Continue in 2 seconds

BI for Intelligent Cost Structures

  • June 01 2001, 1:00am EDT

As economic clouds grow progressively darker, many firms are desperately cutting costs across the board. Freezes, cancellations and layoffs hover closer to reality. This thought strikes anxiety in the hearts of information technology (IT) executives. Once again, IT finds itself in a no-win, downward- spiraling, cost-cutting rut.

Alan Greenspan has been a solid proponent of IT as a way of improving productivity, thus stimulating our recent economic boom.1 Further, he has stated that IT is an important factor for powering the economy both into and out of its current slowdown. The flow of nearly real-time information along the supply chain not only improves productivity, but also improves the ability of an industry to compensate for fluctuations in demand.

For instance, IBM reports that they are avoiding inventory glut in the slowing economy through better supply chain management.2 IBM is using a combination of SAP and I2 to link 25,000 suppliers with 25 manufacturing facilities globally. Later this year, IBM will link this back end with its customer-facing Web sites, enabling orders to "pulse" through their entire value chain, increasing accuracy of fulfillment predictions and decreasing costs.

What can an IT executive do? Con-sider promoting business intelligence (BI) as an e-medicine for alleviating the recession impacts upon your company.

Over the past decade, BI systems have been successful in making enterprises smarter. The vast majority of corporations globally employ BI solutions across a wide spectrum of functions. According to a recent survey, 87 percent of companies utilize one or more data warehouses in some form, fueling a multibillion-dollar marketplace for BI products and services.3

Newer BI applications are aimed at increasing revenue through enhancing customer relationships. In a slowing economy where revenue is generally declining, the cost side ­ especially cash conservation ­ needs additional attention. In a growing economy, a firm should optimize the value chain to customize products and services for targeted customer segments. In a slowing economy, a firm should optimize the value chain to manage costs so that they closely track declining customer demand.

Let me suggest that the next big wave for BI is intelligent cost structures (ICS). We could use the label cash-revenue management, but that acronym is already in use. The heritage of BI has been financial analysis, but the scope of ICS is more than financial. It views the cost structure of the entire value chain so that it can be managed in real time. This is not a postmortem analysis to assign blame after a disaster. It is an active management tool to avoid a disaster.

In a slowing economy, the challenge is to maintain profitability by keeping expenses in balance with declining revenue. The vision is to see, at a glance, the entire value chain from the perspective of incurring expenses while tracking and predicting demand.

It is not the declining revenues that hurt; it is the vanishing profitability. Disaster comes when fixed costs quickly drive margins negative.

In actuality, no cost factor is truly fixed. It is a matter of the latency time between when a decision is made to change the cost structure and when costs actually change. At one extreme, investments in large plants and equipment have cost structures where latency is measured in years. However, there is a broad spectrum of cost factors where latency can be reduced in a timely manner (to hourly or daily).

The approach to ICS is to reduce the time required to react and to increase predictability. The key ICS functions would seem to be assessing, prioritizing, alerting, reacting and evaluating. The assessing function deals with understanding the existing cost structure and implementing ways of reducing the latency time for various cost factors. The prioritizing function deals with establishing key performance indicators on demand and linking them to specific factors in the cost structure. The alerting function deals with monitoring the demand indicators and formulating appropriate action alternatives. The reacting function deals with making a decision and executing the action plan. Finally, the evaluating function deals with monitoring the effects and analyzing long-term trends.

The ICS approach can hopefully lessen the probability of nasty things (such as layoffs) by reacting to declining demand faster and with a more comprehensive action plan.

BI Bottom Line

  1. For IT groups, explore the intelligent cost structure approach as an extension of existing BI applications for profitability analysis and supply chain analysis.
  2. For BI vendors, offer the ICS solution for specific industries, assisting companies in evolving their rigid cost structure into a highly flexible and manageable one.

1. Murphy, Chris. Testing Greenspan. Information Week, March 19, 2001.
2. McDougall, Paul. IBM Exec Says Inventory Not A Problem for First Quarter. InformationWeek, April 3, 2001.
3. Hackathorn, Richard. State of the BI Market. DM Review, April 2001.

Register or login for access to this item and much more

All Information Management content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access