McKinsey Global Institute June 2011 Big data: The next frontier for innovation, competition, and productivity The McKinsey Global Institute The McKinsey Global Institute (MGI), established in 1990, is McKinsey & Company’s business and economics research arm. MGI’s mission is to help leaders in the commercial, public, and social sectors develop a deeper understanding of the evolution of the global economy and to provide a fact base that contributes to decision making on critical management and policy issues. MGI research combines two disciplines: economics and management. Economists often have limited access to the practical problems facing senior managers, while senior managers often lack the time and incentive to look beyond their own industry to the larger issues of the global economy. By integrating these perspectives, MGI is able to gain insights into the microeconomic underpinnings of the long-term macroeconomic trends affecting business strategy and policy making. For nearly two decades, MGI has utilized this “micro-to-macro” approach in research covering more than 20 countries and 30 industry sectors. MGI’s current research agenda focuses on three broad areas: productivity, competitiveness, and growth; the evolution of global financial markets; and the economic impact of technology. Recent research has examined a program of reform to bolster growth and renewal in Europe and the United States through accelerated productivity growth; Africa’s economic potential; debt and deleveraging and the end of cheap capital; the impact of multinational companies on the US economy; technology-enabled business trends; urbanization in India and China; and the competitiveness of sectors and industrial policy. MGI is led by three McKinsey & Company directors: Richard Dobbs, James Manyika, and Charles Roxburgh. Susan Lund serves as MGI’s director of research. MGI project teams are led by a group of senior fellows and include consultants from McKinsey’s offices around the world. These teams draw on McKinsey’s global network of industry and management experts and partners. In addition, MGI works with leading economists, including Nobel laureates, who act as advisers to MGI projects. The partners of McKinsey & Company fund MGI’s research, which is not commissioned by any business, government, or other institution. Further information about MGI and copies of MGI’s published reports can be found at www.mckinsey.com/mgi. Copyright © McKinsey & Company 2011 McKinsey Global Institute May 2011 Big data: The next frontier for innovation, competition, and productivity James Manyika Michael Chui Brad Brown Jacques Bughin Richard Dobbs Charles Roxburgh Angela Hung Byers Preface The amount of data in our world has been exploding. Companies capture trillions of bytes of information about their customers, suppliers, and operations, and millions of networked sensors are being embedded in the physical world in devices such as mobile phones and automobiles, sensing, creating, and communicating data. Multimedia and individuals with smartphones and on social network sites will continue to fuel exponential growth. Big data—large pools of data that can be captured, communicated, aggregated, stored, and analyzed—is now part of every sector and function of the global economy. Like other essential factors of production such as hard assets and human capital, it is increasingly the case that much of modern economic activity, innovation, and growth simply couldn’t take place without data. The question is what this phenomenon means. Is the proliferation of data simply evidence of an increasingly intrusive world? Or can big data play a useful economic role? While most research into big data thus far has focused on the question of its volume, our study makes the case that the business and economic possibilities of big data and its wider implications are important issues that business leaders and policy makers must tackle. To inform the debate, this study examines the potential value that big data can create for organizations and sectors of the economy and seeks to illustrate and quantify that value. We also explore what leaders of organizations and policy makers need to do to capture it. James Manyika and Michael Chui led this project, working closely with Brad Brown, Jacques Bughin, and Richard Dobbs. Charles Roxburgh also made a valuable contribution. Angela Hung Byers managed the project team, which comprised Markus Allesch, Alex Ince-Cushman, Hans Henrik Knudsen, Soyoko Umeno, and JiaJing Wang. Martin N. Baily, a senior adviser to McKinsey and a senior fellow at the Brookings Institution, and Hal R. Varian, emeritus professor in the School of Information, the Haas School of Business and the Department of Economics at the University of California at Berkeley, and chief economist at Google, served as academic advisers to this work. We are also grateful for the input provided by Erik Brynjolfsson, Schussel Family Professor at the MIT Sloan School of Management and director of the MIT Center for Digital Business, and Andrew McAfee, principal research scientist at the MIT Center for Digital Business. The team also appreciates the contribution made by our academic research collaboration with the Global Information Industry Center (GIIC) at the University of California, San Diego, which aimed to reach a better understanding of data generation in health care and the public sector, as well as in the area of personal location data. We are grateful to Roger E. Bohn, professor of management and director at the GIIC, and James E. Short, the Center’s research director, the principal investigators, as well as to graduate students Coralie Bordes, Kylie Canaday, and John Petrequin. McKinsey Global Institute Big data: The next frontier for innovation, competition, and productivity We are grateful for the vital input and support of numerous MGI and McKinsey colleagues including senior expert Thomas Herbig; Simon London, McKinsey director of digital communications; MGI senior fellow Jaana Remes; and expert principals William Forrest and Roger Roberts. From McKinsey’s health care practice, we would like to thank Stefan Biesdorf, Basel Kayyali, Bob Kocher, Paul Mango, Sam Marwaha, Brian Milch, David Nuzum, Vivian Riefberg, Saum Sutaria, Steve Savas, and Steve Van Kuiken. From the public sector practice, we would like to acknowledge the input of Kalle Bengtsson, David Chinn, MGI fellow Karen Croxson, Thomas Dohrmann, Tim Kelsey, Alastair Levy, Lenny Mendonca, Sebastian Muschter, and Gary Pinshaw. From the retail practice, we are grateful to MGI Economics Research knowledge specialists Imran Ahmed, David Court, Karel Dörner, and John Livingston. From the manufacturing practice, we would like to thank André Andonian, Markus Löffler, Daniel Pacthod, Asutosh Padhi, Matt Rogers, and Gernot Strube. On the topic of personal location data, we would like to acknowledge the help we received from Kalle Greven, Marc de Jong, Rebecca Millman, Julian Mills, and Stephan Zimmermann. We would like to thank Martha Laboissiere for her help on our analysis of talent and Anoop Sinha and Siddhartha S for their help on mapping big data. The team also drew on previous MGI research, as well as other McKinsey research including global iConsumer surveys, McKinsey Quarterly Web 2.0 surveys, health care system and hospital performance benchmarking, multicountry tax benchmarking, public sector productivity, and research for the Internet Advertising Board of Europe. The team appreciates the contributions of Janet Bush, MGI senior editor, who provided editorial support; Rebeca Robboy, MGI external communications manager; Charles Barthold, external communications manager in McKinsey’s Business Technology Office; Julie Philpot, MGI editorial production manager; and graphic design specialists Therese Khoury, Marisa Carder, and Bill Carlson. This report contributes to MGI’s mission to help global leaders understand the forces transforming the global economy, improve company performance, and work for better national and international policies. As with all MGI research, we would like to emphasize that this work is independent and has not been commissioned or sponsored in any way by any business, government, or other institution. Richard Dobbs Director, McKinsey Global Institute Seoul James Manyika Director, McKinsey Global Institute San Francisco Charles Roxburgh Director, McKinsey Global Institute London Susan Lund Director of Research, McKinsey Global Institute Washington, DC June 2011 vi Big data—a growing torrent to buy a disk drive that can $600 store all of the world’s music mobile phones 5 billion in use in 2010 pieces of content shared 30 billion on Facebook every month projected growth in 40% global data generated per year vs. 5% growth in global IT spending terabytes data collected by 235 the US Library of Congress by April 2011 15 out of 17 sectors in the United States have more data stored per company than the US Library of Congress McKinsey Global Institute Big data: The next frontier for innovation, competition, and productivity vii Big data—capturing its value $300 billion potential annual value to US health care—more than double the total annual health care spending in Spain €250 billion potential annual value to Europe’s public sector administration—more than GDP of Greece $600 billion potential annual consumer surplus from using personal location data globally potential increase in 60% retailers’ operating margins possible with big data 140,000–190,000 more deep analytical talent positions, and 1.5 million