Big data is the next big thing. At least that is what the McKinsey Global Institute will have you believe. It predicts that data will soon be as important to business as physical assets and human capital, with the potential to create billions of dollars in new value.
But what is it? John Fritz, director of virtualisation and cloud computing partnerships at AMD (Advanced Micro Devices) in San Francisco is fond of quoting the science historian George Dyson who says: “Big data is what happened when the cost of storing information became less than the cost of making the decision to throw it away.”
In recent years, as the costs of computing power and memory storage have fallen, the amount of information companies know about their customers, their competitors, and their working environment has grown exponentially – along with the insights that can be leveraged from all that information. Big data, as this opportunity is now being called, may be the biggest change to come along for business since the internet – and sooner or later, it’s an opportunity that may matter a lot to your company.
But who ends up being captain of this shiny new productivity starship? No one in the executive suite is better positioned to boldly go into big data management than the treasurer.
Why treasurers may win
Treasurers have become increasingly adept at managing and analysing complex streams of data. “CFOs more and more are relying on treasury for providing guidance on where working capital trends are headed,” says Carina Ruiz, leader of Deloitte’s US treasury transformation services.
Treasury is becoming a hub of information, according to Ruiz. For many CFOs, their treasurer is now the person to go to for cash flow forecasting, working capital management, working capital costs, and cost of capital.
Treasurers at a number of leading companies are learning to use today’s faster and more complete cash flow information to operate their company’s cash operations at lower cost and at lower levels of risk. Microsoft, for instance, is now able to track and deploy their cash at what would have been considered science-fiction speed 10 years ago – and better cash management may be only the beginning.
For one thing, big data can help treasurers gain more leverage over their creditors. “The reason they’re doing it is to really beat up on their bankers and other suppliers,” says Marc Alvarez, senior director of reference data at Interactive Data.
Treasurers at larger companies are now finding that they can use data to keep their short-term operating costs down, according to Alvarez. “Especially in the Fortune 500, most treasurers are becoming increasingly demanding of their bankers. They want to know what’s going on,” he says.
Treasurers are also moving beyond traditional enterprise resource planning (ERP) systems such as SAP toward the addition of independent analytics and data services, with a particular focus on data volumes. Interactive Data says that although most data treasurers collect will continue to be through their ERP systems, many are beginning to branch out. “It’s clear to us that you’re going to see independent data consumption go up,” says Alvarez, whose company works with SAP.
Better data translates into more leverage with banks, according to Alvarez, and should help reinforce the trend toward non-traditional lending sources, such as borrowing from hedge funds or self-issued bonds. With as much as 200 basis points on the line, Alvarez says, he could imagine a scenario in which the company could even manage its own yield curve by retiring debt early, in the same way that on the equity side it supports its own stock price through stock-buy backs.
However, the big data world is evolving so quickly that the treasurer’s opportunity may not last long. Some observers believe IT investments in data warehouses and ERP systems could push treasury out of the big swivel chair and back to the engine room.
…But it’s not a sure thing
To prepare themselves for this brave new world, treasurers will need to learn some new skills. Michael Schrage, a co-director of the MIT Media Lab, a centre at the Massachusetts Institute of Technology devoted to adapting emerging technologies to real-world problems, says treasurers will need to develop a more sophisticated understanding of statistics and probabilistic thinking to win in this new environment. At the same time, they will need to become more operationally aware. Accounting knowledge will no longer be sufficient to do the job. “Treasurers will increasingly have to become more operationally oriented,” he says.
And not only treasurers will need to be more operationally aware, Schrage says, but also most corporate finance work is going to evolve away from reporting and towards predicting. A lot of this will involve what he calls operational forensics – being able to look at data and predict how certain changes will change corporate risks. The financial mindset will need to shift away from thinking mostly in accounting terms to thinking in more actuarial terms – particularly as the amount of data increases and the analytics grow more sophisticated.
But other changes will be less intuitive. One thing you won’t need to win is a big hardware budget. Although consultants are sure to find ways to help companies find places to soak up their extra cash, the hardware costs of becoming a big data player can be surprisingly low relative to past IT booms.
Data mining that cost hundreds of thousands of dollars just a few years ago can be done now for a few hundred dollars, hosted on an external cloud, according to Fritz at AMD. “With the cloud now you don’t need to invest in all this hardware,” he says.
Today, even major sites are able to develop on an entirely outsourced basis. It took only 12 employees to build Instagram because the startup was able to use Amazon Web Services to host most of its IT needs, Fritz says. Software too may not be a major expense as in past IT revolutions. One of the industry standard applications for big data analysis, Hadoop, is open source, and vendors in the field are still fragmented, according to Fritz.
Nor are you even necessarily out of the game if your company is still in the dark ages when it comes to data. Traditionally, most business analytics have focused on developing internal sources of data, but Fritz says that more and more insights are now being gained by companies mining external databases. “What you see is people going out and making use of all kinds of different data sets that are either commercially available or publicly available,” Fritz says.
The key question to ask, Fritz says, is “‘What can I do with a small group of really smart guys that can operate in a cloud environment who can deliver me insights that I might not have had before?’”
The one pricey investment may be that group of ‘really smart guys’ itself. For the next few years anyway, they hold most of the cards. McKinsey Global Institute forecasts a growing shortage of data scientists. In the US alone, they say 140,000 to 190,000 data science slots will go unfilled by 2018 – and there will be a shortfall of 1.5 million managers and analysts conversant enough in statistics to act on what they discover.
Beam yourself up
However, Deloitte’s Ruiz argues that for treasurers, the biggest big data challenge in the short run is neither skills nor budgets nor headcount, but leadership.
“You have to prove: one, there is a need and that two, that need can be met by treasury. To me it’s the leadership in treasury that will drive [treasury’s role] versus the hires,” she explains. “If treasury is just purely seen as ‘you guys take care of our banking relationships’ or ‘you guys take care of our banking liquidity,’ they’re not going to change the mindset of our CFO.”
She argues the biggest big data challenge is “treasury leadership’s ability to build an analytic mind-set within the team, veering away from doing the tactical day-to-day nuts and bolts of treasury and refocusing to be the strategic cash analytic and reporting arm to the CFO.”
The other test is treasury’s ability to grasp the data elements and trends. “Treasury groups often fall into the trap of being in a silo, cut off from the operating units. For treasury to be effective, it needs to understand how the respective businesses are run, the mindset of the leaders that run them, and then plug in their knowledge of cash trends in the businesses to add value,” Ruiz says.
For treasurers, the big data boom is likely to have an ironic result. IT experts say that as corporate finance becomes more data driven, diplomatic skills and general knowledge will matter more and more. The proverbial Spock and Scottie will get to mess with the machines back on the Starship Enterprise, but if you’re going to be a big data captain, you’ll be spending your days far from the engine room, reasoning and wrestling with a variety of alien life forms.
Ruiz says treasurers with a broad financial background tend to have a better time convincing their CFOs of the importance of analytic investments. “The ones that I’ve seen that are quite effective in being able to have a very strong conversation with the CFO, are treasurers that have more than just a treasury background,” she says. In particular, she says, treasurers who have an MBA and have spent more time in other areas of finance and have more holistic view of finance tend to have more authority, as do treasurers who also wear a tax-planning hat.
Another aspect of leadership that treasurers in the big data era will likely need is not just a greater ability to manage up, but sideways. For example, getting other business units to share data is not always easy, Fritz warns. Even in the cancer research foundation with which he is associated, scientists will sometimes want to hang on to their own data sets. “Part of the thing that we’re encountering is that people don’t want to share data because their ego is invested in it. You do have to set up the right cultural environment,” he says.
Learning how to work with external developers will be important too, according to Fritz. Development operations are dramatically different from traditional IT – almost offensive versus defensive, he says – but the ‘dev-ops’ group is useful to know.
“It’s worthwhile understanding the devops culture because that way you can focus on the treasury expertise and mathematical expertise and risk management expertise without having to figure out ‘how much RAM do I want to put on my cluster node?’” Fritz says.
A five-year mission
Not every company will listen to a treasurer’s pitch to build more data expertise, Ruiz warns: some technology companies whose cash is rising may not care as much about where their cash is going as manufacturing companies anxious about every penny.
But, if the forecasters are right, even these companies may be creating new risks for themselves down the line, as their competitors’ treasury function takes advantage of new ways to reduce their costs and their risks. The McKinsey Global Institute estimates that the total supply of data will grow by about 40% a year over the next decade – and as it grows, so too do the possibilities for analysis. Treasurers will have to prepare to be assimilated.