What are advanced analytics? They could be anything, but I like to apply the term to something that uses a new paradigm (or at least novel ratios) that promote deeper insight or a new perspective on an old problem.
I was reminded of this listening to Peter Graf (SAP's Chief Sustainability Officer) give his keynote at SAP Insider GRC 2010 conference gathering in Orlando when he brought up the point that the parent company of a well-known orange juice brand was doing a carbon footprint audit and discovered that by far the largest single source in the process was not packaging, transportation or any of the obvious sources within the company. It was the (over) use of fertilizer by the orange growers. Reducing the carbon footprint meant coming up with a way for the growers to cut the use of this expensive input, which apparently was accomplished. It's hard to say which party benefited most from this since oranges are a commodity item (that is, there are established prices and cost savings would be gained mainly by grower) or the CPG company (which may have been able to extract concessions in a long-term contract). No matter. The point is well taken: Although in my book financial measures are the ultimate measure of sustainability, they often mask or ignore opportunities to improve results (which ultimately means financial results). This points to an important potential source of value in sustainability analytics: uncovering immediate opportunities for improving a company's operating performance and its strategic position.
The concept of "sustainability" has been a core part of being in business since there was business and I addressed this issue in an earlier post (see: "Sustainability Management for Business and IT"). Competition and scarcity drives businesses to lower the input-to-output ratios (efficiency), or to reduce the byproducts of a process (reducing them and/or making their disposal less costly) or, more recently, to diminish negative social affects. Financial analysis only takes you so far in assessing physical processes for opportunities in these areas. Assessing a process from beginning-to-end in terms of carbon emissions can (and in this case did) uncover savings that were not apparent and had nothing to do with a regulatory imposed cost (such as a carbon tax, emission limits or fines for polluting). But why stop there? Many years ago, Mobil Corporation decided to recast its analysis of its operations in terms of barrels of oil in order to cut through the monetary haze of a multi-currency, multinational, global operation so as to identify both tactical and strategic opportunities.
"Sustainability" is one important way to rethink and re-imagine how to analyze a company's operations to find opportunities for a sustainable competitive advantage. Most corporations have many tools to do advanced analytics and have access to a vaster array of information than ever that they can use to spot opportunities or trouble. You don't have to go too far outside accounting and financial measures to find different ways of assessing business. Units such as time (days to resolve invoice disputes) headcount (administrative to non-administrative headcount by department or division) and frequency (percent of discounts earned), among others, can provide be used for creating ratios that might just qualify as "advanced analytics" in your organization. Sometimes the result of looking at the business in a new way will provide a breakthrough. More likely, though, it will generate incremental improvements. When advanced analytics are applied frequently and broadly, these small improvements can enhance the most important metric that defines a corporation's sustainability: its profit margin.
Which brings me back to Peter Graf: this is exactly why SAP is making a substantial investment in sustainability management software products that are closely intertwined with their financial and GRC solutions. Incidentally, my colleague discussed SAP's sustainability software at that company's Sapphire users group meeting in 2009 (See: "Sustainability Performance Management: New Imperative for Business "). I would expect to see SAP advance this effort further in 2010 with additional products and enhancements throughout their Sustainability Management solutions.
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Robert D. Kugel CFA
SVP Business Research