Saturday, September 18, 2021

Taking Operational Efficiency to the Next Level: Leverage the 95-5 Rule of Automation

Through an odyssey of over two decades helping clients in various industries solve hard problems, I have gained a deep appreciation of a pattern that can be leveraged to dramatically improve the quality and efficiency of the work and, ultimately, the return on investment of businesses.

Whether it is inventory planning, or financial fraudulent transaction detection, or finding costly insurance claims, it generally holds true that 95% of the work can be resolved by automated algorithms. The remaining 5% needs to be done by domain experts using their expertise, intuition, and creativity. I call it the 95-5 rule of automation.

The 95-5 rule is not simply a division of the labor between machines and human experts flatly in that proportion. There is a structural and temporal implication in it. Algorithms are first applied to a raw problem, which involves a large number of cases and big data and is hard or inefficient to solve manually. This step produces as an output a simpler problem where the work is greatly reduced, by 95% generally. Human experts then work on this reduced problem and make their judgment calls to reach the final decision.

Take as an example our solution to a worker compensation insurance claim problem. A company receives about 200 worker injury claims daily. Our algorithm highlights 10 (5% of the total) of them as potentially costly using a machine learning model based on factors including age, cause of injury, and injury body parts. Using these 10 cases as a starting point, analysts review them carefully and take proper action. The solution has resulted in a 40% reduction in claim loss.

To recap, in the real world the 95-5 rule of automation works this way: applying algorithms to a raw problem to reduce the work by 95% and subsequently having human experts take on the reduced problem.

Here are the benefits as reported by our clients that have adopted solutions based on the 95-5 rule of automation.

  • Improved outcomes. For example, a bank sees its fraud loss reduced by 70%. Another bank finds the bad debt rate dropping by 50%.
  • Increased efficiency. In a K12 education company, content tagging is 100 times more efficient than a manual process.
  • More jobs. A group in a bank hires more analysts because the operation there drives a good return on investment.
  • Improved employees' morale. This is because they work on the reduced problem where the same amount of effort generates more fruitful outcomes. ( I did not realize this point until I saw a report produced by an independent department from a client company.)

When the rule is applied to inventory planning, our advanced optimization algorithm generates a set of recommended safety stocks for all items which serves as the foundation for planners to make further improvements.

One lesson that we have learned is that, unless it is an exceptionally simple circumstance, domain experts should not work with the raw problem directly. Unfortunately, the violation of this principle is happening every day resulting in ineffective, inefficient, and unscalable operations and a stressful workforce. The whole situation is avoidable.

The 95-5 rule of automation has worked for us remarkably. I hope you make the most of it in your organization and take operational efficiency to the next level.

No comments: