Big Data: The next frontier for innovation, competition, and productivity

McKinsey Global Institute Strata Summit September 20, 2011

CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

Key findings

The amount of data collected and stored has grown exponentially in the last decade Technology trends have converged data is personal, everywhere, and increasingly accessible New possibilities exist to innovate and create significant value out of big data Big data will have bottom-line implications for companies and far-reaching effects on the economy There are challenges to address if the value of big data are to be realized
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Data storage has grown significantly shifting markedly from analog to digital after 2000
Global installed, optimally compressed, storage

300 250 Data storage, 150 exabytes 100 50 0 1986 Analog 1993 2000 2007
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200 Digital

SOURCE: Hilbert and Lpez, The worlds technological capacity to store, communicate, and compute information, Science, 2011

Companies in all sectors have at least 100 terabytes of stored data in the United States; many have more than 1 petabyte
Average stored data per firm with more than 1,000 employees, 2009, terabytes Securities and Investment Svs. Banking Communications and Media Utilities Government Discrete Manufacturing Insurance Process Manufacturing Resource Industries Transportation Retail Wholesale Healthcare providers1 Education Professional Services Construction Consumer and Recreation Svs.
3,866 1,931 1,792 1,507 1,312 967 870 831 825 801 697 536 370 319 278 231 >500 = WalMart data warehouse in 2004 235 = Library of Congress collection in 2011 150

SOURCE: IDC; US Bureau of Labor Statistics; McKinsey Global Institute analysis

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This data has gone from being highly macro

Americans burn 1,800 calories per day

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to very personal
He burns She 2,133 burns 1,567 Americans of calories of calories per day per day

burn 1,800

She She He burns burns 1,438 1,489 1,945 calories per day of ofcalories of calories calories per per per day day day

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Even physical objects are generating exhaust data

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The number of connected nodes is increasing exponentially

Estimated number of connected nodes, millions

72215 514 Health care Industrials 26 823 412 1030 13

Security Energy Retail Travel and logistics

Security Industrials Retail Travel and logistics Utilities Automotive

2883 1750 25 26 514 618 2010 2015 12 26 1545

Utilities

Automotive

SOURCE: Analyst interviews; McKinsey Global Institute analysis

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Computation capacity has risen sharply

Global installed computation to handle information

Overall 1012 million instructions per second 6.0 5.0 4.0 3.0 2.0 1.0 0 1986 1993 2000

This computational power is equivalent to almost 1.3 billion laptop computers

2007
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SOURCE: Hilbert and Lpez, The worlds technological capacity to store, communicate, and compute information, Science, 2011

5 ways for big data to create transformational value

Create transparency Expose variability and enable experimentation Segment populations to customize actions Replace/support human decision-making with automated algorithms Innovate new business models, products, and services
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Big Data companies have outperformed their respective markets and have created competitive advantage
Percent, 10-year CAGR (1999 2009)

Big data leader Other competitors

Revenue Grocers Online retailers Big box retailers Casinos Credit cards Insurance

EBITDA

6 -1 5 5 9 9 8 9

12 24

3 -15 2

11 22 10 12 9 14
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11 14 -1

SOURCE: Bloomberg and Datastream; annual reports; McKinsey analysis

Big data can generate significant value across sectors

US health care $300 billion value per year ~0.7 percent annual productivity growth Europe public sector administration 250 billion value per year ~0.5 percent annual productivity growth Global personal location data $100 billion+ revenue for service providers Up to $700 billion value to end users
SOURCE: McKinsey Global Institute analysis

US retail 60+% increase in net margin possible 0.51.0 percent annual productivity growth Manufacturing Up to 50 percent decrease in product development, assembly costs Up to 7% reduction in working capital

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Consumer surplus: Personal location data will generate 6 times more value for end customers than for service providers

Revenue accrued to service providers

Quantifiable value accrued to end customers

Fuel savings Convenience Reduced (e.g., location

congestion
SOURCE: McKinsey Global Institute analysis

sharing)
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Relative value potential and ease of capture will vary across sectors
High Utilities Manufacturing Health Care Providers Information Finance and Insurance Computer and electronic products Transportation and Warehousing Management of companies Wholesale trade

Bubble sizes denote relative sizes of GDP

Natural resources

Big data ease of Capture index

Professional Services Admin, Support and Waste Management Real Estate Construction and Rental Accommodation and Food Retail trade Other Services Low Low Arts and Entertainment

Educational services

Government High

Big data value potential index

SOURCE: McKinsey Global Institute analysis

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To fully capture this opportunity several major issues must be addressed

Data policies Privacy concerns Data security issues Intellectual ownership and liability issues Technology & techniques Deployment of technologies Legacy system or inconsistent data formats Ongoing innovation

Access to data Access to foreign data Integrating with own proprietary data

Organizational change & talent Shortage of talent Leadership that understands big data Aligned workflows and incentives

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3 types of talent are needed to capture value from big data Talent needed Deep analytical Actuaries Mathematicians Statisticians Big data savvy Business managers Financial analysts Engineers Supporting technology Computer programmers Computer software engineers Computer system analysts
SOURCE: US Bureau of Labor Statistics; McKinsey Global Institute analysis

Potential gap by 2018

~150K

~1.5M

~300K

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Importance of access to data: US health care example

Data pools

Owner: Pharmaceutical companies, academia Example datasets: clinical trials, high throughput screening (HTS) libraries

Pharmaceutical R&D data

Clinical data

Owners: providers Example datasets: electronic medical records, medical images

Owners: payors, providers Example datasets: utilization of care, cost estimates

Integration of data pools required for major opportunities

Activity (claims) and cost data Patient behavior and sentiment data

Owners: various including consumer and stakeholders outside health care (e.g., retail, apparel) Example data sets: patient behaviors and preferences, retail purchase history, exercise data captured in running shoes

SOURCE: McKinsey Global Institute analysis

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Implications for organization leaders

1 Inventory data assets, proprietary, public and purchased 2 Identify potential value creation opportunities and threats 3 Build internal capabilities to create a data-driven organization 4 Develop enterprise information strategy to implement technology 5 Address data policy issues
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Implications for policy makers

1 2 3 4 5 6

Build human capital for big data Align incentives to promote data sharing for the greater good Develop policies that balance the interests of companies wanting to create value from data and citizens wanting to protect their privacy and security Establish effective intellectual property frameworks to ensure innovation Address technology barriers and accelerate R&D in targeted areas Ensure investments in underlying information and communication technology infrastructure
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