KDnuggets: Analytic Outsourcing Review: Dude, Where's My Analysis?

[Published on KDNuggets on Dec 6, 2008: https://www.kdnuggets.com/news/2008/n23/21i.html]

Analytic outsourcing has come into prominence in recent years with the growing independence of the KPO (Knowledge Process Outsourcing) segment of the BPO (Business Process Outsourcing) market as an independent sector of its own right. The multi-billion dollar KPO market in India is dominated by both established names in consulting and outsourcing as well as some newer players. Firms like Evalueserve (www.evalueserve.com), Genpact (www.genpact.com), McKinsey & Co (mckinsey.com) and Accenture (accenture.com) are leading the pack in this sector, while traditional BPO companies like TCS, Wipro, Infosys, WNS and EXL are also making a push into this sector, driven by the higher margins in KPO projects. Other countries such as China, Russia, Poland, the Philippines and Hungary are also ambitiously pursuing KPO opportunities, but India still has the lion's share of the global KPO market.

With the prolific outsourcing of more and more analytic functions to external vendors, it becomes important to understand the ramifications of the decision to outsource analytics to onshore or offshore units (either captive or independent) for companies vs. conducting it in-house. Let's first of all understand why this decision is very different from other types of outsourcing.

Differentiating a Business Process vs. Knowledge Process from an Outsourcing Perspective

Business Process Outsourcing entails taking a routine business process that is consistently repeatable, follows standard industry procedures and doesn't require client-vendor interaction on a regular basis and outsourcing it to an external entity. Knowledge Process Outsourcing on the other hand entails processes that are not consistently repeatable, do not necessarily have standard industry norms of execution, require more frequent client-vendor interaction and require a high degree of custom expertise that doesn't necessarily form the curriculum of standard business education. An additional point of difference is that BPO projects contain modules that can be separated and assigned to different entities with much more ease than KPO projects, especially analytic projects where modules are exponentially more integrated. KPO projects also have higher visibility within C-level stakeholders at end-clients than BPO projects.

Is Analytic Outsourcing For You?

There are several factors to be considered in evaluating the decision to outsource analytics vs. retaining it in-house:

• Access to or ability to assimilate analytic talent in-house
• Ability to constantly update in-house talent with latest analytic developments and techniques
• Availability of necessary data in-house and capability to organize it
• Financial Cost vs. benefit of conducting analytic research in-house
• Risks from outsourcing research function
• Advantage of third-party unbiased opinion and access to industry best-practices available to external vendors

With all the opportunities for efficiency, there are a few strategic disadvantages being overlooked by several business organizations that have outsourced a significant amount of their analytics to offshore entities. For instance, analytic projects often have the tendency to yield corollary business insights that may not have been the original goal of the analysis. The persons and entities within the organization may be the most qualified to identify and leverage such opportunities, compared to external vendors. This is especially important to firms where innovation is a critical part of the business model.

Long-term Outlook

The proliferation of analytic outsourcing is inevitable in the long-term, as firms try to focus on their core competitive advantage and leverage comparable yet cheaper talent in offshore markets. At the same time active firms that do not outsource the entire analytic process but manage to retain insight generation at a strategic level should prove to have somewhat of an edge over passive firms that outsource the entire analytic insight generation process. This will especially be an advantage during turning-points in industry and shifts in economic cycles and trends, which will require a deep understanding of all facets of the business and a rapid development and execution of appropriate strategic changes. Also the best KPO firms to partner with will be the ones that do not follow a "black-box" approach to analytics, but are willing to allow some level of scrutiny to their process (of course within the limits of Intellectual Property protection constraints)

Media, A Wharton Professor and Marketing Research - I

A couple of weeks ago I had the opportunity to actually attend a lecture by a Wharton professor - Peter Fader - at the Marketing Modelers meeting down at the ARF in NYC. The topic of conversation was "The Paradoxes of Interactive Media". Peter Fader is a professor at the Wharton school of business and is actually on the board of A-list journals such as Marketing Science and Journal of Marketing Research. He has built his reputation on his research on trial and repeat in the CPG industry, while also doing some mean research in the field of electronic commerce. Most notable was his testimony during the Napster trial. Based on that testimony it was clear that the man is a rebel and revels in lateral thinking. The talk just confirmed it.

Even though I - or most other people in the room - didn't agree with everything he said, but his approach prompted me and everyone in the room to question our beliefs and conventional thinking. In today's blog I am presenting one of the points made in the session.

Professor Fader iterated that cross-group differences across different demographics like ethnicity are often meaningless. Now this may be true from a total category point of view (he used the example of DVD purchaes by hispanic vs. non-hispanic consumers). But if you get down to the brand or attribute level, this actually leads to way different consumer behavior - and since marketing is brand-driven rather than category driven, I would have to say that distinct differences do exist and can be leveraged by marketers to drive sales differently among different demographic groups. However, his essential theory that people are the same (or distributed similarly/ normally, if you want to be statistical) everywhere is pretty solid. However, as soon as you start breaking down a category by its attributes (brand, size, flavor, feel etc.) ethnic differences come into play. I would love to hear other points of view on this. I will deal with a couple of other interesting points made by professor Fader in my next posting....

So the Recession is finally official- Now What?

On Friday, November 28, 2008 the Business Cycle Dating Committee of the National Bureau of Economic Research announced a peak in economic activity in December 2007. Since it is the NBER's sacred and ordained task to announce recession beginings and end, finally everyone including the government can admit that we are in an official recession until the NBER announces a 'trough', signalling the end of the recession. Interestingly, neither the GDP or the GDI (Gross Domestic Income) showed an extremely clear pattern in the two consecutive quarters of decline rule to identify a peak, only the payroll employment seems to have declined every month since December '07 and the NBER seems to have weighed heavily on this metric to dtermine that we reached a peak in economic activity in December '07. Interestingly, I had posted previously in Is GDP a Consistent Measure? No, GDP is actually a Deceptive Measure... that relying purely on the GDP to determine the state of the economy is not a good idea since this measure may no longer be as reliable as it used to be in the past. Even if the financial markets and the economic production begins to stabilize, employment may continue to decline (economists are expecting Friday's employment report to be abysmal at a 325,000 decline- ADP has reported a 250,000 decline in the private sector). What probably is also driving private sector declines is the fact that stock prices are down in the dumps and management will continue to leverage every opportunity to be efficient by cutting costs to appease shareholders, until revenue growth returns to a point where it offsets the need to improve profit margins through cost-cutting. After the 2001 recession, jobs took 4 years to return to peak levels according to the Economic Policy Institute and if that is any indicator, we are looking at late 2011 early 2012 for a full recovery. With the dramatic decline in House Prices and the bleak performance of retirement accounts, households are increasing their savings rate in "safer" securities (typically bonds), as they can no longer rely on their real estate equity as a retirement cushion. In any case we are a long way from getting out of the woods.

Ghilarducci's Guaranteed Retirement Account Plan & The Macroeconomy

The last couple of weeks there's this rumor that's been floating around that the Government plans to do away with 401K and replace them with what is being called Guaranteed Retirement Account. The idea apparently originates from an economist, Teresa Ghilarducci, who put forward a paper "Guaranteed Retirement Accounts Toward retirement income security" in November 2007. A year after the paper was published, in the wake of one of the worst financial crises in the history of the US, the author was apparently called to testify before Congress as the paper caught the government's eye. The paper proposes that workers "not enrolled in an equivalent or better defined-benefit pension" be enrolled in a "GRA" plan that combines the best features of defined-benefit and defined-contribution plans, offering workers guaranteed (?) retirement benefits- contributions will earn a rate of return guaranteed by the federal government. Upon retirement these funds will convert into annuities. Ghilarducci claims that combined with Social Security, these annuities will replace 70% of pre-retirement earnings (I thought most of the folks who entered the workforce within the past decade had given up ever seeing their Social Security benefits?). Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent (but remember you are foregoing the opportunity to generate market returns on your investment- not amounting much today, which is why we are even entertaining this discussion I guess). Assuming this thing works and the Feds will be able to deliver on their promise, what will be the fallout from pulling that kind of capital out of the investment markets? Of the total $17.1 Trillion in U.S. retirement assets, mutual funds managed $2.2 Trillion, while IRAs accounted for $4.5 Trillion (data as of March 31, 2008 from Investment Company Institute). If a $0.75 Trillion bailout was going to pull us out of the financial crisis, what will be the outcome of withdrawing $6.9 Trillion out of capital markets? Or am I missing the math completely?

P&G Giving Up on Facebook Marketing?

I was just reading an article by Jack Neff of AdAge covering P&G "Digital Guru" Ted McConnell. Ted believes that Social Networks like Facebook may never be able to show the ROI on Ad dollars marketers spend on their websites. The article quotes Ted as saying about consumer-generated Media "Who said this is media? Media is something you can buy and sell. Media contains inventory. Media contains blank spaces. Consumers weren't trying to generate media. They were trying to talk to somebody. So it just seems a bit arrogant. ... We hijack their own conversations, their own thoughts and feelings, and try to monetize it." I am not sure if someone rewrote the English language dictionary but last time I checked Media is defined as "means of mass communication" and with a Reach of 12% of global internet users according to Alexa, Facebook certainly fits that bill. Now is it a good medium for advertising, that's a whole another thing. Ted also raises concerns about the type of targeting afforded by Facebook, but that's a fallout of the Information Age. There was a lot of hue and cry about using Credit Bureau data for marketing, a few regulations later that is still an industry. Ted makes a good point about reach fragmentation though- there's just way too much people do online to effectively reach them with any decent amount of banner ads. On the other hand as technology advances the ability of online advertisers to track a target through their internet trail and persevering until a conversion is obtained isn't that difficult. Already re-targeters are identifying unique users and repeatedly hitting them with ads- check this article.

Return on Product Innovation: Measuring your Innovation Pipeline

Innovation is a critical growth driver for most industries, but more so for industries that are mature. Growth industries are less reliant on an ongoing pipeline of innovations because the full potential of the existing portfolio hasn’t been maximized yet, penetration can be further increased and new markets can be expanded into, where success with existing products can be replicated. Products and brands in mature industries on the other hand are characterized by a lack of differentiation outside of price- barriers to entry are low, which increases the number of market players, pushing marginal profits down. In such an environment, innovation provides a strong differentiating factor, allowing a brand to lower dependency on price as a competitive lever.
So if you are responsible for the strategic planning for your firm and not in an early stage industry, you need to be thinking about your innovation pipeline and it’s not enough to say you have a department for innovation- in most industries only 1 in 10 innovations succeed. So you not only need to have a team in place that has a network reach both inside and outside the organization that allows ideas to funnel up, but you need to also have the right metrics in place to evaluate the performance of your innovation strategy vis-à-vis your industry. A study by McKinsey (McKinsey Global Survey Results: Assessing innovation metrics, October 2008) suggests that a large percentage of executives even at companies that actively pursue innovation don’t formally assess innovations at all.
One way to evaluate innovations is using Return on Product Innovation (ROPI) measured through in-market tests (in-market tests are also risky because your competitors can copy it and bring to market faster than you, stealing your thunder). For ‘breakthrough’ innovations that you are planning to take straight to the market without first testing, ROPI can be estimated as ‘one-year out ROPI’, ‘two-year out ROPI’ and so on. At the end of year 1, forecasts can be used to estimate breakeven time for ROPI to turn positive and marketing ROI can be used to evaluate opportunity to optimize marketing strategy to improve ROPI.

ROPI={[Dollar Sales-Cannibalized Sales]/ [Fixed Cost + (Variable Cost*Units Sold)]-1}*100

Fixed costs can include development or other one-time costs related to production, variable costs are usually ongoing production, marketing and distribution costs. You need to deduct cannibalized sales, because these are sales you would have gotten even without the innovation. This equation can be modified for any custom inputs particular to your industry or the nature of innovation. For instance, if estimating ROPI for an in-market test then using the full fixed cost for development is not fair and should be factored down based on the ratio of size of market tested vs. the total market-size.

October Retail Sales

Macy's reported a disappointing sales for the third quarter losing $44 million. Other retailers are expected to report quarterly results later this week including JC Penney, Kohl's and Nordstrom. Few retailers are already reporting poor sales number for the month of October, which is going to put added pressure on the market and the economy. This is going to be a roller coaster fourth quarter.

Enjoy....