Analytics in general centers on the discovery of patterns in data. These patterns can be useful in forecasting. In this post, I discuss the connection between forecasting and financial return.
Predictive analytics: show me the money
Predictive analytics is that area of analytics that concerns itself with the use of data and mathematical models for forecasting purposes. Decision analytics, the other “main” branch of analytics, looks at data for the purpose of classification.
While both traditional reporting and predictive analytics are meant to support decision-making, their foci differ in that the former is retrospective and stops at analyzing current and past data, while the latter is prospective and uses data and sophisticated tools to build models and assess forecasts.
With sophisticated modeling capabilities and access to huge amounts of reliable data that can be mined in many ways, forecasting ceases to be a chimera and, while remaining complex, becomes doable. On the heels of forecasting, follows the potential to shape demand, a concept not always sufficiently exploited. For example, a hospital that is strictly focused on delivering babies and helping mothers-to-be can decide to pursue wellness monitoring of the growing family and offer value-added services to the entire household that go well beyond the mother’s stay for labor and delivery.
Think of the basic formula for return-on-investment:
ROI = (gain – investment) / investment
Gain can be thought of as net income or profit, but also as revenue. Traditionally, upper management increases ROI by focusing on cost-cutting — reducing investment, and thus making the denominator of the ROI formula smaller and the numerator larger. Predictive analytics, and the consequent potential to shape demand, allow management to shift their focus from this strictly defensive position to a more aggressive one targeting new customers or existing customers in new ways and thus increasing the number of revenue streams and revenue itself (in the numerator of the ROI formula).
Skill in carrying this out can spell the difference for an organization between remaining competitive or not, especially in a business environment that demands ever better patient care but can only offer decreasing reimbursements to healthcare providers.