Evidence of Information’s Tangible Economic Value

Posted in information asset management & valuation with tags , , , , , , , , on 2014 Aug 29 by Doug Laney

Nearly every business executive I speak with acknowledges that information has value and is a “critical corporate asset.” Yet scant few measure its value as if it were one. In our recent probe into information-centric companies, we learned that while we value plenty of amorphous or intangible assets including patents, trademarks and copyrights, and even have a formal fudge-factor for indiscernible corporate value: goodwill.  However, the gatekeepers of GAAP (generally accepted accounting principles) continue to deny asset class status to data, organizations that treat it like an asset, garner more shareholder value.

Information as an Asset?

Hundreds of academicians over the past 50 years from have studied and demonstrated the role of information technology (IT) in driving business value, but what they have failed to do is separate the “I” from the “T”. As a physical asset, technology is easily given a value attribution and represented on balance sheets.  But information, not so much. The timeline of accounting and technology milestones the past century reveals that the asset classes were established by the then-nascent SEC in the late 1930s, ostensibly fifteen years before the advent of information technology. Even though information meets all the criteria of a balance sheet asset, it continues to be an asset also-ran, relegated to being talked about as an asset by business executives, treated as a resource by business minions, often managed as a business byproduct by IT departments, and roundly ignored by the finance department.

Anecdotal Evidence of Information’s Value

It’s hard today not to see the tangible, economic benefits of information all around us: Walmart uses social media trend data to entice online shoppers to purchase 10-15% more stuff; Kraft spinoff Mondelez grew revenue by $100M through improved in-store promotion configurations using detailed store, chain, product, stock and pricing data; and UPS saves over $50M, delivers 35% more packages per year and has doubled driver wages by continually collecting and analyzing over 200 data points per truck along with GPS data to reduce accidents and miles driven. Even businesses from small city zoos to mom-and-pop coffee shops to wineries are collecting, crushing and consuming data to yield palpable revenue gains or expense reductions. In addition, some businesses beyond the traditional crop of data brokers monetize their information assets directly by selling or trading them for goods or services.

Yet while as a physical asset, technology is easily given a value attribution and represented on balance sheets, information is treated as an asset also ran or byproduct of the IT department. Your company likely accounts for and manages your office furniture with greater discipline than your information assets. Why? Because accounting standards in place since the beginning of the information age over 50 years ago continue to be based on 250 year old industrial age realities.

Nicolas Carr famously and controversially observed over a decade ago, “IT doesn’t matter.” True, technology itself rarely offers a real strategic advantage. More often it is the data that’s curated, integrated and analyzed which does.

Investors are Rewarding “Infocentric” Organizations (Whether They Know it or Not)

Although we have compiled hundreds of these examples, the question we really wanted to answer at Gartner was,“Do businesses that demonstrate more savvy with information outperform others on Wall Street?” So along with my research colleague Somendra Tripathi, we identified businesses that demonstrate information centric traits such as having a chief data officer (CDO), an enterprise data governance program, or data scientists (not just BI analysts). Then we compared their market-to-book value (specifically, their ) to the S&P average  to discover that infocentric companies not only demonstrate a slight ability to generate more shareholder value per asset, but also have a 200-300% higher q value than the norm. In addition to that eye-opener, we found that information product companies (i.e. those in the business of selling data) have a 400-500% higher Tobin’s q than average.

In a similar study, researchers at the University of British Columbia and New York University have corroborated our findings and demonstrated a causal relationship. Their work reveals how mere mentions of information and data related topics in a firm’s 10-K filings presage a subsequent and significant increase in operating profits relative to the company’s industry.

Accounting for Your Information’s Value

Impressing investors is certainly a great argument for becoming more serious about collecting, managing and leveraging information as an asset. But why account for it as one? As Peter Drucker famously quipped: You can’t manage what you don’t measure.

But the answer to this specific question about quantifying information value was articulated best by a CFO of a major global financial services firm who, after reading my Forbes piece

To put a finer point on it, imagine the difference between telling someone in your organization that he’s in charge of the customer database versus telling him that he’s responsible for the company’s $500M customer information asset. To help organizations capitalize their return on their information assets we help them apply  information valuation models budget for information security, prioritize big data projects, justify analytics projects, and price information assets for sale or trade, among other reasons.

So let’s all ignore what the accountants, insurers and many courts say about information having no measurable value or not being a legitimate asset. It’s time to start behaving as if it does and is, because it does and is.

This piece originally appeared, in part, in Forbes: The Hidden Shareholder Boost From Information Assets

Follow Doug on Twitter: @doug_laney

 

The (Possible) Tax Advantages of Bartering with Information

Posted in information asset management & valuation with tags , , , , , on 2014 Aug 29 by Doug Laney

The (Possible) Tax Advantages of Bartering with Information

As you swipe your loyalty card at the grocery store, the register automatically discounts certain items in your basket as they pass by the scanner. But is it really a discount? Of course the store advertises that you will receive discounts by signing up for and using a loyalty card.  But is it really because you’re loyal? Do you get bigger discounts the more often you shop? Not likely. Perhaps the loyalty card is encouraging loyalty, but heck, you can obtain one from any major grocer. Therefore, it seems there’s something more going on here than just a loyalty-based discount.

In reality, “loyalty-based discount” is code for “free food in exchange information about you and your purchase.” More than your loyalty, grocers and other and merchants with similar programs are after your data.

The Information Economy Matures

Over three decades ago FedEx’s CEO Fred Smith proclaimed that “The information about the package is just as important as the package itself.” Since then, this realization and mindset has swept across every corner of commerce. Recently, we see companies purely in the business of accumulating and selling data with stratospheric valuation multiples. But why should they be the sole purveyors of data? The grocer “loyalty” example has been around for decades, but it’s a B2C (business to customer) model.  Many businesses leaders today are realizing that this model can be extended to B2B (business to business) scenarios as well.

Most notoriously, retailers and, yes, grocers such as Dollar General, RiteAid and Kroger have made certain data sets commercially available to partners, suppliers and others for a fee. Kroger generates an impressive $100M annually in incremental revenue this way. Indeed, businesses in nearly every sector from telecommunications to energy to manufacturing to financial services have sought Gartner’s counsel on forming internal efforts to package, productize, price and promote their own information products. And as you would expect, over the past few years, information marketplaces (e.g. Microsoft Azure, ProgrammableWeb, The Data Exchange, Datatopia, Quandl) have emerged as Ebay-like matchmakers for sellers and buyers of data.  Even Ebay itself has gotten in on the action, with a new category for “information products.”

Not Accounting for What Counts in Information Barter Transactions

But before we get overly excited about and fixated on selling data for cash, let’s get to the real fascinating part: taxation. Yes, taxation. Back to our grocer and you. Remember, you’re trading information about you and your purchase in exchange for free food, not cash. According to generally accepted accounting principles (GAAP), discounted transactions are recorded at the value of the money exchanged, not the cost of goods. Cash is king in these transactions. However, if we presume or demonstrate that the grocer is monetizing the incremental data received by virtue of a personally-identifiable loyalty card being used, then the transaction (or part of it) ostensibly becomes a barter transaction. Stay with me now…

Barter transactions are recorded by both parties based on the value of the good or service received, yet there’s no requirement that both parties perceive the same value for what they’ve received. Here’s the rub: data has no value according to the accounting profession. That’s right, despite what 80% of business executives surveyed by Gartner believe, your a company’s information assets are not assets at all–at least and quite conveniently by neither the accounting profession (e.g. FASB, IFRS, AICPA, IAS) nor government revenue services (e.g. IRS).  Even for companies like ACNielsen and S&P that long have been purveyors of data, and more recent ones like Google, Facebook and Twitter, their vast storehouses of information assets are nowhere to be found on their balance sheets.

Therefore, if you receive information in return for providing any good or service, arguably this value of the transaction for accounting and tax purposes could be recorded as zero or negligible. . Now you may not want to find yourself in a position of arguing this in front of an IRS auditor or tax court, but it’s certainly interesting to note how the everyday grocery transaction is an indicator for what could or should be in store for your data. Regardless the possible tax advantages or not, bartering with or for data unquestionably opens up entirely new avenues of commerce, even for traditional businesses. Welcome to the world of infonomics.

This piece originally appeared, in part, in Forbes:  The Hidden Tax Advantage of Monetizing Your Data

Follow me on Twitter @doug_laney

 

Tobin’s Q & A: Evidence of Information’s Real Market Value

Posted in information asset management & valuation on 2012 Aug 25 by Doug Laney

First posted in the Gartner Blog Network

Tobin’s q is a simple ratio first posited by Nobel-winning American economist James Tobin in the 1960s to understand the relationship between a company’s market value and the replacement value of its assets. Analysis shows that this quotient has been growing since financial statements were standardized following the Great Depression. Smoothing economic boom and bust cycles via linear regression, Tobin’s q has more than doubled from 0.4 in 1945 to a predicted 1.1 in any given year currently.

This means that in general markets now value companies more than the sum of their tangible assets. How can this be?  Non-reportable intangible assets of course.

We know that due to 75 year old accounting standards, certain intangibles cannot be valued and reported.  These unreportable intangibles frequently cited include human capital and intellectual capital. Yet, could these alone have doubled over seven decades? Do corporations of similar revenue have twice the number of employees they once did? No, quite the opposite as we’ve become more efficient and reliant on technology. Do humans have twice the knowledge capacity than we did back in the day?  Not only my teenager would fervently disagree with that.

Then what is it that companies have so much more of, has been accumulating for over half a decade, and that is hidden from balance sheets?

Information.

Ever since Arthur Andersen computerized a GE payroll plant in 1953, companies have become better and better at amassing information assets (leading up to this age of Big Data) and finding ways to leverage them. Yet the value of information isn’t quantified or reported in any way. Even today’s infocentric companies whose business models revolve around collecting, buying and selling data (e.g. Facebook, Google, Experian, Nielsen, etc.) have balance sheets devoid of their most valuable asset.

Furthermore, a study by intellectual capital research firm, Ocean Tomo, shows that the portion of corporate market value attributable to intangibles has grown from 17% in 1975 to a whopping 81% in 2010. Indeed, information accumulation has not only increased dramatically in businesses, but the importance of information itself has supplanted traditional assets in generating revenue, and therefore in contributing to market value as well.

So what are CEOs to do knowing that information comprises a majority of their corporate value?  First, forget what the accountants say, and listen to what the market is saying. Stop just talking about information as such an important asset and start valuing and managing it like one.

For further reading on the topic of infonomics:

To Facebook You’re Worth $80.95 (Wall Street Journal)
Infonomics-The Practice of Information Economics (Forbes)
Extracting Value from Information (Financial Times, free registration)
Introducing Infonomics (Gartner, client access)
Infonomics(Wikipedia)
Follow me on Twitter @doug_laney

Does your organization treat information as an actual enterprise asset?

Posted in information asset management & valuation on 2011 Sep 08 by Doug Laney

Most organizations are disciplined at both managing and measuring the value of (e.g. accounting for) their traditional physical and financial assets, and their workforce. But what about information itself, such as customer, supplier and employee records; transaction data, process control data, etc?

Tell us about your organization.  Respondents receive instant access to poll data.

What is an Asset Really? Surprise!

Posted in information asset management & valuation with tags , , , , on 2011 Aug 28 by Doug Laney

Even if you have given any real thought to what an asset is, most of us untrained in the accounting arts think of an asset as something of value.  While this isn’t untrue, it’s only part of the story.  Let’s look at a few definitions:

  • Webster Dictionary: A single item of ownership having exchange value or convertible into cash.
  • American Institute of CPAs (AICPA): Any economic resources (tangible/intangible) that can be owned or produce positive economic value.
  • Financial Accounting Standards Board (FASB): A probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events.
  • International Accounting Standards Board: A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

You may notice some interesting nuances of what really comprise an asset.

First is the notion that an asset must be owned. OK, this is somewhat obvious, but it explains why a company’s so called “human assets” (employees) are not found on the balance sheet. There’s this little matter of the Emancipation Proclamation.  In most civilized countries at least, people cannot be owned. In the US we are at-will employees (whether we feel like it or not some days!).  Even though many companies manage their workforce with the same discipline as a true asset, it’s more accurate and appropriate to refer to employees as resources, not assets.

The second key characteristic to note is that assets don’t actually have value per-se, it’s more that they have a probability of generating positive future economic value. This means that even the most dormant asset sitting on a shelf somewhere has the potential to contribute toward generating revenue. So arguments about unused assets being valueless are just plain flawed.

So what about information?  Information is owned and controlled by a business. Information has exchange value. Information can be used to generate future economic

Should enterprises, even accountants, consider information as an asset?

We look forward to your ideas and comments. 

Data > Information > Knowledge > Wisdom. Hmmm.

Posted in information asset management & valuation on 2011 Aug 15 by Doug Laney

Frequently we hear information management professionals, particularly consultants, talk about trying to distinguish data from information, often even throwing knowledge and wisdom into the mix. We think we know what they’re really after (other than protracted consulting projects) — it’s a framework within which bits and bytes representing things, events and/or relationships are transformed from a less-consumable format into a “higher order” more usable or valuable format.

While it may be helpful to create conceptual cubbyholes in discussing the information value chain (or supply chain), can one really distinguish “data” from “information”?  Is there actually some quantum jump in energy or a threshold a piece of data must exceed when it transforms into information? Probably not.

Certainly there is benefit in defining a continuum for acquiring, administering and applying information, within an organization–one that includes all of the ways (functions) data is captured, transformed, integrated and accessed/distributed.  However, we have yet to see such a definitive D>I>K>W framework in practice, one that is actually adding value to information management initiatives, not just being bandied about on architectural slideware.

Perhaps you have. We’d certainly like to learn of any examples if they’re out there.

Arguments Against Information as an Asset

Posted in information asset management & valuation on 2011 Aug 12 by Doug Laney

In our previous article we established that information has the characteristics accountants look for in designating something as an asset:

  • It is acquired as a result of past events or transactions
  • It is owned and controlled
  • It can have an exchange value
  • It can generate future economic benefit

Yet arguments and resulting behaviors persist that information is not and should not be classified as or treated as an actual asset.

The first argument we hear is that “information assets are not found on the balance sheet.”  Aside from the fact that this merely begs the question, it is also somewhat untrue.  There actually is precedent for information assets showing up on a small corner of the balance sheet in a special circumstance.  When one business acquires another, the estimated value of the acquired businesses’ customer list is factored into the premium valuation that gets lumped under the balance sheet fudge factor called goodwill.  A customer list is nothing but data.

Another common argument against considering information as an asset is that it isn’t consumable like other assets.  When we think about the most commonplace assets, physical and financial assets, there is a stark contrast. As physical and financial assets are consumed, they are depleted. But when information is consumed, it (or at least a copy of it) stays right where it was. But physical and financial assets are not the only class of recognized assets. A whole raft of intangible assets found on the balance sheet including copyrights, patents and even brand—none of which when consumed are depleted either.

Similarly, some argue that much information is too fleeting or amorphous to be considered an enterprise asset.  But is information really that much less tangible than other recognized intangible assets?  And although its probabilistic value may decline over time, sometimes quite rapidly, this is no different than applying a depreciation scale for any other physical or intangible asset.

One interesting argument is that information merely represents something, e.g. a transaction, a customer or an idea, but isn’t a “thing” itself. Again we might counter that patents represent ideas or processes; copyrights represent words, symbols or other media; brand represents reputation; and even financial assets themselves are an abstraction of any real consumable. Also note that “thingyness” isn’t a requisite asset characteristic.

Finally, some argue that information simply cannot be considered an actual asset because there is no way to place a value on it. We will discuss this in detail in future articles, but you have to acknowledge that if something as nebulous as a company’s brand can be quantifiably measured in economic terms, than anything can, even information.

Where do you stand on this idea?