Predicting The Future (Episode 19)

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Predicting The Future
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Predicting the future is the holy grail of business management. Everyone wants a well polished crystal ball to reveal their future.

Predictive Analytics
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John Miller exposes the value of Predictive Analytics in predicting performance.

How To Manage Costs
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Alan Stratton answers a viewer’s question “How To Manage Costs” and why they’re late to the party.
http://www.performancemanagementedge.com

=== TRANSCRIPT ===

Coming up on this episode of Performance Management Edge… We will predict future performance.
I’m Alan Stratton and this is the show that helps you get an edge in business. This is the edge you need to get things done, to soar above the masses, and to make more money.
Predicting the future or better influencing the future is the holy grail of business management. Everyone wants a big green button on their keyboard that gives them a perfect view of what’s coming.
Some people refuse to look at the past since only the future can be managed. Others examine the past to discover relationships they can exploit to their advantage in the future. I like the concrete platform of the past from which to squint into the future.
In this episode, John Miller polishes his own crystal ball and peers into the future with predictive analytics. Then we’ll deal with a viewer’s frustration with managing costs.
First, over to you – John.
Predictive analytics is a hot topic right now, driven by the success of professional sports teams, gambling casinos, hotel chains, and banks that use historical data to predict patterns and estimations of the future.
Wikipedia defines Predictive Analytics as an area of statistical analysis that deals with extracting information from data and using it to predict future trends and behavior patterns. An updated definition of Predictive Analytics would include the use of unstructured data from sources like Twitter, Facebook, and other social media to predict trends and patterns.
Moneyball, both the movie and the book, tells the story of how the Oakland A’s, one of professional baseball’s lowest payroll teams, could consistently win games and secure a position in the post-season playoffs. While other teams paid top dollar for top stars, Oakland crunched numbers and analyzed player statistics to determine which players were undervalued but likely to perform well.
The core of predictive analytics relies on capturing relationships between explanatory variables and the predicted variables from past occurrences, which is then exploited to predict future outcomes. Predicative analytics requires a data rich history and environment to employ approaches and techniques broadly classified as regression techniques and machine learning techniques (algorithms and technology to allow software to learn).
Predictive analytics has been part of the scientific community for decades and often the basis of scientific insight used to develop a hypothesis.
Card sharks even use predictive analytics in a game of Blackjack. Based on the cards played (history) in a 52 card deck, the gambler extracts that information to predict the odds of winning a hand based on the future and pattern of the remaining cards. That’s why Las Vegas casinos put 4-6 decks of cards in the shoe and reshuffle the cards when about 80% have been played, thus minimizing the ability of a card counter to place bets based on the remaining cards in the shoe.
Customer Relationship Management (CRM) is a frequent commercial application of predictive analytics to extrapolate past consumer behavior to predict future outcomes. This is especially true with those retail operations that provide reward cards thus encouraging customers to provide them with each customers purchase history including frequency of purchase, types of purchases, and order size. When I shop at the local grocery store in Houston, I key in my telephone number and get a small discount on my purchases, thus providing them with a history of everything I’ve purchased in their store for the last five years
Underutilized in most organizations is the goldmine of data and information available in their revenue, cost, and performance management systems and models.
Customer segments and segment profitability, product and service profitability, channel profitability, plant capacity and utilization, demand curves, and activity consumption rates are just a few examples of this data rich environment. Applying predictive analytic tools and techniques in this data rich environment of historical performance should significantly improve budgets, financial forecasts, and operating plans.
Tip of the Day — Use predictive analytics to bring more clarity to your crystal ball…
Thank you John for polishing our crystal ball so we can predict future performance.
Let us hear your opinions. John and I would love to hear your experience and comments on Predictive Analytics. Has it worked for you? Scroll down the page at Performance Management Edge dot com and let us hear your opinion.

Now for today’s question. A viewer sent us this question:
“My SVP feels it’s too expensive to manage costs down – it is difficult to get effective data to actually manage the costs down.”
If he or she feels it’s too expensive to manage costs down, then how does he manage costs? Look at corporate financial statements? Sign off on all purchase requests? Impose headcount restrictions? Cut the budget? Tell everyone not to waste money? Pass all costs on to customers?
Now, before I get too worked up about his question, I have to say that I can relate to his situation. Early in my career as a financial controller, I was also frustrated with my charter or responsibility to “Manage Costs”. No option such as the ones I just mentioned seemed to work. It was frustrating to be the financial expert but not be able to “Manage Costs.” So, I’ll try to be kind to your SVP – I can relate to his problem.
Then I found cost modeling, in this case Activity-Based Cost or ABC. For me, this was exciting. For the first time, operations and finance could work together. We identified the actual work everyone did; why they did the work; and what used their output. What resulted was a new view of operations with an equivalent financial overlay.
With the new tools, we could attack costs from at least three different fronts.
We asked real workers why they did their work; why it took the time it did; why quality was what it was. These questions yielded a lot of low hanging fruit. Many times, workers were just waiting to be asked the right questions. With this information, together we could face costs from a process viewpoint.
By identifying what products or customers used activities and by how much, we then could compare and contrast products and customers. We could face costs from a usage viewpoint.
Comparing product cost with revenue yielded opportunities to rationalize our offerings. We could push more profitable products and customer relationships while keeping an eye on capacity and overhead considerations.
Back to your SVP, if he’s purely into external financial reporting, he may not value working with operations. However, he’s missing the boat.
Does starting this process cost money? Yes. Is it worth it? Absolutely! What’s the alternative? You’re in healthcare where you’ve been able to pass increased costs along to consumers. Do you appreciate the current wave of government regulation? Has government regulation ever reduced cost? No. I can show you plenty of studies on the cost of government regulation.
Now think of the possibilities if you were to combine business modeling with the predictive analytics John Miller just discussed.
You’re late to the party. But it’s never too late. The future of your company is at stake.
I want to thank this viewer for this question. Honoring your request, we’ve withheld your name – but thank you again for the question.
Now to our viewers. Do you agree, or Not? How can you apply what you have heard in this episode? Whatever it is, let’s hear your viewpoint. Please share your view below this video at Performance Management Edge dot com.
In addition to comments, we also appreciate your questions like this one. They help us customize this show to your own issues. Ask your question on the “Ask Us” tab at Performance Management Edge Dot Com or as a video on our YouTube channel.
In appreciation for his question, we’ll arrange a time for this viewer to have a 30 minute telephone or Skype discussion on topics of his choice with one of our experts. And, we’ll send him a copy of “Good to the Core: Building Value With Values” by John Blumberg.
Thank you to the Beyond Budgeting Round Table for furnishing this book.
Please register on our website to be notified of upcoming episodes.
Remember: Business Management is more of an art than a science. Don’t wait for tomorrow to get started. Start today making these perspectives part of your business art.
On behalf our viewers, I thank our experts. Join with us on the next episode for more business insights.
And remember, Performance Pays Profits.
http://www.PerformanceManagementEdge.com

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