Most companies have made great strides in collecting and utilizing data from their own activities. However business leaders who harness and have a well-structured plan for using external data can provide a competitive edge, according to a new report by McKinsey Digital.
However, very few organizations have standardized procedures to deal with external data. Even fewer organizations utilize the externally available data to its full potential, according to research co-authors, Mohammed Aaser, McKinsey’s chief data officer and Doug McElhaney, a partner.
The COVID-19 crisis provides an example of just how relevant external data can be. In a few short months, consumer purchasing habits, activities, and digital behavior changed dramatically, making preexisting consumer research, forecasts, and predictive models obsolete. In such a scenario, McKinsey researchers believe, overlooking such external data is a missed opportunity for C-level executives.
Collecting and analyzing external data however is not new. What is new, is that the value of data created externally is becoming more important than the data that you acquire from internal sources.
In other words, external data can provide new insights into customer behavior and preferences not previously accessible. This enables companies to further tailor their services, sales and marketing to those customers that are most likely to buy their products.
Although external-data sources offer immense potential, they also present several practical challenges. To start with, the authors said, simply gaining a basic understanding of what’s available requires considerable effort, given that the external-data environment is fragmented and expanding quickly.
Moreover, efficient usage and operationalization of external data may require updates to the organization’s existing data environment, including changes to systems and infrastructure. Companies also need to remain cognizant of privacy concerns and consumer scrutiny when they use some types of external data.
Companies across industries can successfully use external data from a variety of sources, the authors said. For example, investors actively gather job postings, company reviews posted by employees, employee-turnover data from professional networking and career websites, and patent filings to understand company strategy and predict financial performance and organizational growth.
Analysts use aggregated transaction data from card processors and digital-receipt data to understand the volume of purchases by consumers, both online and offline, and to identify which products are increasing in share. This gives them a better understanding of whether traffic is declining or growing, as well as insights into cross-shopping behaviors.
Steps to creating value with external data
Use of external data has the potential to be game changing across a variety of business functions and sectors, the authors said. The journey toward successfully using external data has three key steps.
- Establish a dedicated team for external-data sourcing. A key role on this team is a dedicated data scout or strategist who partners with the data-analytics team and business functions to identify operational, cost, and growth improvements that could be powered by external data..
- Develop relationships with data marketplaces and aggregators. Once the team has identified a potential data set, the team’s data engineers should work directly with business stakeholders and data scientists to evaluate the data and determine the degree to which the data will improve business outcomes, which would otherwise take months.
- Prepare the data architecture for new external-data streams. This calls for up-front planning, a flexible data architecture, and ongoing quality-assurance testing. This will provide insights about any necessary modifications to the data architecture and involves examining data regularly against the established quality framework to identify whether the source data have changed and to understand the drivers of any changes.
The value of external data
Whether you are integrating external data in your processes, you are starting a new business by using external data, or you are selling the data you own to third parties, there is great potential in the application of external data.
According to the authors, minimizing risk and creating value with external data will require a unique mix of creative problem solving, organizational capability building, and laser-focused execution.
That said, business leaders who demonstrate the achievements possible with external data can capture the imagination of the broader leadership team and build excitement for scaling beyond early pilots and tests.