Many Financial Institutions know that the proper use of Profitability Analytics is key to their success, ensuring the delivery of value not only to customers but also to employees and investors.
The banking industry is evolving to new, better ways to deliver innovative value propositions. But, unfortunately, not all financial institutions will be able to succeed. Digital initiatives need to be supported by the right decisions, not always as planned.
Also, there is a lot of confusion around Profitability Analytics because many "Data Scientists" and Finance Professionals get confused seeing it just as an IT project. The secret recipe is to establish a data-driven culture.
Based on a survey of 250 finance professionals, the BDO Innovation Lab report sets out six critical factors for establishing a Data-Driven Culture in Banking:
1.- Set the tone at the top is crucial for most banking transformation initiatives, and profitability analytics adoption is no different.
2.- Initiatives for effective management accounting technologies and techniques: Less than 1/3 of those surveyed said their banks had developed strategies for effectively using leading-edge analytic methods and technologies. A more significant number said they had not developed such initiatives. Perhaps most interestingly, a sizable chunk of finance professionals wasn't sure.
"Banks whose decision-making is reactive to the competition are less likely to have developed strategies for the effective use of leading-edge analytic techniques and technologies," the report states. "Being reactive instead of proactive means that these banks lack the ability to predict trends or to turn customer data into useful insights that can be used to improve service, products, and overall profitability."
3.- A commitment to developing and using data: A key here is to embrace data from a wide variety of external and internal sources. The diversity of data sources yields better insights and can help temper biases.
That's especially true when it comes to strategy development and execution. In that regard, about half (52%) of banks use data from both types of courses.
"While this is encouraging," the report says, "it's troubling that the other half of organizations are either using only internal data (40%), using data only to validate strategy post-execution (6%), or not using data at all (3%) when developing and executing their strategy."
Still, banks ahead of their competition in strategy development and execution are more likely to use structured and unstructured data than to define new data sources. "This may indicate that companies focused on strategy development have previously devoted the resources needed to generate the data needed to support those efforts."
4.- Rewards to promote profitability analytics decision-making: According to BDO iLab's survey, slightly more than half of the banks are using incentives, either monetary or non-monetary, for this purpose.
Not doing so is a mistake, BDO iLab says: Banks that believe developing enhanced analytics capabilities is vital to their success are more likely to foster an appropriate culture by providing such incentives.
5.- Adequate resources for profitability analytics efforts: The most frequently cited challenge to developing enhanced analytics capabilities, by far, is recruiting staff with the necessary skill set.
The next-most-common challenge is budget. Survey respondents commented, "Top management has narrow vision, so it does not provide necessary resources" and "It is difficult to get funding to acquire and analyze data."
It might be expected that when senior executives champion enhanced analytics initiatives. However, survey data shows the opposite to be true
"It may be that when departments value analytics efforts, they prioritize it and 'find' the resources to support it," BDO iLab says. "On the other hand, when executives champion the initiative, there may be a lack of coordination within the organization to commit the required resources."
6.- Alignment of profitability analytics efforts: Responsibility for analytics can reside in various parts of a financial institution. Some argue that CFOs should own it, as they are the "impartial guardians of the truth" and can use analytics to "debunk myths or accepted wisdom that hold the company back."
A few banks seem to agree: 51% of those surveyed said finance is at least a partial owner of analytics. Next was IT (30%), a dedicated analytics group (28%), having each department independently manage its analytics (25%) and operations (24%).
Notably, banks that see profitability analytics as a tool for gaining a competitive edge are more likely to have a dedicated analytics group.
Pedro San Martin, CPA, MBA, is Strategic Finance & Analytics Principal at MyABCM USA / BDO Innovation Lab. He's a member of the Institute of Management Accountants-Spain Chapter. You can reach him at email@example.com