Predictive Analytics:

BPM Drives the Dynamic Organization

As business performance management software matures, many
see the inclusion of predictive analytics as a core capability of the
next generation of products. This can only be good news for
companies looking to improve decision-making enterprisewide.

T HE PROMISE OF BUILDING A DYNAMIC ORGANIZATION HAS BEEN AS ELUSIVE AS

by Christian Gheorghe
the promise of actionable information on every manager’s desktop. The
truth is that few companies are capable of getting the right information Christian Gheorghe,
OutlookSoft EVP and CTO, is a
to decision-makers. And few software companies in the business per-
globally featured speaker on
formance management (BPM) space have been able to help them do so; instead,
performance management
most of these solutions rely on “rear-view mirror” reporting and analysis. However,
and predictive analytics.
BPM systems that include predictive analytics help create dynamic and truly pre-
Christian is a member of IEEE,
dictable enterprises.
ACM, DMA, and the New York
A decade ago, business intelligence (BI) software provided a select group of busi-
Academy of Sciences.
ness users with stand-alone data query, reporting, and analysis capabilities. But its
focus on historical data handicapped the software’s ability to improve business deci-
sion-making in the present. In addition, traditional BI applications isolated per-
formance data in the hands of the organization’s financial analysts. Thus, they were
inherently flawed in their ability to collect, aggregate, and validate data on an enter-
prise scale; only power users had the access, time, and expertise to make them work.
The first generation of BPM software, viewed by many as the evolution or strate-
gic application of traditional business intelligence tools and technologies, advanced
organizations toward a truer sense of performance intelligence on two fronts. First,
it brought analytics to the masses; the BPM vision included in its scope everyone
from the CEO to the line-of-business manager. And second, BPM vendors empha-
sized the need for real-time information, stressing the limitations of viewing per-
formance information only in the past tense. BPM became effective at centralizing
data and automating the routine yet time-consuming tasks
around data collection, validation, and manipulation. This
ensured not only that information was accurate, but also that
it was available quickly companywide.

BPM Gets Predictive

Although the move from BI to BPM represented a strong
shift in the right direction, it failed to give decision-makers
everything they needed in order to understand and effective-
ly forecast their financial and operational performance. This
is why a number of BPM vendors have begun talking about
the potential of “predictive analytics.”
Whereas traditional BI tools forced users to spend too
©2006 RICHARD DOWNS C/O THE ISPOT.COM

much time on data collection, aggregation, and the like, BPM

systems are sometimes accused of providing too much data.
The age-old problem of analysis paralysis can hamstring
users. The idea of predictive analytics, when applied to BPM,
is to help users overcome information overload by accelerat-
ing the analysis process. An automated “agent” can dynami-
cally alert decision-makers to problems and opportunities.

May 2006 Business Performance Management 21

 Like standard BPM solutions, predictive BPM tools address both historical and real-time con-
Most BPM cerns, but they add to the mix the ability for business managers to be proactive. They look to the
applications offer future, while accounting for the present, and automate time-consuming processes including data
collection, aggregation, analysis, and the identification of variances. They can also suggest cours-
drilldown es of action to the business decision-makers. Exhibit 1, at right, shows how the scope of BPM sys-
capabilities for tems can expand to include predictive analytics.
A majority of BPM applications offer drilldown capabilities for analyzing performance
analyzing variances and their underlying causes, but the analysis is typically manual, time-consuming,
performance reactive, and cumbersome. Valuable time can elapse between the variance reporting (what hap-
pened), variance analysis (why it happened), and final determination of the appropriate action
variances’ causes, for proceeding. Conversely, predictive BPM software eliminates this time delay by automating
but the analysis is the discovery process. It offers dashboards in which variances are reported automatically. And for
variances falling outside acceptable limits, predictive BPM can provide a root-cause analysis and
typically manual, an explanation of the context in which the variance occurred. For example, if performance on a
reactive, and key business metric such as days sales outstanding (DSO) falls outside of specified parameters,
predictive BPM can automatically alert decision-makers and provide them with the reasons, root
cumbersome. causes, and context behind the variance.

Predictive BPM in Context

How does it work? Using OutlookSoft’s solution as an example, the software automatically
scans its data sets for the reasons behind successes and failures, based on the data hierarchies
that are set up during implementation. The reasons typically reflect the component parts of the
business, such as shifts in product sales, underperforming geographies, rising raw material
costs, or other factors. If corporate net income comes in below expectations, the predictive ana-
lytics segment of a BPM application may scan the numbers of all the company’s business units
to discover which fell furthest below budget. In this way, predictive analytics is able to automate
the drilldown process that is usually a manual function for BPM software users.
Root-cause analysis leverages a BPM system’s access to external information to further
explain the reasons behind a variance. Predictive analytics technologies delve into transactional
and operational data outside of the performance management application, looking for patterns
within that data which correlate to patterns in the organization’s KPIs. For example, a leading-
edge predictive BPM system might be able to connect shortfalls in the company’s product-
quality KPIs with shop floor accidents and absenteeism, problems revealed through the auto-
matic analysis of the detailed information in the company’s operational systems.
A predictive BPM system should also include automated context searches, which further
help end users understand variances. These could involve searches of the company’s support-
ing documentation, or unstructured data, for contextually relevant information. Just as Google
might index a company’s Web site, a predictive BPM system can search the corporate network
for relevant information within unstructured files such as Word documents, spreadsheets,
PowerPoint presentations, and e-mails. Most explanatory information within a company is
stored in these types of documents — in fact, according to Gartner, upwards of 80 percent —
and sophisticated BPM solutions can identify those that relate to a particular KPI variance and
leverage that information to offer an in-depth explanation of the given variance.
BPM systems that incorporate predictive analytics technologies can also report on KPI risks
and the probable impact of potential events. They can forecast performance variances and
present probable reasons for the deviations, along with ratings of the likelihood that the vari-
ance will occur again in the future. Advanced statistical techniques anticipate changes in high-
er-level KPIs by analyzing base component metrics, serving as an early warning system for
business managers.
As predictive BPM software matures, it will track not only the relationships of KPIs with
other metrics, but also the connections between KPIs and business-process events. It will iden-
tify the process steps driving KPIs that are at risk and then notify managers about which ones
need to be addressed to improve each metric. Even more important, the history of events, KPI
values, and actions taken to influence them will accumulate within the performance manage-
ment system. Eventually, when the BPM application identifies a KPI that it deems to be at risk,
it will be able to present business managers with a description of the action taken in previous
circumstances when the same KPI was at risk.

22 Business Performance Management May 2006

 Predictive BPM software also can make recommendations for
action based on the predicted variance and outcome. Some solu-
Exhibit 1
tions have this recommendation logic programmed in, and sug-
Closing the BPM Loop With Predictive Analytics
gestions for action are delivered to managers based on the nature
of the variance. For example, suppose the metric for DSO comes
in at an average of 90 days, versus an expected 75 days, for a cer- Plan Bud
tain business unit. At the same time that it automatically alerts the
t get
affected business manager to this variance from plan and identi- Ac
fies the root cause for the variance (perhaps a particular customer

For
or category of customer is driving the variance), a predictive BPM

t
Predic

ecas
S
solution could also recommend a course for action. It might sug-

DICTIVE ANALYTIC

TRA
gest that the business manager follow a specific, predefined pro-
BUSINESS

DITIONAL BPM

t
cedure for collecting monies owed. The advantage of this
approach, versus training each employee on the company’s rec- PERFORMANCE
ommended courses of action, is that the software ensures that MANAGEMENT

Close
PRE
r
every manager is on the same page; it automatically reinforces

ove
corporate policies and standard operating procedures.

sc
Di
Re
Practical Applications for Predictive Analytics por
Enterprises across a broad array of industries — including t
Analyze
manufacturing, financial services, retail, and technology compa-
nies — are using predictive capabilities within performance
management software to forecast product sales, plan seasonal
campaigns, analyze pricing scenarios (including the potential
impact of competitor price changes), and evaluate the effective-
ness of their channels.
One example of a real-world company using predictive BPM is a major broadcast media
organization that has implemented OutlookSoft’s Insight application to improve its ability to
analyze variances quickly. The setup includes a predictive analytics dashboard that focuses on
costs, OIBDA (operating income before depreciation and amortization — a form of EBITDA),
and sales performance. Using the predictive BPM solution, the media company can quickly iden-
tify the top three reasons behind any major variance in costs, sales, or OIBDA. Moreover, the
software focuses executives’ attention on the specific media outlets responsible for each variance,
further streamlining the alert/decision/action process.
Often software isn’t needed to determine the primary reason behind a performance shortfall
— for example, the reason the New Orleans market struggled last fall. However, managers are
finding that secondary or tertiary events impacting performance can be far less obvious. In many
cases, these factors would take far longer for financial analysts or business managers to uncover
manually. In addition, because this company’s system leverages statistical analysis techniques,
including linear regression, some of the factors it uncovers as having an impact on performance
could have been easily missed, or even noticed and subsequently dismissed, if the company
relied on manual analysis.

The Next Generation of BPM

As companies continue to demand more from their performance management systems, pre-
dictive analytics capabilities will play an increasingly important role in decision-making by shap-
ing strategic and tactical planning. In a recent survey conducted jointly by OutlookSoft and BPM
Magazine, 87 percent of respondents said that they think predictive analytics is important to the
budgeting and planning process, but only 17 percent are employing technologies that include the
capability. Fortunately for the majority of survey respondents, a handful of business performance
management solutions have begun to incorporate and leverage predictive technology.
The goal of business performance management is to help decision-makers better manage,
plan, understand, and leverage their performance. Predictive analytics is a natural complement
to traditional BPM software and processes. It provides information about what, why, and how
that helps companies understand their performance trends, anticipate future business perfor-
mance, and recommend specific actions. The new generation of BPM software can make any
enterprise a predictable enterprise. Now, that’s a giant step forward for performance.

May 2006 Business Performance Management 23