Monday, September 19, 2011

McKinsey Consulting: “Big Data Is The Next Frontier”

What Is Big Data?
BigData in its literal sense, refers to data whose scale requires radically new tools, storage, software, and approaches to use it fully. (1) Big Data now refers to the underlying data sets as well as the analytics driven by it, such as neural networks, artificial intelligence, rules-based systems, and more. (99) For purposes of this blog, Big Data is QM, and we will examine it through the lens of McKinsey consulting's 150 page white paper Big data: The next frontier for innovation, competition, and productivity.

BIG DATA CONFERS COMPETITIVE ADVANTAGE: McKinsey's paper  clearly points to the strategic implications of big data. For example, “The use of big data is becoming a key way for leading companies to outperform their peers.” (6) Or similarly, “…the impact of developing a superior capacity to take advantage of big data will confer enhanced competitive advantage over the long term and is therefore well worth the investment to create this capability.” (6)  To bring this point back to the present though, McKinsey cites Tesco, Amazon, Wal-mart, Harrah’s, Capital One, and Progressive Insurance as innovators in this area, partly attributing their success to it. (23)

DATA IS A FACTOR OF PRODUCTION: Traditional economics defines the factors of production as: labor and capital. McKinsey makes an interesting point by proposing ‘data’ as a new factor of production. (4)

BIG DATA WILL TRANSFORM ECONOMIES ON PAR WITH THE IT REVOLUTION: “The same preconditions that explain the impact of IT in enabling historical productivity growth currently exist for big data.” (24)

Big Data As Strategy

McKinsey has already cited big data (aka QM) as transformational, a digital-age factor of production, and a source of competitive advantage. McKinsey also points to big data as a strategy though, “established competitors and new entrants alike will leverage data-driven strategies to innovate, compete, and capture value.” (6)  Perhaps more interesting though, is the idea that western economies will soon witness an explosion of innovations surrounding big data, “…our research suggests that the scale and scope of changes that big data are bringing about are at an inflection point, set to expand greatly, as a series of technology trends accelerate and converge.” (2) What happens to industries where data-driven companies see productivity and profitability double? Will the laggards have time to hire quants and catch up? I doubt it.

The Coming Shortage of Big Data Talent 

Another profound data point from the article is the coming shortage of big data talent. “The United States alone faces a shortage of 140,000 to 190,000 people with deep analytical skills as well as 1.5 million managers and analysts to analyze big data and make decisions based on their findings.” (3) This assertion fits with a recent WSJ article "Business Schools Plan Leap into Data" which cites the importance that MBA programs are placing on the analytical aptitude of their graduates.

Here is a fantastic interactive visualization of the existing big data talent and expected talent flows over the coming years.

“A shortage of people with the skills necessary to take advantage of the insights that large datasets generate is one of the most important constraints on an organization’s ability to capture the potential from big data. Leading companies are already reporting challenges in hiring this type of talent.” (103) This shortage will be particularly acute for “people with deep expertise in statistics and machine learning, and the managers and analysts who know how to operate companies by using insights from big data.” (10) None of these talent gaps can be filled quickly, or addressed without a training pipeline. Even in industries which can attract talent, experiential industry-specific learning is needed to supplement the requisite big data skills… a process which takes a long investment of time.

Quantification of Benefits

·  The US healthcare system could save “$300 billion in value every year”, including a reduction in “national health care expenditures by about 8 percent.” (2)
·  McKinsey estimates that a retailer fully leveraging big data can “increase its operating margin by more than 60 percent.” (2)
·    McKinsey estimates that western European governments can save “$150 billion in operational efficiency improvements alone by using big data.” The value is much greater if the error elimination, anti-fraud efforts, and tax evasion applications of big data are considered. (2)
·    Accumulating scarce talent in advance of demand positions a company well and gives a first mover advantage.
·   To the extent that analytics are patentable, competitors are forced to use less attractive solutions for decades.


DATA INSPIRED MERGERS: “Consolidation in an industry can also bring about beneficial scale effects in the aggregation and analysis of data.” (101)

DATA IS  THE FOUNDATION OF CAvQM:  I stated “Data is the foundation of CAvQM.” In my Cemex blog, and McKinsey apparently agrees, “Access to big data is a key prerequisite to capturing value.” (102)

FACTOR OF PRODUCTION: I agree that data is a factor of production, but I don’t agree that this is a recent development. Cemex was doing this in the 90’s, and the OM triangle has always pointed to a trade- off between information and capacity… which is inextricably linked to labor and capital.

GREATER INCOME DISPARITY: When productivity explodes it will make big data skills more valuable, and the shortage of talent will drive compensation up further.

"Big data: The next frontier for innovation, competition, and productivity." McKinsey Global Institute. May 2011. By James Manyika, Michael Chui, Brad Brown, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Angela Hung Byers.

"Business Schools Plan Leap Into Data." Wall Street Journal. 04AUG2011. Melissa Korn and Shara Tibken.