Open Source Business Analysis

I was talking with a private equity firm last week about how they did their research into software and hardware technology niches to understand potential investments, competitors, and market dynamics.  They estimate that 80% of the material they read is a waste of time, yet they consider their research process a proprietary advantage.  I think that conversation reveals a basic business assumption that is about to change dramatically.

In every industry, you can picture thousands of unfortunate analysts across dozens of companies all doing essentially the same work.  They’re all forecasting market growth, analyzing competitors, trying to understand customers, and so on.  And they read the same news, the same financial reports, and the same market research, for the most part.  The results of this work are closely guarded proprietary analyses, yet they’re all very similar.  There’s a huge amount of duplicated effort that doesn’t add much value.

Business Analysis as Software

Does this remind you of anything?  It’s what software development used to be like when every company developed its own custom applications in-house.  Every company had its own system for everything from payroll to accounting, either done in-house or by expensive consultants.  Eventually, software development activity was consolidated through a number of mechanisms:

  • Commercial off-the-shelf software
  • Process outsourcing (e.g., an external company handling your entire payroll process with their in-house software)
  • Higher-level software languages and components
  • Open source software

As a result, software development these days results in much less duplicated effort.

This dynamic has not occurred to the same extent with business analysis, to say the least!  Most big companies still have departments that do things like economic forecasting and competitive analysis.  Certainly, a part of this thought process is unique to each company and thus valuable for informing business decisions, but most firms can’t pinpoint where the commodity information ends and the differentiation begins.  It reminds me of the old John Wanamaker quote, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”  The same is true of business analysis.

So Why Is This the Case?

I see a few causes for this waste.  First, there’s a game theory problem.  The first company to “open source” its analysis benefits its peers but doesn’t receive any benefit in return.  So there’s no incentive for individual firms to go first.  The current equilibrium results in little or no information sharing.

Second, external information sources are opaque.  Market research reports only include conclusions and estimates, not how those conclusions were reached.  As a result, consumers of those reports end up double-checking the work to make sure it’s applicable to their situations, or redoing the entire analysis because they need a slightly different focus.  Black box information sources can’t be easily repurposed.  In order to tweak an analysis by 10%, I have to reverse engineer the whole thing.  This isn’t an accident, either.  Research vendors want their clients to remain dependent on them, and revealing any of the inputs to their analysis reduces that dependence.  It makes sense for vendors to maximize their profits, but it doesn’t exactly maximize value for customers!

Third, internal analytical departments are motivated to maintain their headcount and budgets.  Advances in efficiency are often resisted because those affected want to avoid creating a reduced need for their work.  In reality, the importance of business analysis and research services will just continue to grow.  The difference is that they will be doing more highly-skilled, value-added intellectual work and less rote data gathering and number crunching.  But like any such revolution, it’s easier for people to see the negative first-order effects than to see the positive (and overall more impactful) second-order effects.  Those attitudes will take time to change.

Where Do We End Up?

Eventually, we’ll end up in a world where business information is more readily accessible, cheaper, and easier to remix and customize to specific needs.  The opportunity to disrupt the current high-cost approach to business analysis is just too appealing for new entrants, and the potential cost and efficiency savings will be too attractive for customers.  But the barriers to change described above won’t go away overnight.  Time and effort will be needed to get people used to the new paradigm of open source business analysis.


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