Investment guru Warren Buffett admonishes investors to invest only in companies whose business they understand and also to "beware of geeks bearing formulas". It's true that in the run-up to the financial meltdown, too many managers made some spectacularly bad decisions based in part upon computer models they didn't understand. But ultimately the fault lies not in our geeks but in ourselves. Because computer models don't make bad decisions, managers do. And the opposite is true, the best bosses make the best decisions.
As Sir Terry Leahy steps down from Tesco he will leave an enviable legacy that many CEOs and CIOs aspire to – and might have saved them a lot of blood, sweat and tears during recent years. The mission of the company under his leadership has been to earn and grow the lifetime loyalty of its customers. To do this he has tasked his employees to 'understand customers better than anyone'. Tesco's approach has been driven by analytics, creating a culture of fact-driven decision-making.
Many C-levels across multiple industries have aspired to the insight-driven approach that Leahy has created. What was apparent during the economic meltdown was that too many had been choosing to ignore any facts that didn't fit with their own preconceptions, or cynically use analytics only to justify their decisions. Decisions based only on instinct came home to roost.
This may explain why so many managers are still making decisions based purely upon their 'gut.' Research by Accenture indicates that 40 per cent of major business decisions are based solely on gut-instinct rather than systematic data analysis. The result is often dangerously flawed decisions made for all the wrong reasons.
Analytics are not perfect, but they are superior to the shoddy alternatives—bias, prejudice, self-justification and hunches. Leading companies like Tesco are strong advocates of the use of predictive analytics to help managers make better decisions about whom to employ, where they market their products and how they manage their organisation.
Tesco's approach has benefitted customers directly. The access to customer information helps Tesco know much more about what its customers want and think. But it has also given its customers the ability to compare prices and buy online at the click of a button. They can look at a retailer's ethical environmental policies and find out any sort of information that is being shared online. Hence Tesco's vision of having world-class customer knowledge.
All organisations can reap significant benefits by becoming more analytical. The Royal Shakespeare Company, for example, examined seven years of ticket sales to optimise its share of wallet among its existing customers—and to identify new audiences. The RSC's targeted marketing program increased the number of "regulars" by more than 70 per cent.
Leahy's success shows C-levels the extent to which analytics is rapidly becoming the next mandatory management discipline. Mangers must increasingly develop their quantitative and analytical acumen. Fortunately, this does not require managers to become geeks themselves, but it does require that they be quantitatively literate enough to comprehend a predictive model's benefits, assumptions and limitations. Coaching and communications skills are also needed so managers can translate business requirements and market assumptions to their analysts.
Analytical leaders like Leahy are the first and most critical element of building an analytical organisation. These leaders seek out smart analytical people for their teams and ask them hard, challenging questions when presented with reports or modeled results. A critical step in every major decision is deciding how important decisions will be made and which metrics will be monitored to ensure decisions are on track. Analytical leaders set an important example for others, judiciously blending quantitative analysis with sound decision making.
At Tesco, Philip Clarke, the current IT Director will take the helm. He inherits 13 years of dynamic expansion and development that has made Tesco the UK's number one retailer and third in the world after Wal-Mart and Carrefour. This appointment suggests that Tesco will continue to blaze a trail for analytics. Having the CIO taking over as CEO doesn't happen often, but when it does, it is often because of the CIO's role in building and sustaining an analytical capability as a competitive differentiator.
Tesco has been working on this approach since it launched its Clubcard scheme five years ago, but the Royal Shakespeare Company only recently began to employ predictive analytics to make better marketing decisions and get better results.
I predict that many more organisations will seek to emulate the success of analytical leaders such as Tesco and the RSC as their managers learn how to use analytics to make smarter decisions and produce better business results. Long after Sir Terry retires, his legacy will see many in senior management at other companies seeking the sorts of insights that his staff can draw on every day.
About the author:
Jeanne Harris, Executive Research Fellow, Accenture Institute for High Performance and co-author of Analytics at Work: Smarter Decisions, Better Results, published by Harvard Business School Publishing Corporation.