June 5, 2023 •Oak Street Funding
Businesses that are striving to be innovative often embrace popular terminology. One concept that’s been receiving a great deal of attention is “data-driven,” as in a business that roots its operations and decision-making in solid data rather than subjectivity.
What is a Data-Driven Business?
There are many businesses today that are truly data-driven businesses, from online travel services such as Airbnb® that exist completely online and in databases, to heavily data-dependent operations that are tied to physical processes, such as Amazon®. When we talk about data-driven business, we’re usually referring to what’s been called a data-informed operation, in which data is used with conventional business practices to optimize existing business models and improve competitiveness.
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What is it so hard to become a data-driven business?
The goal of such organizations is to leverage data to gain the intelligence needed to make the kinds of decisions that can transform the business. Doing so requires those businesses not only to change their processes, but to make significant changes in their culture and the mindset of leaders and staff.
There are several obstacles that can prevent a business from becoming a data-driven business, but one of the biggest is a lack of data culture and strategy. Becoming a data-driven business requires a commitment to using data to inform decisions and drive business outcomes, and this can only be achieved with a strong data culture that supports and encourages the use of data.
Other obstacles to becoming a data-driven business include:
- Data quality and availability: The quality and availability of data are critical factors for success in data-driven decision making. If the data is inaccurate, incomplete, or not easily accessible, it can limit the value that can be derived from it.
- Technical challenges: Implementing and integrating data-driven technologies can be technically challenging, especially for organizations with legacy systems or limited technical expertise.
- Resistance to change: Change can be difficult, and resistance to change can be a significant obstacle to the adoption of data-driven processes and decision-making. This can be particularly true for organizations that have long relied on intuition and experience to drive decisions.
- Privacy and security concerns: The use of data raises important privacy and security concerns, and a data-driven business needs to have robust systems in place to ensure the protection of sensitive information.
Overcoming these obstacles requires a comprehensive strategy that includes investment in technology, data management processes, and employee training, as well as a commitment to using data to drive decision-making and continuous improvement. Successful transformations into data-driven businesses are resulting in improvements of 20 to 30 percent in EBITDA as those organizations develop access to more granular insight and create efficiencies.
Advantages to data-driven paradigm
Among the advantages of moving to a data-driven business paradigm are the potential for revenue growth, as it becomes easier to more precisely target clients, adjust pricing to their situations, and react more quickly to market changes. This strengthens client loyalty by better assessing and responding to their needs; increasing profitability and efficiency; and becoming better at identifying potential areas of risk so they can be addressed more quickly.
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The key to making the transformation into a data-driven business is ensuring that all business decisions will be derived from the data and the strategy. Signs that your business is doing this well include data always being incorporated in meetings and discussions about tactics, having the data strategy emphasized during onboarding of new employees, data being addressed in the budgeting process, and being able to identify an ROI for the data strategy. Just as important, your top leaders must be able to explain the strategy and its objectives to employees and those outside the business.
There are some common philosophies you’ll find in companies that make a successful transformation to a focus on data. They begin with a leadership team that embraces and evangelizes the importance of a data-driven culture, and places a high value on transparency and communication. That’s important, because success with this business model requires genuine collaboration among all levels and functions. Sharing data among all employees makes it possible to improve that collaboration and encourage greater performance among individuals and teams.
Companies that have become data-driven businesses place a priority on the collection and storage of practical, usable data. They invest in the tools and knowledge needed to gather, store, and analyze new data as it becomes available. By creating this type of framework, they’re able to continually assess current systems and processes and gain immediate insights into areas where change is needed.
If your organization and its operations are not already built around obtaining, storing, and analyzing data, there are several steps you can take to achieve the transformation. From a high-level perspective, you need to develop analytic models that are relevant to your business, understandable, and that provide useful information. Ideally, those models should be based on your current processes for decision-making. Next, use the models to turn the analytics into simple tools your entire team can use to inform the decisions they have to make as part of their functional responsibility. Finally, use what you’ve learned to create value from all the data that’s available to you.
A practical framework to become a data-driven business
Start with the leadership. If the people running your organization do not embrace your goals enthusiastically and by example, the rest of your staff won’t make it a priority. It takes more than simply stating that data is important and must be considered. The leadership has to create a believable business case for how the focus on data will benefit both the organization and the employees.
Fix some things fast. It’s rarely a good idea to rush into significant changes, but identifying some key problems or opportunities and making those the first objectives for the transformation into a data-driven business can produce evidence that the focus on data is sound and effective. If the team sees measurable ROI and value, they’ll be more likely to embrace subsequent efforts and to help the company’s leadership develop key performance indicators for gauging success.
Scale up in steps. Rather than jump into the new focus by making a significant investment such as the replacement of all technology, construct a transition plan using the resources the company has and open-source tools. Instead of trying to solve large problems in one fell swoop, break them into smaller components and develop incremental solutions. Thinking smaller will increase the likelihood of success and staying on a timeline, which will build enthusiasm for continuing to expand the effort. Along the way, look for opportunities to improve your data architecture and processes to create efficiencies and set standards for continuous improvement.
Prepare your people. As you move through the transformation to a data-driven business that relies more heavily on data, you may begin to notice gaps within your team’s expertise. Employees whose enthusiasm for dealing with the new environment may surprise you. It’s a good time to consider realigning your staff to meet the needs of the changing organization by changing people’s roles or making strategic hires.
Celebrate success. Finally, as the company begins to derive successes from the transformation, take time to ensure everyone knows how well things are going. Recognize staff members for the contributions they make, and reward everyone in small but meaningful ways for their willingness to take risks. That recognition will encourage continued innovations.
Oak Street Funding has supported businesses like yours to transform into a data-driven business. Contact us to learn how.
Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.