Why Accurate Business Function Classification is Important
Consider the following problem: you are a local government with infrastructure responsibility for a number of business parks. A developer has submitted plans to enlarge a park, purchasing an existing brownfield site that is adjacent to one of the existing parks. So far, so good. However, for the new park access, the developer plans to utilise the existing road network. The existing park residents want to be sure that the type of business is complementary. The existing park is mainly made up of science-based organisations, and as such the science park management has lobbied the local authority to ensure it meets their demands in exchange for access rights.
What do you think is the best way to describe complementary businesses? Well, a legal document outlining the industry classifications that would sit within a science-based category; and a universally understood codification that identifies a business function that cannot be manipulated.
Does one exist? Thankfully yes (and not just one, depending on the country where the business park and planning authority is located). More to come on this in the Little Bit of History section.
The government isn’t the only type of organisation that is in need of adequate understanding around business function. On a commercial level, most businesses utilise classifications in some way.
|GOVERNMENT||GOVERNMENT & COMMERCIAL|
|Disaster prevention risk prediction, identifying areas of risk, e.g. chemical plants||Cross market analysis needs an international standard|
|Disaster recovery for natural disaster aid, e.g. identifying and understanding impacted||Ris identification and management|
|Tax and licensing, e.g. which businesses are exempt or need to comply?||Logistics and planning for infrastructure projects|
|Identifying non-compliance, e.g. businesses that should be registered to trade||Supplier risk, where a supplier operates across business functions and an area is hit by poor trade conditions that could impact operations|
|Government statistics around the business universe, e.g. Department for Business and Industrial Strategy||Sales territory planning by business verticals|
|Marketing portfolio segmentation and market sizing|
If we break this down more specifically by business need and type of industry, the application may be slightly different, but there is still a demand for classification.
|BUSINESS NEED||INDUSTRY EXAMPLE||IMPACT OF CLASSIFICATION|
|Market/customer segmentation||Packaging, hospitality, retail||Classification assists with business development and territory planning and/of/expansion, and in real estate development.|
|Financial risk categories||Manufactureing, industrial services||Natural and other disasters can have a significant impact on the creditworthiness and viability of businesses.|
|Classification of customers||Insurance||Accurate classification of businesses allow for more exact insurance coverage and premium assessment.|
|Compliance||Financial services||Assists in the identification of businesses that must be registered or regulated at local/state/federal level.|
|Prospecting||Paper supplies/packaging||Prevents missed sales opportunities due to poor SIC classification.|
Let’s take a look at a commercial issue. One of the businesses most reliant on business function is the insurance sector. For underwriting, a very deep level of data is needed and Standard Industry Classification (SIC) just doesn’t cut the mustard. For example, if an insurer is selling liability cover, the underwriter needs to know whether a carpenter works in shipbuilding or is a kitchen fitter, as the risks are rather different.
For commercial insurance the information collected is usually from the insured, i.e. it is self-reported, or sometimes reported via a broker. But, the loss adjuster needs to understand whether the self-reported description is accurate. So, how do they check? Finally, the insurer also needs to be able to exclude businesses based on their function.
Dun & Bradstreet also works with less obvious examples, such as satellite navigation providers. It is easy to see where the likes of Google and Bing Maps get their content if you think of them as large online directories first. In this case, company address data is there to be utilised, but even then the business function is needed to highlight points of interest, such as the closest Indian restaurant.
The History of Industry Classification
The SIC is a system for classifying industries by a four to eight digit code. Established in the United States in 1937, it is still used by government agencies to classify industry areas. The SIC system is also used by registries in other countries, e.g. by the United Kingdom’s Companies House (1).
How a Business Determines Its Registry Data
When a business registers at a registry, they are asked to provide an Industry Classification Code. This is the ‘as registered’ SIC, and the important point to note here is that it is self-assigned, using a pre-defined list of categories and their resultant codes. With the fast pace of change, particularly in the technology sector, you can start to understand some of the complexities in maintenance and application.
- While a good starting point, the categories that exist are often not terribly useful to really understand your customer base, business risk assessments with partners, or the many other business needs we discussed earlier. For example, a common code 7299 is ‘Miscellaneous personal services not elsewhere classified,’ which doesn’t reflect the business operation at all.
How Non-Registry Data is Created for Businesses
For markets where registry data isn’t readily available, a business classification has to be sourced. In these cases, Dun & Bradstreet will review a business at record creation, and the business will then be cross-referenced with other trusted sources, such as commercial telephone directories, to best determine its business sector.
Data modelling techniques are also used to refine this process, such as inferring from the name what the business may do, e.g. Swan Chinese Restaurant, to apply the relevant code. Prior to the application of artificial intelligence (AI), keywords from the business name and other sources have already been compiled and data already clustered using a multitude of sources to assume quality through plurality, and marketed by Dun & Bradstreet as SIC 8.
This is a proprietary process and Dun & Bradstreet has global coverage. However, not every record can be accurately classified using this system, as there is a reliance on the underlying data. To better understand SIC 8, the Swan Chinese Restaurant is a good example to demonstrate the need for more granularity, as the differentiation between ‘restaurant’ and ‘take away’ is somewhat blurred in the mainstream codification.
Global Business Needs for Unified Categorization
Waters become muddied further when companies wish to expand globally, and the need arises to categorise businesses in a number of markets across a variety of classification systems since SIC is NOT the global standard. The best known in addition to SIC are:
- NACE REV 2 (2006), which is a revision of ISIC Rev 1 which was developed in 1961 (2)
- NAICS North America Industry Classification System developed in 1997 (overtaking the use of the SIC in the US)
Furthermore, there isn’t a one–to-one mapping from one system to another, which can result in a loss of accuracy and granularity, as well as difficulty in the ability to analyse and utilise data effectively.
When applying SICs, Dun & Bradstreet ranks the SIC in order of revenue generation against the company. For businesses engaged in more than one activity, industry codes are assigned for those functions that contribute, in general, to at least 10% of the company’s revenue.
Things get a little more intricate where a company has subsidiaries. In this case, industry codes are assigned based on a company’s own revenue generating activities as well as those performed by its direct and indirect subsidiaries. But, subsidiaries are assigned their SIC codes based solely on their own activities, unless they, in turn, have subsidiaries. Branch locations are coded based on the activity performed solely at the branch location.
To put this into a business context, consider a coffee shop that may also have another business operating at the same location, such as an ice cream shop; both affiliated with separate but well-known brands. If financials are available, then the SIC is assigned in order of the highest revenue producing activity of that business. However, when financials are absent, the assignment is done by inference.
This detailed application allows customers to understand the primary business focus. But where there are multiple SICs, the trick is to find the appropriate one for the user needs and this may not be the one that drives the most revenue as per the above explanation. This is where data planners come in.
Standard Industrial Classification Statistics
Dun & Bradstreet provide SIC, NAICS and NACE throughout the product portfolio. Looking in a little more detail at the US view, the foundation is 1987 US SIC, which has 1,005 code values. To improve SIC classification, Dun & Bradstreet carried out independent research and added a proprietary extension to the 1987 SIC. This then creates a new industry code schema which has 18,785 code values, the SIC 8, vastly improving the granularity.
e.g. SIC: 5812 = eating place SIC 8: 58120108 = Italian restaurant
- This standard allows customers to understand industry segmentation in one consistent code structure.
- NAICS and ISIC are not as detailed (NAICS has only 1,058 code values), as can be seen by the examples below: NB N.E.C = Not elsewhere classified.
|ISIC3-1||ISIC Rev3-1 Description|
|0111||Growing of cereals and other crops not elsewhere classified|
|0111||Growing of cereals and other crops not elsewhere classified|
|ISIC4||ISIC Rev4 Description|
|0111||Growing of cereals (except rice), leguminous crops and oil seeds|
|0111||Growing of cereals (except rice), leguminous crops and oil seeds|
|NAICS||NAICS Description||SICB||SIC Description|
|011130||Dry Pea and Bean Farming||01190100||Pea and bean farms (legumes)|
|011130||Dry Pea and Bean Farming||01190101||Bean (dry field and seed) farm|
|011130||Dry Pea and Bean Farming||01190102||Cowpea farm|
|011130||Dry Pea and Bean Farming||01190103||Lentil farm|
|011130||Dry Pea and Bean Farming||01190104||Mustard seed farm|
|011130||Dry Pea and Bean Farming||01190105||Pea (dry field and seed) farm|
When you look at a large market such as the US, there are approximately 22.4 million active businesses, and Dun & Bradstreet has at least 1 SIC assigned to 93% of them. Whilst the accuracy of the SIC coverage is admirable, often there is only 1 SIC assigned to a business, and in some instances, it is challenging to assign a SIC with a strong level of granularity due to the fast pace of business evolution and the constraints of the classification standard.
The diagram below is an example of how rather generic classifications are applied when a business is registered and how the application of AI can dramatically improve the outcome.
When Standard Industrial Classification Modelling is Used
Where a code cannot be assigned locally, Dun & Bradstreet applies an industry code model to assign one. The industry code that is inferred uses company names and business trade styles to determine what a company’s line of business is, so even before AI, data science has been utilised to bolster the foundation the classification is built on.
These industry code models (as per the process diagram below) are used in a number of markets, including Australia, Canada, India, Israel, Ireland, Italy, Korea, Mexico, New Zealand, the United Kingdom, and the United States.
The ability to expand SIC coverage, improve its level of accuracy, and in many cases, allow for increased granularity for businesses often involved in a variety of industry verticals has allowed Dun & Bradstreet to better assist customers in the proper segmentation of their portfolio for risk management, prospecting efforts, and a general drive for new and incremental revenue.
Even though this development improves business classification, it is semi-automated and keywords without context can in some cases introduce inaccuracy, for example, a business consultancy called the ‘Fish Practice’ was incorrectly assigned ‘47230 - Retail sale of fish, crustaceans and molluscs in specialised stores,’ as ‘Fish’ was heavily populated throughout web content -- not a great improvement.
Applying AI to Improve Industry Classification Assignment and Precision
Although the modelling of SIC generated improvements, Dun & Bradstreet was not content with the anomalies. So, with customer consultation, a deep review of business needs, and a desire to utilise cutting edge technology to open the aperture around business classification, a decision was made to run a pilot to see whether AI could, in fact, improve SIC assignment and precision.
The pilot approach allowed for the use of data-driven techniques to provide a confidence score around SIC coverage as well as determined where best to focus efforts for continuous improvement, closing any gaps in coverage.
The objective was to:
- Improve coverage – increase SIC coverage
- Improve accuracy - increase the level of granularity of assigned SICs and to minimise unclassified or miscellaneous business services classification
- Improve depth – increase the depth of SICs assigned to a business from one or two SICs up to five
Machine learning and natural language programming seek to improve search accuracy by understanding the searcher intent and the contextual meaning of terms as they appear in the searchable dataspace, whether on the web or within a closed system, to generate more relevant results. These systems consider various points, including the context of search, location, intent, variation of words, synonyms, generalised and specialised queries, concept matching, and natural language queries to provide relevant search results. (3)
The context could be understood as everything that surrounds a word, i.e. what gives it meaning. Context is the key component in the process.
Dun & Bradstreet ran a proof of concept using machine learning ‘Neural Language Modelling’ using just basic Company House ID information, SIC UK2007 descriptions, and the web.
The technology is underpinned by a new technique known as deep learning. Deep learning uses complex mathematical structures called neural networks to represent language and concepts. Whilst previous generations of Natural Language Processing (NLP) technology suffered because they viewed documents as jumbles of keywords, rather than as whole sentences, deep learning truly understands context and nuance.
Learning the jargon of different industries is a critical step towards developing deep knowledge about industrial categories. By reading large quantities of text, the AI system recognises how words change their meaning in different contexts. For instance ‘CNC’ means ‘Computer Numerical Control’ in the context of engineering, but ‘Civil Nuclear Constabulary’ in the context of policing.
The AI system reads and learns autonomously, gaining knowledge from public domain pages (for instance, Wikipedia, company, social media, or government websites). When it identifies gaps in its knowledge in specific subjects, it actively seeks to learn more about those subjects.
Thus primed and armed with the official definition of the UK SIC Taxonomy (published by the Office for National Statistics), the system can make informed decisions about the industrial category for each company. Since the UK SIC Taxonomy runs to over one thousand pages, this problem is very well suited to an AI reading agent, rather than a human operator.
The many pieces of information that Dun & Bradstreet has on each company, both proprietary and open source, can be read and digested by the AI system. By combining all of the information, a well-rounded, trackable decision can be made on each company in milliseconds. In contrast, a human analyst, operating under typical time constraints, relies on a small number of data points to make their decision.
After all of the evidence has been weighed, the system produces a confidence score which reflects the confidence of each decision. Critically, the system ‘knows when it doesn’t know.’ This is very important, since the human operators can now direct their energy to the most challenging cases, better suited to the human ability to understand complexity and nuance.
Input Data for The Proof of Concept
The input data sources were:
- 3.5 million records from the United Kingdom’s Companies House.
- 2 billion+ websites (in index form)
The system, returned a total of 28,142,665 classifications (at least 5 for each organisation), together with a taxonomy score. The higher the taxonomy score, the more likely the SIC is correct.
A process of in-depth quality assurance followed each iteration and provided feedback to fine-tune the model and get it ready for production.
There were four iterations on average five weeks apart, increasing in reliability and accuracy
Scale of AI for Global SIC Codes Project
A web page contains 440 words on average, and humans beings read the text at the rate of circa 200 words per minute (4). It would, therefore, take a single person 4,560 working days to read one million web pages, or twenty years and four working months. The AI systems, however, read one million websites in around 8 minutes; the whole website, not just the homepage.
In data terms, over 350TB of data was modelled for over 5.6 million UK businesses. Dun & Bradstreet began with foundational data and ‘explicit’ datasets, such as UK 2007 SIC codes already applied to the data, along with the broad line of business description, as per the examples on the right.
The Human in the Loop
Aligned with this is a continuous improvement programme and a quality assurance tool (QA) so that the process is always learning and the inputs help ‘teach’ the machine with ‘human in the loop’ processes.
So, for each record, the SIC codes provided can be reviewed and validated using the ‘about us’ section of the company website or other sources of content utilised for assignment.
For each record the QA tool can:
- Validate the SIC, if it is correct
- Remove the SIC, if it is incorrect
- Add additional SICs
- Indicate whether a URL is incorrect or inactive
- Add in the correct URL where applicable
So far, the process has delivered 6.7 million UK SICs, either as newly assigned or verified as below, and the programme is being extended to the US database.
When compared against the objectives, it looks like this:
- Improved coverage = 4.3 million additional SIC codes
- Improved accuracy = 1.2 million verifications
- Improved depth = 1.5 m with advancement in precision
This is clearly an improvement. Consider looking at the results through the lens the business development scenario mentioned previously. Here is the data for the business park in detail after the application of the AI process:
- 40% of primary SICs were changed, providing a much clearer classification
- 6% were validated, providing a much clearer view in terms of those complementary businesses
Next Steps for Global SIC Improvements
As the model evolves the programme has included more ‘implicit’ datasets, which using machine learning has enabled identification of industrial activity through implied insights such as relationships. Examples of these types of ‘implicit’ datasets are below.
Data sources to be used in future production runs include:
- transactional data such as payment history (e.g. understanding approximately 4 million payment interactions on over 1 million businesses)
- what other companies a company does business with and can provide insights into what the company in question does.
Import & Export
Understanding if a business imports or exports, along with what a company is importing or exporting through commodity codes, can also help to identify what the company in question does.
Data from digital social sources that maps business foot traffic across particular categories can provide a rich source of text for AI ‘learning.’
Open data provides many opportunities to identify business activity using a growing number of resources.
Adding data sets has improved accuracy and precisions as can be seen using the examples below:
Summary of Industrial Classification Systems and Code Study
Data science has shown that it can help improve SICs and ultimately the data Dun & Bradstreet provides to customers. This is just a start though, as big data processing and more open data become accessible, further improvements will be seen. The process will ultimately expand the view of what a business does for a far more targeted sales and marketing approach and portfolio risk segmentation.
The use of AI will only increase, as the technology improves, and analysts struggle to make sense of the multitude of data sources that AI can process easily to make a well-rounded decision.
- “Standard Industrial Classification,” Wikipedia.
- “NACE REV 2,” eurostat.
- Ziefle, M. “Effects of Display Resolution on Visual Performance,” ResearchGate.