The value of business analysis
How much business analysis is needed at small companies?

There is often a big argument about how much business analysis is needed before a decision can be taken. But before I proceed any further, let me just state two interesting facts below:

• Many empirical studies have shown that a passive index strategy will outperform actively managed portfolios over the long run. Or in other words, you can simply invest in a few index funds (or more commonly called as ETF or index traded funds) and check your portfolio on retirement. No fees to be paid, no hassles, and no need to reallocate your portfolio, ever.

• Fortune is reporting that year after year most analysts fail at their prime objective: making money for their clients. All those high profile, supposedly super-smart analysts that are on media have as much clue about stock market direction as a monkey throwing darts. By the way, our smart friends on Wall Street are notorious for being obsessed with business (particularly quantitative) analysis.

In many large corporations, similarly, nothing really gets done unless it has been analyzed a million times. Many executives in Corporate America are true believers in analyzing almost anything to a point that eventually everyone gets sick and tired of everything and does not know what the real conclusion of the business analysis is. The senior management doesn't care about the outcome of the business analysis anyway. They typically decide what to do based on what they want to do; they just expect that some fancy business analysis with lots of charts and tables will provide the cover they need to impress some Wall Street analysts.  (Related:  Standards for competitive intelligence)

But there is value in business analysis…

Yes, too often most business analysis is done just for the heck of it. But it is also true that decision-making process will be chaotic without business analysis. Managers will be forced to rely on their gut instincts for almost everything. What needs to be done, however, is to put some boundaries around the analysis and agree on a timeline for completion. Here are some of the steps that many companies have taken to make business analysis more meaningful and productive:

• Clearly agree on the outcome that can then determine the process, team structure, resources, and framework

• Bring in outside consultants to bring a structured format, objectivity, and a capability to challenge the current thinking within an enterprise

• Make sure that the process moves forward steadily, senior management is engaged in the process and is aware of preliminary results, and the business analysis process concludes with recommendations that can be summarized in less than five PowerPoint slides that make sense to the guy who turns off the lights every night.

So how much business analysis should a small company do?

A lot more than they currently do. Sounds contrary to what my comments above would lead you to believe. Well, small companies need to bring business analytical frameworks to their decision-making, which is currently not there. I have observed that they are constantly pressed for resources and do not always have the time and the wherewithal to constitute internal teams supported by outside advisors.  

In the absence of such a system, the decisions are often taken without a clearly laid out framework.  This not only results in confusion among the employees, customers, and suppliers (since they do not know if there is a process in place) and ignores the inherent risks in the decision (Related link:  Risk management for small businesses).

Robert Kraft, Founder and Chairman of the Kraft Group of Companies (the current owner of the New England Patriots), and a Harvard Business School graduate, believes that decisions should be rooted in sound business analysis even if they are eventually taken based on your gut feeling. He admits that he has taken decisions that were not sound in the opinion of his financial advisors but when he took those decisions based on what he felt in his heart (for example, purchasing the New England Patriots), the business analysis was there for him to look at.  Thus, he along with everyone else, knew what the risks were and if his decision were not to work out the way he anticipated, they had a risk management framework in place.  That is the value of business analysis.

Many small businesses today continue to rely on the gut feelings of the leadership team rather than generating hard, fact-based data for at least a high-level business analysis. There is absolutely no need to put task forces in place, have endless meetings, and come up with conclusions that confuse everyone but a simple, neat, analysis will go a long way in laying out the facts for everyone to see so that even when a decision is taken based on gut feeling, the risks are known to everyone and can be managed using a process that is transparent and understandable.

Recommended articles:  Case study of risk management at Pfizer    Keep your analysis flexible

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