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10 best practices in operational analytics

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One of the most powerful ways to apply advanced analytics is by putting them to work in operational systems. Using analytics to improve the way every transaction, every customer, every website visitor …

One of the most powerful ways to apply advanced analytics is by putting them to work in operational systems. Using analytics to improve the way every transaction, every customer, every website visitor is handled is tremendously effective. The multiplicative effect means that even small analytic improvements add up to real business benefit.

This is the slide deck from the Webinar. James Taylor, CEO of Decision Management Solutions, and Dean Abbott of Abbott Analytics discuss 10 best practices to make sure you can effectively build and deploy analytic models into you operational systems. webinar recording available here: https://decisionmanagement.omnovia.com/archives/70931

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  • Webinar: 10 best practices in operational analyticsOne of the most powerful ways to apply advanced analytics is by putting them to work in operational systems. Using analytics to improve the way every transaction, every customer, every website visitor is handled is tremendously effective. The multiplicative effect means that even small analytic improvements add up to real business benefit.In this session James Taylor and Dean Abbott will provide you with 10 best practices to make sure you can effectively build and deploy analytic models into you operational systems.<Quick overview on operational decisions and the value of analytics in operational systems>1) Be flexible; data mining is not a set of rules! (though the results may be)I need to work this point out more2) Avoid three key data preparation and modeling mistakesblindly using data mining software defaultsforgetting some algorithms assume particular distributions of dataassuming powerful algorithms can "figure out" the model3) Diversity is strength: build lots of modelsalgorithms have strengths and weakness; leverage multiple families of algorithms to improve understanding of the datamodel ensembles can provide significant improvements in model accuracy4) Pick the right metric to assess modelsthe metric dictates which model will be selectedthe metric should match the business objective, not how algorithms view the models5) Have deployment in mind when building modelsdifferent approaches are necessary for real-time deployment vs. batch deployment or offline deploymentbiggest problem: moving all data preparation from data mining tool environment to the database6) Focus on actionsKnowing is not enough, must actMake sure you understand the options, how the model helps you select between them, what the regulations and policies are7) The three legged stoolOperational decisions have to work for three different groups – business IT and analyticsLike a three legged stool it will only stay up if all three groups are working togetherCollaboration across the groups is key8) Focus on explicabilityBusiness people understand their business, IT people understand their systemsThe models, and the actions taken in response to them, must be explicableOperational decisions are often regulatedConsider model representations like scorecards, decision trees, rules and an implementation platform like a brms to ensure explicability9) Build in decision analysisNo decision is static, no decision remains good over timeModels too age and degradeAny decision implementation must therefre monitor results, to see if it is degrading, and constantly challenge itself with new approaches, new models, new rules to see if it could be improved.Test and learn10) BWTDIMBegin with the decision in mind
  • As we are talking about decisions it is worth remembering that all decisions matter, as Peter Drucker noted. Not just the big, strategic decisions of your executives but the day to day decisions that drive your business.
  • Models make predictions but predictions alone will not help much – you must ACT based on those predictions.When you are thinking about smarter systems, taking action means having the system take action in a way that uses the predictions you made. You need to make a decision based on those predictions and this means combining the models with rules about how and when to act.Let’s take our retention example from earlier. Knowing that a customer is a retention risk is interesting, acting appropriately and in time to prevent them leaving is usefulGrovel index story
  • Story about powerpoint modelRisks of models that are done separately and the need to put them to workPredictive models don’t DO anything, they just make predictionsRules make them actionableTaking the rules, for instance, that represent a segmentation and deploying them into a decision makes them actionable
  • Remember – decisions are where the business, analytics and IT all come together
  • Once deployed analytics cannot be a “black box”, we must understand analytic performanceObviously you need a 'hold out sample' or business as usual random group to compare to.You need to understand what's working and what's the next challenge – which segments are being retained, for instanceYou must understand operational negation.You need to track input variables, scores, decisions or actions taken (classic example is in collections where a strategy may dictate a 'do nothing' strategy, but the collections manager overrides the decision and puts the accounts into a calling queue) and operational data that fed the decisionBoth analysts and business users must think about what they can do to improve decision making, which is the foundation of adaptive controlIn our retention example I need to have some customers I don’t attempt to retain or that I don’t spend any money retaining. I have to capture what the call center representative ACTUALLY offered and what was actually accepted (if anything), not just what SHOULD have been offered and I have to be able to show the results to my business users in terms they understand.When decisions have to be compliant, and many do, or when decisions might have to be explained or justified in court or even in the court of public opinion, automated systems can be a challengeWhere a judge or journalist can talk to people who made decisions and review company policy documents, they don’t do so well talking to computers or reviewing math and code.If a decision is automated it must be possible to log how the decision was made, how predictions were calculated, what actions were taken and why. This must be something that can be reviewed, even made public. Business rules and models like decision trees and scorecards are particularly helpful in this respect.You need models that are good at explaining their actions - scorecards and decision trees/strategies for example – and the ability to trace these decisions historically and document them.Retention offers may not seem like they have a big compliance issue but what if a particular group of customers argues they are being discriminated against because they always seem to get worse offers than another group? Could your business users explain exactly how it was done? Could you show a judge and a jury that your approach was fair and reasonable?
  • Analytics improve decision makingFind problem areas and improveSuggest rules to close the gapsEnhance data with predictive analytics
  • Begin!Identify your decisionsHidden decisions, transactional decisions, customer decisionsDecisions buried in complex processesDecisions that are the difference between two processesConsiderWho takes them nowWhat drives changes in themAssess Change ReadinessConsider Organizational changeAdopt decisioning technologyAdopt business rules approach and technologyInvestigate data mining and predictive analyticsThink about adaptive control
  • Decision Management Solutions can help youFind the right decisions to apply business rules, analyticsImplement a decision management blueprintDefine a strategy for business rule or analytic adoptionYou are welcome to email me directly, james at decision management solutions.com or you can go to decision management solutions.com / learn more. There you’ll find links to contact me, check out the blog and find more resources for learning about Decision Management.

Transcript

  • 1. Webinar: 10 best practices in operationalJames Taylor, analytics CEO
  • 2. Your presenters James Taylor CEO of Decision Management Solutions. James works with clients to improve their business by applying analytics and analytic technology to automate and improve decisions. He has spent the last 8 years developing the concept of Decision Management and has 20 years experience in all aspects of software. Dean Abbott Owner of Abbott Analytics. Dean has applied Data Mining and Predictive Analytics for 22 years and provides mentoring, coaching, and solutions for Web Analytics, Compliance, Fraud Detection, Survey Analysis, Text Mining, Marketing and CRM analytics and more. Dean has partnerships with the largest predictive analytics organizations in the US. ©2011 Decision Management Solutions 2
  • 3. AGENDA 1 Introducing Operational Analytics 2 The 10 Best Practices 3 Wrap up
  • 4. The 10 Best Practices1. Be flexible; data mining is not a set of rules!2. Avoid 3 key data preparation, modeling mistakes3. Diversity is strength: build lots of models4. Pick the right metric to assess models5. Have deployment in mind when building models6. Focus on actions7. The three legged stool8. Focus on explicability9. Build in decision analysis10. BWTDIM ©2011 Decision Management Solutions 4
  • 5. IntroducingOperational Analytics ©2011 Decision Management Solutions 5
  • 6. Analytics have power Online Acquisition Campaign Conversion Rates Response Risk Customer Fraud Churn ©2011 Decision Management Solutions 6
  • 7. And that power is operational How do I… prevent this customer from churning? convert this visitor? acquire this prospect? make this offer compelling to this person? identify this claim as fraudulent? correctly estimate the risk of this loan? It’s not about “aha” moments It’s about making better operational decisions ©2011 Decision Management Solutions 7
  • 8. Multiplying the power of analytics Type Strategy TacticsOperations Low Economic impact High ©2011 Decision Management Solutions 8
  • 9. Operational decisions matter “Most discussions of decision making assume that only senior executives make decisions or that only senior executives’ decisions matter. This is a dangerous mistake.” Peter Drucker ©2011 Decision Management Solutions 9
  • 10. 10 Best Practices ©2011 Decision Management Solutions 10
  • 11. Be Flexible: Data Mining isNot a Series of RecipesData Mining Project Entry Points:1) Business Understanding2) Data Understanding Business Data Understanding UnderstandingData Mining Project Next Data Data Preparation Steps: Data Deployment Data1) Data Understanding Modeling2) Modeling, then Data Preparation Evaluation3) Data Preparation, then Data Understanding, then Modeling 11
  • 12. Avoid The Three BiggestData Preparation Mistakes1. Don’t blindly use data mining software defaults – Missing data  Is the record with missing values in one of the fields kept at all?  What value is filled in? What effect will this have? – Exploding categorical variables with large numbers of values – what happens to the models? 12
  • 13. Some Software Fills Missing Values Automatically Common automated missing value imputation: – 0, mid-point, mean, or listwise deletion Example at upper right has 5300+ records, 17 missing values encoded as ―0‖ Afterfixing model with mean imputation, R^2 rises from 0.597 to 0.657 13
  • 14. Avoid The Three BiggestData Preparation Mistakes2. Don’t forget some algorithms assume the distributions for data – Some algorithms assume normally distributed data: linear regression, Bayes and Nearest Mean classifiers 14
  • 15. How Non-normality affectsRegression ModelsRegression models―fit‖ is worse withskewed (non-normal) data – In example at right, by simply applying the log transform, performance is improved from R^2=0.566 to 0.597 15
  • 16. Avoid The Three BiggestData Preparation Mistakes2. Don’t forget some algorithms assume the distributions for data – Some algorithms assume normally distributed data: linear regression, Bayes and Nearest Mean classifiers – Distance-based algorithms are strongly influenced by outliers and skewed distributions: k-Nearest Neighbor, k-Means, the above algorithms 16
  • 17. Avoid The Three BiggestData Preparation Mistakes2. Don’t forget some algorithms assume the distributions for data – Some algorithms assume normally distributed data: linear regression, Bayes and Nearest Mean classifiers – Distance-based algorithms are strongly influenced by outliers and skewed distributions: k-Nearest Neighbor, k-Means, the above algorithms – Some algorithms require categorical data (rather than numeric): Naïve Bayes, CHAID, Apriori 17
  • 18. Avoid The Three Biggest DataPreparation Mistakes3. Don’t assume algorithms can ―figure out‖ patterns on their own – Features fix data distribution problems – Features present data (information) to modeling algorithms in ways they perhaps can never identify themselves  Interactions, record-connecting and temporal features, non-linear transformations 18
  • 19. What are Model Ensembles? Combining outputs from multiple models into single decision Models can be created using the same algorithm, or several different algorithms Decision Logic Ensemble Prediction 19
  • 20. Motivation for Ensembles Performance, performance, performance Single model sometimes provide insufficient accuracy – Neural networks become stuck in local minima – Decision trees run out of data – Single algorithms keep pushing performance using the same ideas (basis function / algorithm), and are incapable of ―thinking outside of their box‖ Often, different algorithms achieve the same level of accuracy but on different cases—they identify different ways to get the same level of accuracy 20
  • 21. Four Keys to EffectiveEnsembling Diversity of opinion Independence Decentralization Aggregation From The Wisdom of Crowds, James Surowiecki 21
  • 22. Bagging Bagging Method – Create many data sets by bootstrapping (can also do this with cross validation) – Create one decision tree for each data set – Combine decision trees by averaging (or voting) final decisions – Primarily reduces model variance rather than bias Results Final – On average, better than any Answer individual tree (average) 22
  • 23. Boosting (Adaboost) Boosting Method – Creating tree using training data set Reweight examples – Score each data point, indicating when each where incorrect decision is made (errors) classification – Retrain, giving rows with incorrect decisions incorrect more weight. Repeat Combine – Final prediction is a weighted average of all models via models-> model regularization. weighted sum – Best to create ―weak‖ models—simple models (just a few splits for a decision tree) and let the boosting iterations find the complexity. – Often used with trees or Naïve Bayes Results – Usually better than individual tree or Bagging 23
  • 24. Random Forest Ensembles Random Forest (RF) Method – Exact same methodology as Bagging, but with a twist – At each split, rather than using the entire set of candidate inputs, use a random subset of candidate inputs – Generates diversity of samples and inputs (splits) Results – On average, better than any Final individual tree, Bagging, or even Answer Boosting (average) 24
  • 25. Model Ensembles: The Good and the Bad Pro – Can significantly reduce model error – Can be easy to automate -- already has been done in many commercial tools using Boosting, Bagging, ARCing, RF Con – Model interpretability is lost (if there was any) – If not done automatically, can be very time consuming to generate dozens of models to combine 25
  • 26. Ensembles of Trees: Smoothers  Ensembles smooth jagged decision boundariesPicture fromT.G. Dietterich. Ensemble methods in machine learning. In Multiple ClassierSystems, Cagliari, Italy, 2000. 26
  • 27. Heterogeneous ModelEnsembles on Glass Data  Model prediction diversity obtained by using different algorithms: tree, NN, RBF, Gaussian, Regression, k-NN  Combining 3-5 models on average better than best single model  Combining all 6 models not best (best is 3&4 model combination), but is close  The is an example of reducing model variance through ensembles, but not model bias 27
  • 28. The Conflict withData Mining Algorithm Objectives Algorithm Objectives – Linear Regression and Neural networks minimize squared error – C5 minimizes entropy – CART minimizes Gini index – Logistic regression maximizes the log of the odds of the probability the record belongs to class ―1‖ (classification accuracy) – Nearest neighbor minimizes Euclidean distance 28
  • 29. The Conflict withData Mining Algorithm Objectives Algorithm Objectives Business Objectives – Linear Regression and – Maximize net revenue Neural networks minimize – Achieve cumulative squared error response rate of 13% – C5 minimizes entropy – Maximize responders – CART minimizes Gini index subject to a budget of – Logistic regression $100,000 maximizes the log of the – Maximize savings from odds of the probability the identifying customer likely record belongs to class ―1‖ to churn (classification accuracy) – Maximize collected revenue – Nearest neighbor by identifying next best minimizes Euclidean case to collect distance – Minimize false alarms in top 100 hits – Maximize hits subject to a false alarm rate of 1 in 1,000,000 29
  • 30. Possible Solutions to Business Objective / Data Mining Objective Mismatch Model Ranking Metric Model Building Considerations1. Rank models by algorithm 1. Force the data into the objectives, ignoring business algorithm box, and hope the objectives, and hope the winner does a good job in models do a good enough job reality2. Use optimization algorithms to 2. Throw away very nice theory of maximize/minimize directly the data mining algorithms, and business objective hope the optimization algorithms converge well3. Build models normally, but rank 3. Take your lumps with models by business objectives, algorithms not quite doing what ignoring their ―natural‖ we want them to do, but take algorithm score, hoping that advantage of the power and some algorithms do well efficiency of algorithms enough at scoring by business objective 30
  • 31. Model Comparison Example:Rankings Tell Different Stories Top RMS model is 9th in AUC, 2nd Test RMS rank is 42nd in AUC Correlation between rankings: 31
  • 32. Model Deployment Methods In data mining software application itself – Pro: Easy--same processing done as in building model – Con: Slowest method of implementation with large data In database or real-time system – Model encoded in Predictive Model Markup Language (PMML) -- http://www.dmg.org/  A database becomes the run-time engine  Typically for model only, though PMML supports data preparation and cleansing functions as well – SQL code – Model encoded in ―wrapper‖, run via calls from database, transaction system, or operating system  Batch run or source code Run-time engine – Often part of data mining software package itself 32
  • 33. Sample PMML Code 33
  • 34. Typical Predictive Model Deployment Processing Flow Select Clean Data Import/Select Fields (missing, Data to ScoreData to Needed recodes, …)Score The key: reproduce all Re-create data pre-processing done Derived to build the models Variables Decile** Score* Scored Scored Data Data Data 34
  • 35. Knowing is not enough Those who know first, win Those who ACT first, win Provided they act intelligently ©2011 Decision Management Solutions 35
  • 36. Avoid the insight-to-action gap ©2011 Decision Management Solutions 36
  • 37. Analytic insights must drive action ? ©2011 Decision Management Solutions 37
  • 38. Business rules drive decisions Decision Regulations Policy History Experience Legacy Applications ©2011 Decision Management Solutions 38
  • 39. Three legged stools need three legs ©2011 Decision Management Solutions 39
  • 40. Operational decisions at the center Business ©2011 Decision Management Solutions 40
  • 41. Monitoring and compliance ©2011 Decision Management Solutions 41
  • 42. Scorecards are a powerful tool Years Under Contract Years Under Contract 1 0 1 0 2 5 2 5 More than 2 10 More than 2 10 Number of Contract Changes Number of Contract Changes 0 0 0 0 1 5 1 5 More than 1 10 More than 1 10 Value Rating of Current Plan Value Rating of Current Plan Poor 0 Poor 0 Good 10 Good 10 Excellent 20 Excellent 20 Score Score 30 ©2011 Decision Management Solutions Fig 5.4 Smart (Enough) Systems, Prentice Hall June 2007. 42
  • 43. Why use a scorecard?Reason Codes Simplicity•Return the most important •Easy to use and explainreason(s) for a score •Easy to implement•Explaining results •Although not necessarily easy to buildTransparency Compact•It is really clear how a score card •One score card can often replacegot its result many rules and tables•The complete workings of a score •One artifact for one predictioncard can be loggedCompliance Familiar•Easy to enforce rules about use of •Analytic teams are used tospecific attributes developing score cards•Easy to remove rough edges •Regulators and business owners are used to reviewing them ©2011 Decision Management Solutions 43
  • 44. Continuous improvement ©2011 Decision Management Solutions 44
  • 45. Continuous improvement ©2011 Decision Management Solutions 45
  • 46. Don’t start by focusing on the data Better decision Analytic insight Derived information Available data ©2011 Decision Management Solutions 46
  • 47. Start by focusing on the value Better decision Analytic insight Analytic Derived insight Derived information Available information data Available data ©2011 Decision Management Solutions 47
  • 48. Wrap Up
  • 49. The 10 Best Practices1. Be flexible; data mining is not a set of rules!2. Avoid 3 key data preparation, modeling mistakes3. Diversity is strength: build lots of models4. Pick the right metric to assess models5. Have deployment in mind when building models6. Focus on actions7. The three legged stool8. Focus on explicability9. Build in decision analysis ©2011 Decision Management Solutions 49
  • 50. Action Plan Identify your decisions before analytics Adopt business rules to implement analytics Bring business, analytic and IT people together ©2011 Decision Management Solutions 50
  • 51. Let us know if we can help Decision Management Solutions can help you Focus on the right decisions Implement a blueprint Define a strategy http://www.decisionmanagementsolutions.com Abbott Analytics can help you Find the right software Define a strategy Learn the ropes http://www.abbottanalytics.com ©2011 Decision Management Solutions 51
  • 52. Thank you! James Taylor, CEO james@decisionmanagementsolutions.comwww.decisionmangementsolutions.com/learnmo re