A recent article in CIO Magazine transported me back to my strategy consulting days at KPMG.
Our Dutch consulting practice based in Amsterdam used to have some amazing subject matter experts, in what used to be called Intellectual Capital Valuation. This highly regarded team developed a methodology to assign values to various forms of intellectual assets owned by a business. Among other things, these intellectual assets are usually items as your technology or design patents, your brands, your methodologies, which could then be included in the company’s balance-sheet as capital assets, and included while assessing overall value of your corporate entity.
There are of course, additional items that also take on notional values, but mostly at times of strategic events such as a merger, an acquisition or a bankruptcy situation. These may include your customer or user-base, your vendor or partner ecosystem, your market-share or share of industry-capacity, perhaps long-term buying contracts. On occasional circumstances, especially for technology companies, one might also consider
key individuals as assets.
It seems strange when you step back and think, that there is yet another category that so deeply impacts day-to-day functioning of the business, its ongoing competitiveness, and even survival. Yet this category barely gets a second glance as a corporate asset.
Consider global supply-chain processes (think WALMART), customer-analytics capabilities (think AMAZON or NETFLIX), the training-system that defines global corporate culture (think APPLE), the globally-standardized store management system (think MCDONALD’S), or the unique guest-experience design (think MARRIOTT or the RITZ-CARLTON).
Each of these items in this somewhat vague and intangible category evolved over a long period of time and required an incredibly complex interplay of insights, knowledge and experience-sharing. They were also created using a set of building blocks that ultimately point to an often sidelined entity called data-capital. According to the McKinsey Global Institute, data capital explains most of the valuation premium enjoyed today by digitized companies.
It also seems strange to me that in a world of business intelligence, big analytics and streaming sensor-data, our primary interest so far has been to focus on exploiting data output that ultimately drives strategic decisions leading to multi-billion dollar business outcomes, but not so much on protecting and valuing the unique algorithm, that intricate query, that visualization, maybe even that spreadsheet model which made them happen. Perhaps that odd patent your company filed with the Patents Office was enough.
“In the 1930s, when the newly formed Securities and Exchange Commission demanded that public companies account for their true costs and profits in regular reports, most of their assets were physical – machines, factories, buildings, land–and assessing their value was straightforward.” The world has changed significantly since. The piece goes on to say, “Think of Acxiom, Equifax, or Dun and Bradstreet, companies that only buy and sell information–nothing you can touch. These data brokers already know what their information is worth: whatever it will fetch in the free market.”
The Financial Accounting Standards Board, the nation’s accounting authority, has struggled to update its rules for an economy increasingly driven by information and intellectual property. FASB has debated the question of intangible assets twice between 2002 and 2007. Both times, complications convinced the agency to drop it from the agenda. Among the issues: how to account for time employees spent gathering data—as an expense or a capital investment?
According to Gartner, less than 5% of organizations calculate the value of their data, measure its benefits, or properly inventory their information. Without an established accounting rule for valuing it, data becomes invisible – a zero in financial documents that are supposed to portray a company’s true health.
In many cases, data does indeed hold inherent value. Companies buy and sell demographics, psychographics, records of shoppers’ purchases, health reports, online browsing histories–all kinds of data about individuals and groups. Bob Schmidt and colleague Jennifer Fisher at Wells Fargo have even applied for a patent in 2011 on a method for calculating the worth of Individual pieces of corporate data.
Technology firms, especially cloud companies like Oracle, have already started to include data capital numbers (such as number of web sessions in their cloud or number of candidate records in their HCM cloud) in their quarterly meetings with analysts. As platform competition heats up in traditional industries, expect retailers to boast about average number of data points collected per customer, usage-based auto insurers to cite aggregate data collected annually, and logistics firms to emphasize the total number of package scans captured.
And as companies such as Acxiom, FICO, Equifax or D&B will attest, while owning data is indeed valuable it also helps to know what your information assets are worth. New England Biolabs even valued its information assets to determine what kind of insurance to buy for the company’s information assets.
METHODOLOGIES TO VALUE INFORMATION ASSETS
The Wall Street Journal recently published a story about past attempts by FASB (the accounting standards board) to value information assets.
It also raised some interesting issues from a practical implementation standpoint:
– Should time employees spend gathering data be counted as an expense or capital investment?
– Does their data have a shelf-life? Should one estimate its future worth and track and report any changes in its value?.
While these are very valid points, one needs to think of information assets from two different perspectives – (1) The Accounting-View & (2) The Business Valuation.
With the Accounting-view one expects to take a conservative approach to arrive at a value that takes a more tangible perspective. On the other hand, the Business-value approach must use Accounting-value as merely a starting point, and then layer-on additional indicators of value, derived from market-sizing opportunities and the “visible optionality” (more later).
SEPARATING INFORMATION ASSET FROM AN OPERATIONAL DATABASE
What qualifies as an information asset?. Do powerpoint presentations from business meetings, training-videos or chemical safety data sheets constitute proprietary information. The answer is “it depends”. Context must play an important role in determing value for an information asset.
For a Goldman Sachs making a merger or acquisition pitch, a power-point may be the repository for a lot of proprietary analytic information that could impact billions of dollars of potential capital raised or lost.
For DuPont or Monsanto making highly sophisticated crop-chemicals, the safety data sheets may be prime sales tools to its end-audience (upside opportunity), and possibly protection from future class-action lawsuits as well (downside risk).
For McDonalds, the training video and the store-manual is the lifeblood of their franchising operation. Its the one key asset standing between sustaining a successful retail fast-food brand with a global growth-scale, and one that remains an undifferentiated neighborhood “burger-and-fries” place.
The new perspective on information assets differs from practices of the past. It used to be that technology and business analysts gave CEOs historical data they could use to spot trends. This barely qualifies as table stakes in today’s business reality.
The connected information-rich world of business and markets now demand that analytic systems unearth a range of viable business outcomes to guide guide strategic-decisions that define future directions of the company. And shed light on levers that minimize the risks inherent in those decisions. Data has finally moved from the engine-room to the CEOs office.
To reiterate therefore, the business-value approach must use accounting-value merely as a starting point. Next it must layer-on additional indicators of value. To do so, it must look at its most visible markets and derive an added value from sizing opportunities in this vicinity. Next it must look at market-opportunities that lie beyond its short-term time-horizon, but lies within its strategic scope over a reasonably longer time horizon. This third-layer is most commonly called “visible optionality”.
EXPLOITING BY-PRODUCTS OF INFORMATION ASSETS (“The Optionality Value”)
Much as the industrial lore goes. Several well-known and highly regarded brands began life in the marketplace not as an industrially manufactured product, but as an accidental reuse opportunities for a by-product from that production process.
The analogy is quite apt for the information space as well. A highly valued information or insight is often an accidental or exploratory by-product of interrogating data assets, and hence, something whose immediate value may often be invisible to the enterprise.
Pharmaceutical companies, by far the biggest advocates of information assets as intellectual property, have turned this into a science. The high costs and long timelines to develop new drugs and bring them to market, the limited time-period (17 years) allowed by FDA to recoup and profit from their investments (protected from any direct competition).
Big-Pharma has begun to realize the futility of spending too much on fundamental biotech research to create new drug candidates. Instead by interrogating their molecular drug data, their insights gleaned from past clinical trials and the cumulative proprietary knowledge of the between human-physiology and their drugs at the molecular-pathway level, big-pharma has been extremely effective in identifying new use-cases (ie., new diseases areas) where the existing drug could be made equally or more effective. That effectively opens the doors to new patents, new disease markets and additional longevity for their information assets where they play the field unimpeded by direct competition.
THE DARK SIDE
There are however a dark side to making information assets visible to the world. Unless protected by legal measures, declaring specific assets may tip off the competition making an enterprise vulnerable and leave its strategic profit-pool without a protective moat. It also alerts undesirable elements such as industrial hackers, and sovereign industrial espionage teams. All too common scenarios these days in a connected world touting
an ambition to move to an open industrial-internet.
It also makes the balance sheet a lot heavier than it needs to be. CEO careers/bonuses are created and lost on how well their corporate business strategy was formulated and executed, and is measured almost entirely by financial outcomes (ROI / ROA / Turnover / Operating Leverage / Debt Ratios). In this scenario, adding new assets to the books only makes one terribly nervous CFO. It also creates the need for additional methods & processes to select, evaluate, measure and value information assets on a routine basis. It also demands those processes hold up to scrutiny of accounting and financial reporting standards.
It also poses additional questions. Can the information asset stand up as collateral for raising debt? How much does it impact the overall enterprise valuation for Wall Street?
Valuing information as a strategic asset provides immense advantage for an enterprise whose primary business opportunity lies in exploiting data, analytics and insights to develop products/services that build its competitive advantage.
There are however, several interim challenges to doing this in a consistent “template-d” manner. Lack of clear methodologies is an immediate one. So is the bigger challenge of breaking down organizational silos to allow creation of cross-functional data-sets that make the “Optionality” visible.
Additional areas to work on also include training Marketing, PR and Analyst Relations teams to communicate this new enterprise value to the financial community (Wall Street investors & financiers), while avoiding tipping their hand to competition. Its a fine-line to walk on, but its benefits may be worth the effort