Financial Analytics in E-Commerce: Starting to Take Shape

The e-commerce market is entering a new period. After an initial phase during which companies focused largely on making their products and services available to potential customers via the Web, users are now trying to take a more comprehensive look at their deployments, one that correlates each sale to their entire operation.

Consequently, a new breed of financial analytics tools is emerging. “Now that companies have collected their financial data in one place, they want to analyze it so they can understand their operations better,” said Joshua Greenbaum, principal of Enterprise Applications Consulting.

E-commerce has matured quite rapidly. Just about every company from the local corner store to Wal-Mart now has a Web presence. However, establishing one does not necessarily mean that it is effective. As a result, companies are searching for ways to determine how each e-commerce business process impacts the bottom line. Consequently, analytics tools, which enable a business to correlate such items as software depreciation or sales leads, have become more important.

Competition Becomes Fierce

In fact, analytics has become a top management concern in many enterprises because e-commerce advances mean that virtually every market segment faces more competition now than ever before. The Internet has eliminated many of the traditional geographical barriers that companies used to fend off competitors, so firms can market their goods and services worldwide.

In addition, many corporations are having problems finding ways to differentiate themselves from the rest of the pack because traditional methods are no longer viable for a variety of reasons. Regulated monopolies are now few and far between. In many countries, financial services, airlines, telecommunications and postal enterprises were funded and run by the government. Increasingly, the walls protecting these companies are falling down, so they find themselves going toe-with-toe with capitalist enterprises in order to garner customers.

In developed countries, such as the U.S., the number of potential new customers is shrinking because large companies have deeply penetrated many customer bases, especially in commodity oriented areas, such as mobile phones. To be successful, retailers need to do a better job of managing their businesses. Financial analytics tools offer them the opportunity to more closely examine their assets and liabilities.

Taking a Few Baby Steps

While it’s easy to discern the theoretical benefits of financial analytics, successful deployments are rare. One issue is the complexity involved with the underlying technology. Putting an infrastructure in place to consolidate financial data had been impossible. Historically, data was housed in many different impenetrable silos. Now, many companies have now deployed integrated enterprise resource planning systems and have built large data warehouses on top of them, so their information is in one place.

Once the data is collected, software is needed so companies can sift through their information to glean trends. Traditional reporting tools are insufficient for that task. “Reporting tools told a company something obvious: Sales were going up or down,” said Roger Oberg, vice president of product strategy for the Spotfire division of Tibco Software, told the E-Commerce Times. “But they were unable to help companies pinpoint the reason for the change.”

Business intelligence reporting tools perform the former function while analytics products do the latter. In many cases, the new analytics tools are being built on top of the business intelligence systems and add one more layer of granularity to the reporting process.

Here Come the Big Boys

Strategic acquisitions by top vendors underscore the growing importance of business intelligence products. In March 2007, Oracle started a buying frenzy, by paying $3.3 billion to acquire Hyperion Solutions. In October, archrival SAP followed suit with a $6.8 purchase of Business Objects. In November, IBM closed out the year by paying $5 billion to buy Cognos.

While the business intelligence market has reached a mature phase, the financial analytics sector is still embryonic. Vendors had been talking about these features for a few years, but only are only a few recently began delivering them.

Their emergence has raised new challenges for e-commerce companies. First, they need to determine what data they want to examine. “The new analytics products work with new information formats, such as items found on blogs, as well as traditional data sources, such as information stored in databases,” David Schehr, research director at market research firm Gartner, told the E-Commerce Times. E-commerce companies may find they could correlate information, such as Web customer reviews, to product sales.

Data Overload

This new ability comes with a downside. “Sometimes, there is so much data available that executives can often feel overwhelmed,” Enterprise Applications Consulting’s Greenbaum told the E-Commerce Times. Vendors are working on items, such as dashboards, that make it possible for managers to point and click their way through oodles of information, deduce customers’ buying preferences, and perform “what if” analysis to make sound financial decisions.

Taking advantage of these features usually requires a corporate restructuring, which sometimes can be quite dramatic. Executives need to move away from a focus on the performance of autonomous business units and more toward a view of the organization functioning as a cohesive whole. Balancing the new requirements that analytics brings, such as breaking down traditional departmental barriers and reshaping the workforce, with often conflicting initiatives, such as tightening the budget, can be difficult to complete.

As a result, the use of financial analytics tools is now quite limited. Early adoption has been limited to areas, such as financial services, where correlating business performance data is easy to cost justify. For instance, Spotfire is used to helps hedge fund managers to minimize risk. While these capabilities are beginning to work their way into e-commerce operations, more time will be needed before their use becomes common.