Big data blues: The dangers of data mining

Big data might be big business, but overzealous data mining can seriously destroy your brand. Will new ethical codes be enough to allay consumers' fears?

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More than simply bits and bytes, big data is now a multibillion-dollar business opportunity. Savvy organizations, from retailers to manufacturers, are fast discovering the power of turning consumers' ZIP codes and buying histories into bottom-line-enhancing insights.

In fact, the McKinsey Global Institute, the research arm of McKinsey & Co., estimates that big data can increase profits in the retail sector by a staggering 60%. And a recent Boston Consulting Group study reveals that personal data can help companies achieve greater business efficiencies and customize new products.

But while harnessing the power of data analytics is clearly a competitive advantage, overzealous data mining can easily backfire. As companies become experts at slicing and dicing data to reveal details as personal as mortgage defaults and heart attack risks, the threat of egregious privacy violations grows.

Just ask Kord Davis. A digital strategist and author of Ethics of Big Data: Balancing Risk and Innovation, Davis says, "The values that you infuse into your data-handling practices can have some very real-world consequences."

Take Nordstrom, for example. The upscale retailer used sensors from analytics vendor Euclid to cull shopping information from customers' smartphones each time they connected to a store's Wi-Fi service -- a move that drew widespread criticism from privacy advocates. (Nordstrom is no longer using the analytics service.)

Hip clothing retailer Urban Outfitters is facing a class-action lawsuit for allegedly violating consumer protection laws by telling shoppers who pay by credit card that they had to provide their ZIP codes -- which is not true -- and then using that information to obtain the shoppers' addresses. Facebook is often at the center of a data privacy controversy, whether it's defending its own enigmatic privacy policies or responding to reports that it gave private user data to the National Security Agency (NSA). And the story of how retail behemoth Target was able to deduce that a teenage shopper was pregnant before her father even knew is the stuff of marketing legend.

Online finger-wagging, lawsuits, disgruntled customers -- they're the unfortunate byproducts of what many people perceive to be big data abuses. According to a September 2013 study from data privacy management company Truste, 1 of 3 Internet users say they have stopped using a company's website or have stopped doing business with a company altogether because of privacy concerns.

Honesty really is the best policy

But IT professionals are discovering that balancing the power of sophisticated algorithms with consumer rights is about more than avoiding bad publicity or lost sales. These days, it pays to be honest -- literally. "Organizations that are transparent about their use of data will be able to use that as a competitive advantage," predicts Davis. "People are starting to become very interested in what's going on out there with their data, so organizations that have practices in place to share that information ethically are going to be in a much better position to be trusted."

Yet many CIOs and data scientists are struggling with the question of how to derive real value and actionable insights from confidential data while still respecting consumers' rights and even earning their trust. As the store of data grows, and techniques for manipulating data multiply, some IT professionals are taking matters into their own hands with innovative approaches to preventing data abuse.

Retention Science is a perfect example. The Santa Monica, Calif.-based data analytics firm uses predictive algorithms and data such as aggregated household income, purchasing histories and credit scores to help companies predict a customer's purchase probability and build retention-marketing campaigns. In addition to the data supplied by a client, Retention Science also relies on the data it licenses from third-party providers to target the right consumers at the right time.

To create targeted campaigns while still respecting consumer privacy, Retention Science has established hard-and-fast rules governing its use of consumer data. For one, Retention Science refuses to share data across clients. For example, if Gap Inc. were a client, and had supplied Retention Science with consumer data, that information would never be shared -- even anonymously -- with other retail clients.

In another effort to preserve consumer privacy despite handling terabytes of confidential data, Retention Science insists that all of its data scientists, many of whom are professors and researchers, sign confidentiality agreements. "They are not allowed to share or use data anywhere else or for their own publications," says Retention Science CEO Jerry Jao.

In addition to holding its own employees accountable, Retention Science also "works only with businesses that are fully committed to getting their consumers' consent in advance to use their data," says Jao. "We don't want to include information from individuals if they didn't grant access in the first place."

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