We all know, at a gut level, that data analytics can deliver the kind of value not attainable through gut-level decision-making. But, ironically, we never had the hard data that shows us the results analytics delivers.
Researchers from MIT and the University of Pennsylvania have finally documented what we have known instinctively all along, but didn’t have the data to prove: analytics do pay off for organizations, and data-driven companies lead their industries. End of the irony.
The researchers, led by MIT’s Erik Brynjolfsson, and including Lorin Hitt of the University of Pennsylvania and Heekyung Kim of MIT, examined whether performance is higher in firms that emphasize a data-driven decision-making approach. Using detailed survey data on the business practices and information technology investments of 179 large publicly traded firms, the researchers found that firms that adopt data-driven decision making have output and productivity that is 5-6% higher than less data-driven enterprises.
The research team looked across an array of performance measures such as asset utilization, return on equity and market value, concluding that adoption of data analytics made a difference in these places as well. “Our results provide some of the first large scale data on the direct connection between data-driven decision making and firm performance,” they announced in the study’s findings. To date, most conclusions about the power of competing on analytics has been anecdotal, they say.
The team’s definition of a “data-driven” enterprise was based on companies’ reported usage of data for the creation of a new product or service, usage of data for business decision making in the entire company, and the existence of data for decision making in the entire company.
Brynjolfsson has been involved in previous studies that demonstrated the role of information technology in boosting business value and productivity, and is familiar with the factors to measure IT’s impact, including technologies, management practices, and industry structures. The current study demonstrates that, “after controlling for IT use as well as other traditional inputs and industry, data-driven decision making appears to differentiate high-performing firms from others.”
Brynjolfsson elaborated further on the findings in an interview with The New York Times, observing that the distinction is between decisions based mainly on “data and analysis” and on the traditional management arts of “experience and intuition.” And while a five percent increase in output and productivity seems relatively modest, this is significant enough to separate winners from losers in most industries, he says. The companies that are guided by data analysis are “harbingers of a trend in how managers make decisions, and it has huge implications for competitiveness and growth.”
The productivity and output bump from data analytics will likely increase as time goes on, Brynjolfsson adds, noting that new technologies often take time until their impact is felt in a big way.