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Analytics in Financial Services: Keynote Presentation for TDWI and NY Tech Council in New York City

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Keynote Presentation Given in New York City on March 30th, at a joint event of The Data Warehousing Institute (TDWI) and the New York Technology Council. This keynote presentation by Jaime Fitzgerald …

Keynote Presentation Given in New York City on March 30th, at a joint event of The Data Warehousing Institute (TDWI) and the New York Technology Council. This keynote presentation by Jaime Fitzgerald focused on "Bridging the Gap" between business goals in the data and analytic enablers of achieving these goals.

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