The Intelligent Enterprise

Utilize Decision Management to Move From Business Intelligence to Predictive Analytics

Moving forward, it is no longer enough to look backward at historical performance. Becoming analytic and adaptive will be a source of sustained competitive advantage.
In an era of Big Data organizations are looking to use analytic insight to improve their business. Rapidly changing competitive landscapes and the need to evaluate and adopt new business models is pushing organizations to become more adaptive. How can these imperatives be reflected in the way we build systems? In response to these imperatives, organizations are increasingly buying or building a new class of systems - Decision Management Systems. Decision Management Systems leverage the growing power of predictive analytics to create agile, analytic and adaptive processes and systems. This paper introduces the concepts of Decision Management Systems and shows how these systems can be easily integrated into your Enterprise Architecture. Technology enabling platforms like business rules management systems are outlined. The potential for data mining and predictive analytics to drive increased accuracy and profitability by making these systems analytic as well the role of experimentation in making them adaptive is discussed. Agile, analytic and adaptive Decision Management Systems are a critical component in a modern enterprise.

James Taylor CEO

CONTENTS
Introducing Decision Management Systems Decision Management Systems and Enterprise Architecture Becoming Analytic Becoming Adaptive Next Steps

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Introducing Decision Management Systems

Key Characteristics
Decision Management Systems have three key characteristics four if you count their unique focus. Decisions Their unique focus, of course, is that they are designed to manage and automate decisions. Not process, or events. Nor are they focused on managing data or being a complete enterprise application. Decision Management Systems just make decisions. Agile Because decision making changes all the time, often in response to external stimuli over which you have little or no control, Decision Management Systems must be designed for change and for the management of change, not just for execution. The system is built from the very beginning on the basis that it will need to change. This, of course, is one of the primary reasons for using business rules and a business rules management system as the basis for building a Decision Management System. Analytic Good decisionsaccurate or precise, profitable decisionsoften rely on the analysis of data to see what is likely to work and work well. Decision Management Systems are therefore analytic, embedding such analysis into their decision-making. They are designed to apply the content of what we know, the data we have, not just its structure. Adaptive Finally Decision Management Systems are designed to improve over time, to adapt. They are designed to learn, test and experiment. Both automated learning and support for the kind of experimentation that helps humans learn how best to change the system are involved. A Decision Management System rarely works as well on day 1 as it will later. It is also timeless, continuing to adapt to new circumstances.

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Decision Management Systems and Enterprise Architecture

At the core of a Decision Management System is a Decision Service a serviceoriented component that makes decisions for other components, business processes and legacy systems. This Decision Service delivers consistent, accurate, up to date decisions to a potential wide range of channels, systems, process and events. These systems and processes need Figure 1:Decision Services many decisions made and they can simply ask for a decision from the Decision Service and get a recommended action returned to them. These decisions are made by the Decision Service based on the right combination of business rules, optimization and predictive analytics: Business rules to manage policies and regulations, best practices and know-how; optimization to manage trade-offs and constraints; and predictive analytics to predict risk, fraud and opportunity. Finally data from all the channels and systems is gathered to provide feedback on what works and what does not so that the decision-making of the service can be systematically improved.

The Role of Business Rules in Delivering Agility

The purpose of this paper is not to detail the power of business rules. The use of a business rules management system, however, is highly useful to Decision Management Systems. Using business rules and a business rules management system as the core of your Decision Management System allows you to bring clarity and transparency to your decision-making logic. With business rules and a business rules management system you get: Design transparency so you can see how you plan to make each decision and so know what you can change. Execution transparency so you know what happened, how you decided each time, and why and when to change your approach. Collaboration so everyone (business and IT) can participate in managing decision-making and making changes. Impact analysis so those making changes can see the business impact of change. Most importantly, a business rules management system simplifies and streamlines analytics deployment so analytics use can expand rapidly.

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Becoming Analytic
Why Be Analytic?
When people make decisions they consider policies and regulations, they apply their experience and best practices. Often they also conduct some analysis of data, looking at transactions and historical records and changing their decision based on what they find. When we automate a decision we can use business rules to do a great job of representing policies, regulations, best practices and expertise. What we lack is a way to automate this analysis. Figure 2:Closing The Loop This is particularly important as we live in an era of Big Data. There is more data available that is arriving more rapidly in more formats all the time. This data offers tremendous potential but only if it can be put to work. The value of this data, and of analytics, lies in the power to improve decision-making.

However our approach to enterprise applications makes this difficult. We have largely separate operational and analytic systems. We extract data from our operational systems and load it into our analytic systems but that's it. Traditionally we have used reports and dashboards, visualizations and graphics to enable human decision-makers to make better decisions. This does not, however, close the loop because it is too hard to drive these better decisions back into our operational environment. When we make our Decision Management Systems analytic, delivering analytic decisions to our operational systems, we close the loop.

Uses of Analytics
Analysis of data improves the precision or accuracy of decisions. By evaluating the effectiveness of alternatives in the historical record and by consider the data available, the effectiveness of decisions is improved. In general there are three kinds of decisions that can be improved with analyticsrisk decisions, fraud decisions and opportunity or marketing decisions. These are all kinds of operational decisions, the kind of high volume, transactional decisions that can be automated using Decision Management Systems. Analytics have the most history in risk and fraud decision making but there is tremendous energy behind using analytics in marketing and other opportunity-centric decisions more recently.

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Risk Decisions Risk is acquired one customer, one transaction at a time: Credit risk is acquired by making bad loans to consumers, supply chain risk by selecting the wrong supplier, schedule risk by picking the wrong route. Many operational decisions can therefore be improved if the decision is made based on an accurate assessment of risk. In general there is a big gap between the value of a good risk decision and the value of a bad one. If, for instance, an accurate decision is made about credit risk then a bank stands to make some money from fees. If an inaccurate decision is made then the bank could lose significantly more money in unrecoverable debt. To assess risk in these decisions requires analytics that can predict the risk analytics that can answer the question how risky is this person or transaction. Organizations often want to know why someone or something is risky and the use of analytics in these circumstances is often regulated, limiting the kinds of analytics that can be used. Fraud Decisions Fraud decisions are closely related to risk decisions except that there is generally no upside in a fraud decisiona bad fraud decision will result in a loss but a good decision does not automatically make money, it simply makes it possible to make money from the transaction. Classic fraud decisions are those around accepting credit cards, identifying someone for security purposes, and detecting tax or insurance claims fraud. Good fraud decisions require an accurate assessment of how likely it is that this transaction, person or network is fraudulent. In general no-one really cares how this is determined as long as few fraudulent transactions are missed and few legitimate transactions are mislabeled as fraud. Opportunity Decisions Opportunity decisions are focused on how to maximize loyalty and revenue, typically when interacting with customers or prospects. These very customercentric decisions include cross-sell and up-sell decisions for example. There is generally little difference between good and bad decisions as these decisions are operating at the margins. There is generally no downside at alleven a very bad opportunity decision will not undermine the core transaction, it will simply mean no additional value can be created. Analytics can be used to predict which offers or actions will provoke a positive response, to predict how likely there is to be an opportunity to provoke a response or to estimate the potential available. These kinds of analytics must change rapidly to take advantage of competitive and market circumstances and generally involve many scenarios that must be modeled.

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Types of Analytics
To improve our risk, fraud and opportunity decisions we need to develop more analytic Decision Management Systems. Traditional analytic tools such as reporting and query tools are not embeddable in Decision Management Systems and offer only limited potential. To drive analytics into our Decision Management Systems, we must move up the analytic spectrum. Success will require going beyond Business Intelligence tools to data mining and predictive analytics. Data mining and predictive analytics approaches in particular let you take the increasing volume of data available to you and apply it to your Decision Management Systems. Figure 3: The Analytics Spectrum

The Intelligent Enterprise

Decision Management is a time tested and proven approach across multiple industries for rapid deployment of predictive analytics. Moving from Thresholds to Data Mining to Predictive Analytics is a clear path to becoming an Intelligent Enterprise. Thresholds The first step is to use analytics to improve the thresholds used in your rules. As business users develop business rules, or work with business analysts to do so, many thresholds and conditions must be specified. These may be specified by regulations but are often either based on best practices and experience or company policy. Simple analytic tools such as query and visualization tools can be used to evaluate these thresholds. The impact of a threshold can be assessed, for instance the number of existing customers or transactions that would pass a rule can be measured and this can be compared with the business expectations. Similarly rules that intended to detect or flag something can be compared with historical results to see if they actually do so. One tax authority, for instance, used this approach to validate the rules their experts wrote for detecting fraudulent tax returns. Reports

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and queries identified the tax returns that the rules identified and these were assessed to see how many were actually fraudulent. The end result of this step is the analytic confirmation of judgmental business rules. Data Mining The next step is to use mathematical techniques to find candidate business rules. Many data mining and analytic techniques generate rules or decision trees for segmentation and association. For instance data mining tools can be used to find statistically similar clusters of customers or to find products that are often sold together. While these techniques are mathematical in nature, and often require a different tool that is more focused on an analytic user, the end result is very explicable to someone familiar with business rules and with the use of decision trees to represent business rules. Because business users sometimes resist the use of analytics, being uncomfortable with having their actions determined by an algorithm, this shared representation can be very useful. For instance, the analytically derived business rules or decision tree can be loaded into a business rules management system and then edited, allowing business users to exert some control over the results. This will tend to degrade the value of the analyticsthe non-intuitive results of data mining are often the most usefulbut it might make the difference between implementation of some analytic results and none. One organization for instance used data mining techniques to identify parts that an engineer should take with them to an onsite visit because they were likely to be required. By allowing business users to selectively implement these decision trees in a business rules management system the organization overcame opposition to the approach. Some tools, including some business rules management systems, make this combination of analytic and judgmental development more explicit. Analytic techniques that support building decision trees, using mathematics to find the correct branches in the tree, are combined with human judgment while editing a decision tree. For instance the user might begin by using an algorithm to find the segmentation approach that most clearly divides profitable and unprofitable customers but then apply their own judgment or policy at the next level of the tree, dividing customers by gender say. The end result of this step is a set of new business rules that have been analytically derived from your data. Predictive Analytics The final step is to use mathematical techniques to build analytic models that predict risk, fraud or opportunity. These models typically involve expertise in analytics as well as specialized tools for developing the models. The models dont generally make

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decisions but predictions that can be used in decision-making rules. For instance a model might predict the likelihood that a particular transaction is fraudulent. Business rules would then use this result or score along with the value of the customer, location, amount etc to determine the best action to take, the right decision to make. Examples of these models include credit risk scorecards that use various factors about a consumer to score their credit risk, neural networks that automatically detect fraud by seeing how different a transaction or network is from regular patterns, and regression models used to predict the propensity of a consumer to accept a particular offer if it is made to them. Building these models is generally a specialist task performed by people known as data miners, data scientists or statisticians. They will use workbenches that allow them to pull in large amounts of data; clean, integrate and analyze this data; find predictive characteristics in this data; and develop and deploy a predictive analytic model based on these characteristics. Some automated tools aimed at less technical users exist, often taking advantage of machine learning techniques. In general predictive analytics are mixed with business rules in Decision Management Systems by making the result of the predictive analytic model, the score, available to the business rules as an attribute. This might be stored in the database along with other data, created dynamically in the database when required using an in-database analytic engine, or calculated using code or business rules. The trend is towards scoring, running the model, in real-time so that the predictive analytic result being used in the decision is as up to date as possible but many scenarios only require that the scores are available in the database as fields that the business rules management system can access.

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Becoming Adaptive
If agility is about being able to respond to known change, changes in policy or regulation for instance, being adaptive is about responding to unknown changes. This matters because decisions are difficult to manage over time as: Decisions can take time to play out. The outcome of a decision is not always immediately apparent so it may not be clear what the best decision is when you have to make it. Decisions are a moving target. Thanks to constant change in the environment, best is not a static concept but a dynamic one. You cant control many of the factors that affect a decision. However, operational and repeatable tactical decisions are repeated over and over again in your organization. This gives you the opportunity to manage them in the long run by learning what might work better in the future by analyzing the decisions you have already made. So experiment!

Why Experiment?
You experiment to continuously improve the way you make decisions. Experimentation might allow you to see how to respond to changing business conditions or it might help you make a decision better and better over time to boost profits, reduce losses, or improve retention. You constantly learn more about your customers and gather more information about their behavior. New insights and market trends come from you, your competitors and from third parties. A process for continual review and improvement of how you take a decision allows you to detect and respond to changes in the behavior of your customers without having to start a special project and helps you show an ROI for the data you collect and analyze. One of the challenges with decisions is that they take time to play out the results may not become obvious for some time. At the point you make an operation decision you cannot know what the long-term outcome of that decision will be. So, if you take a population and take a decision about how to treat them, you will only see the results if you wait for some period of timeperhaps until they are next due for a check-up or a renewal, perhaps sooner. It is important to track your results and tie that back to your decisions to know what kind of impact you are looking for. However this is not enough: by the time the results are clear it is way too late to gather any new data about what might have worked better. If you use a single decision-making approach (a single set of business rules and predictive analytic

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models) for every decision you make then you will have no data about how other actions might have resulted in better (or worse) results. This is what makes experimentation so important. By experimenting you create data about multiple decision-making approaches. These different approaches can then be compared to see what the best approach is and this best approach can then be applied to future decisions.

What Kind Of Experiments Are There

Two main kinds of experimentation are worth implementing in Decision Management SystemsA/B Testing and Champion/Challenger Testing. A/B Testing A/B or A/B/C (or A/B./X) testing compares multiple approaches where there is no particular bias to one approach or another. Each approach is different in some known ways from the others. These differences can be significant but it is more common for them to be fairly modest. It is also common for the same kind of change to be made in each approach so that they all vary along the same dimension as it were. A/B Testing is common in marketing where multiple offers or offer selection rules are compared and in pricing where multiple pricing or discounting approaches are considered. A/B Tests tend to work well when there is quick feedback on how well something works (offers are accepted, products purchased immediately) and often only run for a short period. During the test transactions are generally allocated to one of the approaches randomly with an even distribution between the approaches. Which approach was used is recorded so that results can be compared across approaches. Once the test is complete one of the approaches will be selected as the preferred approach, because it generates better results, and that will then be used for the rest of the campaign. Sometimes one approach will work best for one subset of the transactions and another approach for a different subset. In these circumstances an approach can be developed that combines the two, with additional rules to determine which subset the transaction is in. Champion/Challenger Testing Champion / Challenger testing is designed to handle a situation where you have a preferred or established approach and wish to see if there is some alternative that might be better. This is common in risk-based decisions where there is a significant

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investment in the current approach and where it may be some time before the results can be determined. You take your main Figure 1:The Champion/Challenger Process approachthe championand apply it to most of your population. You also create a number of challengers or alternatives and apply them to a small percentage of the population. Each Challenger differs from the Champion in some measurable and defined way. Perhaps it has different business rules, perhaps it uses a different risk model, perhaps it is more aggressive about retaining customers. Each Challenger will therefore deliver different results from the Champion. These results may be better or worse but only testing the approaches with real transactions, in a live environment, can really show. This approach means that most customers or transactions are still handled using your preferred or approved approach. This is important in decisions with a long time to value as it ensures some stability for the majority of transactions. However, as time passes, you are also collecting information about how these alternatives work. You can extrapolate from their effectiveness of these challengers on these subsets and determine if they work better or worse than the champion. If one works better, you can make that the new champion and then apply it to all subsequent decisions. As noted above you might find that a challenger is only better in certain subsets and so merge the challenger into the champion. To ensure ongoing improvement, you can create or promote a new champion and develop new challengers to keep repeating the process. Ensuring that you always have challengers running allows you to constantly verify your approach and continuously improve it.

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Using Business Rules to Manage Experiments

Using business rules and a business rules management system to build a Decision Service is a classic use case for business rules. Each transaction is passed to the Decision Service, a decision is made, and the results returned to the system or process that requested the decision. As far as the calling process or system is concerned the Decision Service is a black box. This enables you to encapsulate experimentation within this Decision Service. To support experimentation, in Figure 2:Decision Service Experimentation this case Champion/Challenger experiments, a Decision Service is configured to push a small percentage of the transactions through each of the Challenger approaches while pushing the majority through the Champion. Results from the different approaches can be compared and measured over time. If a Challenger does better than the Champion, it can be made the new Champion and the process of identifying and testing new Challengers repeated to continually improve the decision. Because the various approaches will be managed as separate rulesets or subdecisions, they can be mixed and matched as required by the experimental approach being taken. Some business rules management systems explicitly support this approach with configurable elements while others use standard elements like ruleflow and business rules to manage the allocation. As long as the rules necessary to log which transaction took which approach are included, it will be possible to tie outcomes back to the approach used and so measure the result of the experiment. The key advantage of this approach is that it does not require the calling processes or systems to be aware of the experimentas far as they are concerned it is just a call to a Decision Service. This allows experimentation to be added without disrupting systems and requiring lots of coding. It also allows the experimental approach and the amount of experimentation to be varied over time.

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An Overall Technology Environment

Finally, the overall technology environment for managing experimentation includes a few additional features: As noted, the production business rules environment must allow a Decision Service to have not just a single approach but several approaches to which transactions can be allocated. It must be possible to randomly assign transactions and run them through alternative business rules and analytics within the Decision Service. You need to capture the overall business results that are the consequence of the decisions in a way that allows you to know which decisions were taken using which approach when you come to analyze results. A simulation/testing environment is really valuable. Within this simulation environment, you need to be able to do some testing of how different rules and analytics might affect results in various "what-if" scenarios. Generally you want to do some off line simulation before you commit to an experiment. Business users must be able to analyze the results both of production experiments and of simulations, which means a business-friendly interface for analysis. The easier it is for business users to make changes to the deployed approaches, to edit the business rules, the tighter and more effective your iterations will be. Analytic models need to be updated regularly and this needs to be factored in to the way analytic models are developed and deployed into the experimentation environment. Support for designing appropriate experiments requires a flexible analysis platform for business users to explore their data. There is a growing array of automated analytic technology that runs A/B and Champion/Challenger testing under the covers and constantly updates predictive analytic models based on the results of these experiments. These adaptive analytic technologies are particularly powerful in marketing and other un-regulated environments and are becoming more widespread and established.

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Next Steps
Organizations have implemented decision management systems to improve fraud detection, automate and streamline underwriting, improve marketing response rates, increase customer loyalty and satisfaction measures, ensure GRC compliance, improve process efficiency and more. More use cases can be found in free our report on Decision Management Systems Platform Technologies. As organizations move forward into the era of Big Data, effective systems will become increasingly analytic. Analytic systems can no longer be kept separate from operational systems, and analytic Decision Management Systems is a well proven approach that enables you to close the loop by putting analytics to work improving day to day decisions. Increasing rates of change in business models, competitive landscape and more mean that static applications, no matter how agile, will fall behind. Building adaptive Decision Management Systems allows organizations to constantly experiment and learn what works and what does not. Adaptive systems stay relevant and continue to improve over time.

Works Cited
Taylor, J. (2012). Decision Management Systems Platform Technologies Report. Palo Alto CA: Decision Management Solutions. Taylor, J. (2012). Decision Management Systems: A Practical Guide to Using Business Rules and Predictive Analytics. New York, NY: IBM Press.

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