytics Works, it Really Works…
9Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
� Selected firms have made analytics a source of competitive advantage
� It happens every day… just not as broadly as would be ideal
� Lots of effort, some wins, many losses… not “firing on all cylinders”
3. Yet Most Teams and Organizations are Not Benefitting Enough
What is the root cause of this “performance gap”?
Right Focus Right Method Execution Results!1 2 3 4
Inaugural Event on Practical AnalyticsThe #1 Cause: Complexity
Seeking opportunity in analytics is complex - there are “too many
options”…
1. Thousands of
Business Models
2. Infinite Decisions + Business Processes
(existing and potential)
Analytic
10Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
3. Many Types of Analysis w/
1000s of Sub-Concepts
4. Lots of Tech Tools, Platforms, Plug-ins,
Deployment Options
Analytic Initiatives
We need a way to simplify this complexity without losing the potential
Inaugural Event on Practical AnalyticsOther Root Causes of “Analytic Underperformance”
While complexity is the largest impediment to results in analytics,
there are several other challenges worth mentioning…
Cross-Functional Collaboration
Communication Challenges
1
2The good news is…
11Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Communication Challenges
Technology and
Data Management Barriers
3
…managing complexity
makes all these other
problems easier to manage
also…
People: Talent, Skills, Learning,
Team Effectiveness
4
Inaugural Event on Practical AnalyticsPresentation Outline
1. Quick Intro
2. The Challenge ("The Gap")
3. A Solution to The Challenge ("Bridging the Gap")
12Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
3. A Solution to The Challenge ("Bridging the Gap")
4. Application to Your Business Models
5. From Opportunities to Results
6. Key Takeaways
Inaugural Event on Practical Analytics
� Simpler
Simplify Your Analytic Process via “Causal Clarity”
Find Opportunity
Faster
Unlock More Easily
Clearly defining “Cause and Effect” is the most crucial enabler of
analysis that is
13Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
� More Impactful.
� More Efficient Fewer Wasted Steps
Benefit /Cost
Inaugural Event on Practical Analytics“Causal Clarity”
If cause and effect are clear, practical analytics becomes feasible
Key Decisions
Drivers of Results…
Better
Decisions
Optimized by Our
Analysis of Data…
Revenue
Costs
Lead to
Better Results
14Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Costs
Risks
ProfitKey Business
Processes
Better
Processes
Causes Effects
Inaugural Event on Practical AnalyticsCausal Models: A Simple “Base Case”
Each business model has an inherent “causal model,” but the
“core branches” are similar
Revenue
Cost of Revenue Gross Profit
less
Example: Drivers
of Net Profit
Your
15Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Cost of Revenue
Operating Costs
Marketing
Overhead
Other
Gross Profit
Other Costs
Net Profitless
Your Business Model
Has
Inaugural Event on Practical AnalyticsThe “Point of Opportunity” Concept Illustrated
Your Business Model
Has “Causal Model”
(aka Drivers)A Point of
Opportunity
Creating
16Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
(aka Drivers)Opportunity
Returning to the causal model above on the previous slide,
let’s find a concrete point of opportunity
Inaugural Event on Practical AnalyticsA Point of Opportunity
Here is an opportunity to enhance ROI on Marketing + Sales efforts:
Price per TxnTransactions
per Client
Point of Opportunity: “Efficiency of New Client Acquisition”
Key Driver / KPI: Acquisition Cost per New Client
Formula: [spending on new client marketing]/[# New Clients)
17Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Volume
Price per Txn
Sales and
Marketing
per Client
# of Clients
X
Inaugural Event on Practical AnalyticsThe Good News: Establishing “Causal Clarity” is Not Rocket Science
Easy and Quick: There are 3 Main Steps
Goal Business Model Causal Model
1 2 3
� Usually net profit � Products / services � Aka “drivers tree”Inputs
3 Things
To
Define:
18Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
� Usually net profit
� Can be anything!:
– Marketing ROI
– Non-profit impact
– Customer
satisfaction
– Etc.
� Products / services
� Distribution
� Target customers
� At what price
� Cost structure
� Known KPIs and
rationale for them
� Aka “drivers tree”
� Makes the causal
model visual
Inputs
To
Use:
Inaugural Event on Practical AnalyticsPresentation Outline
1. Quick Intro
2. The Challenge ("The Gap")
3. A Solution to The Challenge ("Bridging the Gap")
19Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
3. A Solution to The Challenge ("Bridging the Gap")
4. Application to Your Business Models
5. From Opportunities to Results
6. Key Takeaways
Inaugural Event on Practical AnalyticsBackground: Types of Questions Analytics May Answer
We are about to get practical, let’s keep the following in mind…
Past Present Future
Information
What happened? What is happening
now?
What will happen?
20Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Source: Tom Davenport , et al. Analytics at Work: Smarter Decisions, Better Results (Harvard Business School Press, 2010)
(Reporting) (Alerts) (Extrapolation)
Insight
How and why
did it happen?
(Modeling,
experimental
design)
What’s the next
best action?
(Recommendation)
What’s the
best/worst that
can happen?
(Prediction,
optimization,
simulation)
Inaugural Event on Practical AnalyticsOne More Framework: Value vs. Volume
In some cases, analytics makes a single high stakes decision better.In other cases, we “make it up in volume”
High-Value, Low-Volume
Decisions
Example: M&A, capital investment,
strategic market positioning
High
Value
Eco
no
mic
Im
pa
ct
of
Ea
ch D
eci
sio
n
Medium-Value, Medium-Volume
Decisions
21Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Source: Neil Raden and James Taylor. Smart Enough Systems (Prentice Hall 2007).
High VolumeLow Volume Decision Volume
Low
Value
Eco
no
mic
Im
pa
ct
of
Ea
ch D
eci
sio
n
Decisions
Example: Product development and
pricing, customer segmentation,
targeting
Low-Value, High-Volume Decisions
Example: Loan approval, customer
cross-sell offer, customer request for
credit-line increase. Direct Marketing.
Inaugural Event on Practical AnalyticsFinancial Services Business Models
To get practical, let’s establish causal clarity for several key business
models in Financial Services
Business ModelCore Products /
Services
Key Drivers
(illustrative)
1. Retail Financial
Services
� Deposit Products
� Loan Products
� Investment Products
� Customer acquisition,
retention, and profitability
� Product pricing
� Share of wallet
22Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
� Share of wallet
2. Commercial /
Business Banking /
Financial Svcs
� Debt Financing
� Institutional Financial Svcs
(e.g. for Money Managers)
� Cash Management
� Fee structure / yields
� Volume
� Cost efficiencies
3. Trading� Proprietary trading
� Market-making
� Trade execution
� Risk-adjusted returns
� Transaction spreads
� Cost efficiencies
4. Investment
Banking
� Underwriting
� M & A
� Other advisory services
� Deal flow
� Deal completion rates
� Fee structure
Inaugural Event on Practical Analytics1. Retail Financial Services
Point of
Opportunity:Increase ROI on Marketing Spend
BY Decreasing Acq. Cost / Customer*
Key Driver / KPI: Acquisition Cost per New Client
Formula: [spend on new client marketing]/
[# New Clients)
1. Deposits
2. Investments
3. Loans
Products
Illustrative Example
23Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
* P = Profit per year per customer, n=number of years the customer stays
Volume
Profit per
ProductProducts per
Client
# of Clients
XAllocation of
Marketing $
*2nd Order Causality + Pt of Opportunity
Inaugural Event on Practical Analytics2. Commercial/Business Banking / FS
Point of
Opportunity:Grow Fees BY Increasing “Share of
Wallet” from Corporate Clients
Key Driver / KPI: Share of Wallet (“SOW”)
Formula: [Total Fees from Client]/[Total Client Fees
on Products YOU offer, via ALL providers]
Customer
Illustrative Example
24Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
* “Total Client Fees includes spending on ALL companies that offer the same or similar products/services
Share of
Wallet
Total Size of
Wallet
X
The size of the
pie we are
sharing….
Marketing
Customer
Loyalty
Client benefit
of using your
platform more
exclusively
Customer
Experience
Optimization
Better Outreach
via Predictive
Analytics
• Everything ok?
• You would benefit
from product X
Inaugural Event on Practical Analytics3. Trading
Point of
Opportunity:Maximize Alpha!
Key Driver / KPI: Risk-Adjusted Return
Formula: Alpha
Volume: #
Illustrative Example
25Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Volume: #
Trade-able
Opportunities
Quality:
Profit per
Opportunity
X
Quality of Real-
Time Decision
Models + Tools
Trading
Profits
“Cost of
Discovery”
Less…
Investments
in Finding
these
Opportunities
How “Big” are
these Trades
1. Accuracy of “Triggers”
2. Cost of False Positives
3. How well do models
adjust to changed
world?
Inaugural Event on Practical Analytics4. Investment Banking
Point of
Opportunity:Increase Profit per Employee
Key Driver / KPI: Return on Human Capital (“HCROI”)
Formula: [NET Profit] / [# Employees]
Staff & Team
Profit per Gross Profit Net
Illustrative Example
26Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Profit per
Person-Hour
# Hours
XStaff + Team
Effectiveness
Gross Profit
“Other Investments in
Staff Performance”
Less…
•Cost of analysis
•Cost of training
•Cost of new systems
(e.g. knowledge mgt + workflow)
1. Resource allocation
(who does what. Why?)
2. Re-use of IP: how well do we
re-purpose?
3. Task Value to Cost:
how much waste?
Net
Profit
Inaugural Event on Practical AnalyticsAnalytic Themes in Financial Services
Before getting into specific methods, here’s a quick tour of key topics
� Risk Management: always important, more now than ever
� Big data / quant frontiers (especially relevant to trading)
� “Recommendation engines,” other predictive models, and their
practical applications
� Process optimization & automation using data, analysis, and “system-
imbedded decision models”
27Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
imbedded decision models”
� Customer Experience Analytics: expectations, service levels,
satisfaction, and impact on client loyalty, retention, and profitability
� Marketing Analytics (esp. with the impact of multi-channel marketing)
� Customer Lifetime Value (CLV) analysis and related predictive analysis
� Product pricing analysis: a perennial that just became more crucial w/
new financial regulations, constraints, and customer behaviors
Inaugural Event on Practical AnalyticsAnalytic Methods: Top 5 “Most Promising” in Financial Services
The best methods depend on your business model & “point of
opportunity”, but this list is a good place to start…
“Predictive yet
Practical”
Customer
Method
� “Better odds” of accuracy (decision, offer, risk-assessment)
� You won’t be right all the time, and you don’t have to be
� Allocate resources to your most profitable customers
� Use WITH predictive analytics to INFER WHO WILL be most
Source of Impact
1
2
28Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Operational
Analytics
� Use of analytic insights “in-system” to improve process
efficiency, quality, and automation
� Ranges of use include staffing, workflow enhancement, etc.
5
Customer
Lifetime Value
Price
Optimization
Risk Mgt
� Use WITH predictive analytics to INFER WHO WILL be most
profitable in the future, not just the present.
� Broad category: from deal-level risk to trade counter-party risk
� 2008 to 2011: remarkable changes in “parameters”
2
3
4
� Maximize profit yield per product, per transaction, per dollar
invested…
� By finding the optimal balance of price and feature parameters
Inaugural Event on Practical Analytics
Customer
Lifetime Value
Analytic Methods: Trends into the Future
While several “perennial” analytic methods remain essential, the
“mix of opportunity” is changingP
ote
nti
al
Va
lue Predictive
Analytics
Price
Open-Data w/
Proprietary
Risk Mgt
29Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
“Old Standby” New / Cutting Edge
Po
ten
tia
l V
alu
e
Price
Optimization
Video /
Image
Text Analytics
Proprietary
Analysis
Inaugural Event on Practical AnalyticsPresentation Outline
1. Quick Intro
2. The Challenge ("The Gap")
3. A Solution to The Challenge ("Bridging the Gap")
30Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
3. A Solution to The Challenge ("Bridging the Gap")
4. Application to Your Business Models
5. From Opportunities to Results
6. Key Takeaways
Inaugural Event on Practical AnalyticsWhat We Need to Get Practical
To get practical about analytics, we need three things…
What We Need Definition
1. Causal Clarity re: Your
Business Model
� How You Make Money
� Key Drivers of Results
31Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Business Model � Key Drivers of Results
2. Definition of Your Points
of Opportunity
� Gaps vs. Potential
� Room for Improvement
3. A Plan to Capture the
Opportunity
� Insight You Need
� Method to Get It
Inaugural Event on Practical Analytics
Insights or Information Required
Your Point of Opportunity (Decision or Process)
Translates to
Which drives
Planning Your Analysis
Planning starts with the goal, the “point of opportunity”
32Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Analysis Methods Required to Create this Information
Required Data
Tools, Platforms, Technology, People, and Processes
Which drives
Allowing definition of
And selection of the right
Inaugural Event on Practical AnalyticsHow We Choose Analytic Methods
Selecting the right analytic method is a key success factor. Consider
the logic below…
1. Your Goals
33Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
2. Types of Info
you Need
3. Information
Available
Analytic MethodInforms
Note: This is a key topic, yet covering it fully would require more time than we have today.
The Practical Analytics Knowledge Portal will include a “method selection template” that helps select the right analytic method for your specific opportunity
Inaugural Event on Practical AnalyticsPresentation Outline
1. Quick Intro
2. The Challenge ("The Gap")
3. A Solution to The Challenge ("Bridging the Gap")
34Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
3. A Solution to The Challenge ("Bridging the Gap")
4. Application to Your Business Models
5. From Opportunities to Results
6. Key Takeaways
Inaugural Event on Practical AnalyticsSummary of Key Takeaways
Executives Leadership
1. Begin Your
Business
Model
2. Define +
Agree on
the Causal
Model
3. Identify
Points of
Opp.
4. Define the
info needed
to unlock
the opp.
5. Keep
analysis as
simple as
possible…
For All
Attendees
Tips By
We hope you will benefit from the concepts shared today
35Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
Executives Leadership� Establish “causal clarity” visually so that everyone understands
� Encourage teams to use this context to prioritize and target effort
� Expect recommendations to be justified by their impact on key drivers
Business Professionals� Identify points of opportunity
before investing time in analytic
details
Technology Professionals� Insist upon understanding the
business context and causal logic
of requests for analytic systems
and effort
Tips By
Role:
Inaugural Event on Practical AnalyticsFYI: Sources of the Methods Shared Today
In my quest to “Bridge the Gap” between business results & technical
solutions, I have been “integrating” & applying the ideas of others:
1. Although the methods I shared are my own creation, I feel a huge
debt of gratitude to numerous “idea sources”, innovators, and
subject matter experts who influenced my work
2. My focus has been on:
36Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
2. My focus has been on:
a. Applying their ideas in new ways
b. Combining their ideas to solve problems
c. Helping my team apply the ideas to get results
If you find my method helpful, take it and use it too!
Inaugural Event on Practical AnalyticsComplementary Resources You Can Access
After you leave today, you may want more information…
To provide you with ongoing access to relevant knowledge & tools, we are
creating a knowledge portal re “Practical Analytics.”
To signup for access to the portal:
37Analytics in Financial Services: How Analytics and Data are Changing the Financial Industry, © Fitzgerald Analytics 2011, all rights reserved
1. Send an Email to [email protected]
2. Text the word “analytics” to 917-846-3759
We hope that today’s event, plus the portal, will help YOU benefit as
much as possible from analytics in your career