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The Vanguard System™ and Business Intelligence
(BI) Systems are both forms of Business Analytics.
However, they differ in that BI systems use statistical
analysis to monitor past performance while the Vanguard
System uses modeling and simulation to forecast future
performance.
In addition, the Vanguard System is knowledge-centric
rather than data-centric. It captures management
estimates and company know-how from individuals
throughout your organization and merges this knowledge
into high-level business models. This shift in focus
makes it possible for Vanguard to support proactive,
strategic decisions.
Vanguard's model-based dashboards
give you insight into what WILL happen rather than simply
what HAS happened.
Traditional BI Systems
A focus on historical data
Traditional BI systems consist of a central data
warehouse that contains company transaction data and a
reporting mechanism that allows users to access the data
in several summary and ad hoc formats. A common interface
is a dashboard that reports how the company is doing on
Key Performance Indicators (KPIs).
Traditional BI System
The theory behind these systems is that you cannot
improve what you do not measure. Without some sort of
feedback mechanism, you are essentially driving blind.
With a traditional BI system, you are no longer
driving blind; but, because all information is
historical, your only view of the world is through your
rear-view mirror. If the road on which you are driving is
long, featureless, and straight, you can stay on course
by making small corrections and watching how the road
drifts behind you. However, if there is a fork in the
road ahead (an opportunity) you won't see it until it
passes. And, if there is a sharp curve, you crash. What
you need is a system that gives you a forward view.
Many BI vendors are focusing on Predictive Analytics
in an attempt to provide a forward view. Predictive
Analytics involves using statistics to find trends and
patterns in historical data that you can extrapolate. It
is important to understand that these forecasts are not a
prediction of the future; they are an extrapolation of
the past. Using the driving metaphor, you are still
looking backwards; but you predict that because the road
behind you is straight, the road ahead will continue in
the same direction.
Typical BI systems can provide significant benefits to
organizations when users properly understand the system's
limitations. The primary limitation is that these systems
allow you to respond to changes in company performance
after the change has occurred or has begun to occur, but
they do not help you anticipate changes that deviate from
historical patterns. In addition, once you extend your
planning horizon far into the future, you no longer can
use history as a proxy for future performance; so, you
don't have the necessary input for classic decision
analysis. In short, traditional BI systems help you with
operational, day-to-day management, but they are
incomplete when applied to strategic planning.
The Vanguard System
A Focus on Strategic Decisions
The Vanguard System gives you the forward vision
required to make proactive, strategic decisions. The
basis for these decisions cannot be found solely in
historical data, the method by which traditional BI
systems operate, but by applying scientific rigor to
management estimates, expectations, and insights. You
find answers by capturing and then mining the knowledge
your employees possess.
The Vanguard System delivers results to
decision-makers via a client-server network architecture,
similar to that of traditional BI systems. However, where
traditional systems collect data, organize it, and
deliver information in the form of reports, the Vanguard
System captures business knowledge, assembles it, and
delivers results in the form of decision-support models.
The Vanguard System
How Is the Output from Vanguard Different?
Case Study 1: One way to apply the
Vanguard System is in building a company simulation
model. This real-time, collaborative model can have
hundreds of contributors who maintain knowledge about
portions of the company under their direct control. This
knowledge is rolled up into an enterprise-level model
that reflects the expected operations of the entire
organization.
One of many reports this system can generate is a bell
curve showing the profit expected over the next 12
months. Because it is impossible for any system to tell
you exactly what is going to happen, this system displays
the range of possible outcomes by factoring all risks and
uncertainties gathered from individuals around the
company. The following is an example of such a report:
Projected 12-month profit (base
case)
This report tells you that the most likely profit the
company will earn is just under $400 million. However,
profit could be as low as $250 million or as high as $600
million.
Suppose the next day you look at the same report and
see the following:
Projected profit after risk
identified
The most likely profit has not changed much; it is
still about $400 million. However, the system is now
projecting a significant chance that some event could
wipe out profits. This chance manifests itself as a new
hump centered on a profit of zero.
What has changed? By drilling into the model, you
discover that a purchasing manager has learned that the
supplier of a key raw material is experiencing financial
difficulty. If they go under, new prices negotiated with
alternate suppliers are likely to be higher.
Since this possible event has not yet happened, it
will never show up in a historical reporting system. And
although the event is unlikely, it might not show up in
status reports. Furthermore, since the purchasing manager
does not have a full understanding of how the price of
this material affects all aspects of the organization, he
might not recognize that the potential price increase is
a serious risk.
Using Vanguard, the purchasing manager can modify the
component under his control to reflect the new risk and
all parent models will show the impact of this change
instantly.
Case Study 2: The CFO can use the
same company simulation model to estimate future cash
requirements by generating a report such as the
following:
Expected cash flow
Although typical cash flow is positive, the company
must have access to at least $111 million to be 95% sure
it will have enough cash to cover all planned
investments. Moreover, if everything goes well, the
company could see an excess cash flow of $290 million.
This type of report is directly actionable. You can
use it to help plan contingencies on both ends of the
cash spectrum. Clearly, you need to make sure cash is
available to support the company if operating cash flow
is negative. However, a well-run company will plan for
the most positive outcome. If there is an excess cash
flow of $290 million, are there projects in the planning
phase now that will take advantage of the new resources?
Idle cash will reduce the company ROA.
Moving Forward
Traditional BI systems are not limited by a lack of
features or analytic capabilities; they are limited by
their basic architecture. By centering on historical
data, traditional BI systems cannot help you with the
most valuable business questions such as:
- What are the major risks we face now?
- How much cash do we need to be sure we can cover
all planned activities?
- In which projects should we invest to maximize
the portfolio effect and cancel risk?
- Should we go forward with a planned expansion?
- How will acquiring a competitor affect our
expected profits and risks?
- Should we sell an underperforming division?
- Etc.
The input used to answer these questions includes
management estimates, knowledge about markets, suppliers,
manufacturing techniques, etc. These questions are
answered by using cohesive, future models which are made
up of the combined knowledge contained within your
organization. This is exactly what the Vanguard Business
Intelligence System does.
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