By Douglas Laney
Gartner, Inc.
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When considering how to put information to work for your organization, it's important to go beyond thinking and talking about information as an asset, to actually valuing and treating it as one. This is the basis of the new theory and emerging discipline of Infonomics which provides organizations a foundation and methods for quantifying information asset value and formal information asset management practices. Infonomics posits that information should be considered a new asset class in that it has measurable economic value and other properties that qualify it to be accounted for and administered as any other recognized type of asset—and that there are significant strategic, operational and financial reasons for doing so.
The Value of Information
Although information arguably meets accounting standards criteria for an asset, and more specifically, further litmus tests for an intangible asset, it is not found on public companies' balance sheets. Regardless of what our 75-year old accounting standards dictate, if you’re not quantifying information’s value then you’re not likely to be generating or demonstrating sufficient value from it. Nor are you reaping any of the other potential benefits from quantifying information’s value.
While involving the CFO in valuing your company's data may be premature, doing so may also assist him or her in demonstrating overall corporate wealth and health to the board and investors. Even non-economic indicators of information value, quality and performance can help IT organizations and businesses set a course for better managing and leveraging information. In fact, organizations that are intent on becoming more information-centric, as well as those that have altogether information-based business models, should make it a critical function to audit the actual and potential value of their information assets.
Why Put a Value on Information?
We generally talk about the concept of information in either purely technical or strictly contextual terms. Information is something to be created, captured, updated, stored, moved, arranged, integrated and ultimately accessed, used (or ignored) and retired. Beyond its technical manifestation, however, information means something. It has context, particularly when applied. It is a message, an event, or a unit of knowledge.
Yet information isn't actually any of those things. Rather, it is merely symbolic of them — a proxy. While the meaning of information ultimately drives business processes and decisions, it is the increasingly efficient, neat and compact way with which we can technically represent information that allows its near-unfettered flow and accumulation. Therefore, it is both information's meaning and physical representation that combine to improve business process performance, decision making, and innovation.
Organizations whose business and IT leaders recognize this cycle and the growing importance of information are better positioned to take advantage of it. Information should no longer be seen merely as an operations by-product to be managed, or even as just a business resource to be leveraged, but it should be seen as an enterprise asset to be valued. Leading organizations in nearly every industry — including retail, financial services, manufacturing, life sciences and telecommunications — recognize information's benefits, sometimes even above some traditional assets, in generating revenue.
Information is a Unique Asset
Business leaders must recognize that there are things in the business world that financial assets can't buy, physical assets can't perform, and humans can't process. In supply chain and customer relationship domains, for example, many businesses would rather forego cash from business partners in lieu of a cache of information. Businesses that do a better job of compiling, managing and making available their information assets are more-valued business partners. Not only are information-based transactions fast becoming a means to avoid the tax man, it is a way to conceal certain business activity from public disclosure and thereby the prying eyes of competitors.
Once the corner store clerk knew his customers' buying habits, family, financial situation and personal interests. Today, this familiarity must be approximated on a grander scale in a global online information-based marketplace. Information assets and analytics have become the necessary, albeit impersonal, substitute for this personal touch. Only by considering information as a true enterprise asset are organizations better positioned to manage and deploy it with the same discipline as traditional assets — leading to vast improvements in the realized value of information.
Just as with conventional assets, information is increasingly amassed as a resource to generate tangible benefits, although primarily via improved decision making and process performance. However, business leaders are often tripped-up by the common misconception that information only has value when applied — i.e., data has no value when sitting idly in a database. This simply is not so. Just as physical inventory sitting on a shelf in a warehouse has discernible value, so do idle information assets. The difference is between realized value and the accounting definition of an asset’s value—which takes into consideration its probable future economic benefit.
Organizations that treat idle information, or so-called “dark data”, as anything less than having potential economic benefit will find themselves at increased competitive disadvantage. All information has a probable future economic benefit. IT and business leaders need to keep this in mind when considering business strategies and options for acquiring, administering and applying information. This probability varies based on a number of factors, including but not limited to its completeness, accuracy, consistency, timeliness and business process relevance. And like any asset, information’s value depends upon the organization's capacity to deploy it.
The courts are split and insurers are confounded about recognizing information as a form of property. Recent legal rulings against insurers' denied claims related to data loss or destruction sometimes have confirmed electronic data as a physical property—and other times not. This has prompted insurers to offer electronic data insurance and/or specifically exclude data in property and casualty policies. In addition to a lack of accounting visibility, many businesses also are at increasing financial and legal risk of having insufficient insurance coverage for data-related misappropriation, mishaps or misconduct.
Where Are Information Assets on the Balance Sheet?
In interviews with three dozen nonfinancial business executives we conducted at industry events over the past year, nearly 80% believe that their company's information asset value is represented under Goodwill, Other Intangibles or elsewhere on the balance sheet. However, despite meeting all the criteria of an intangible asset, information surprisingly is entirely absent as an asset class on the balance sheet. Even among enterprises whose core business is the buying and selling of information (e.g., TransUnion, Experian, Dun & Bradstreet, IMS Health, A.C. Nielsen and SymphonyIRI Group), information assets are nowhere to be found on their balance sheets.
Public companies are not required to inventory, quantify or assess the value of their information assets. Yet, these assets are either their primary source of revenue generation, or increasingly and materially contribute to their top line. Even intangible assets, such as copyrights, patents and brand, are reported in financial statements. Therefore, the growing disparity between corporate book values and market values is in large part due to the undisclosed value of information assets. Case-in-point is the yawning gap between Facebook’s near $100B market valuation versus its book value of under $7 billion. As a pure information-based business, this suggests that Facebook’s off-balance sheet information assets generated by nearly a billion unassuming, unpaid information workers ostensibly are worth more than $90 billion. This figure represents the investing public’s present-value expectations of Facebook’s ability to monetize this data.
While some companies may claim that information is not possible to quantifiably value, valuation models for other similarly non-depleting balance sheet intangibles are straightforward enough to apply.
Reasons to Acknowledge and Account for Information as an Asset
Regardless of what financial reporting standards may dictate, quantifying the value of information assets offers a range of benefits to your enterprise:
Measuring the Value of Your Information
First is the maxim that "you can't manage what you don't measure." Enterprises regularly invest in data collection, management and access technologies, resources and projects with only a vague estimation of the economic benefit this information will deliver. Without mapping the probable usage of data to actual business processes, projects and technologies can hardly be justified, nor can ROI be computed.
Understanding Your True Information ROI
Similarly, organizations spend significant slices of their IT budget on information management. Only by measuring the comparative value that information delivers before and after this investment can they determine the ROI on information management initiatives. Otherwise these investments are perceived and recorded only as a sunk cost.
Securing Your Information
Consider the millions of dollars organizations spend securing information assets. These solutions should be budgeted in direct relation to the probable economic value of losing or misappropriating data, but are not. They proceed on the broad assumption that information security solutions merely cost less than the probable economic loss over their life span. How does an organization know whether it's spending too much or too little on information security without quantifying the information's value?
Influencing Your Corporate Valuation
At some point during a business' lifetime, it inevitably encounters opportunities to be acquired. The ability to claim and receive a premium valuation based on a formal quantification of information asset value can translate into found money. Conversely, a business with strong skills in monetizing information assets may find that potential acquirees with a wealth of underutilized information assets are a sweet deal.
Assessing Contractual Risks
Most legal contracts fail to specify whether parties are indemnified for the misuse, damage or loss of electronic data. Although some courts have begun to side on the notion of e-data as "tangible property," protracted litigation is no fun, and assessed damages are still a judicial art. Understanding the value of information that potentially falls under the dominion of any contract can help companies better assess a contract's value and risks, and to set damage limits.
Borrowing Against Information
Over the next decade, Gartner foresees the potential of information being used to collateralize loans. Particularly for information-centric businesses and others that have demonstrable (if not auditable) valuation models for information assets, the ability to obtain lines of credit against the value of their customer database, for example, will become a viable option. Ultimately “information banks” will emerge to handle information-related safekeeping, access, transactions and investments.
Bartering With Information
Even as early as the 1990s, officials from the Internal Revenue Service were acutely aware of the practice of bartering with information. Nearly two decades later, revenue service organizations around the world still have no answer for this gray market created by information as a currency. The simple act of swiping one's grocery store loyalty card for free food has evolved into a way of doing business among large enterprises. If information is a currency in this new "infoconomy," then it should be translatable into common economic terms. Organizations that have valid methods for quantifying their (and others') information value are in a stronger negotiating position with business partners, and better poised to innovate around information-based bartering than those without such methods.
Selling Information
Information can be directly monetizable as a viable product itself. Just as once the lumber industry discarded shavings but now profits from this byproduct (e.g., artificial logs, mulch and particle board), most enterprises generate a wealth of data that may be more valuable to others than to their own organizations. Packaging the data and testing the market leads to new revenue sources for forward-thinking business leaders. As this practice becomes more prevalent, we anticipate the emergence of a vibrant information marketplace industry for commercial data assets.
For now, information assets cannot be formally recognized according to accounting standards, but in time that may change. Regardless, we believe it is a good practice for businesses to begin internally valuing their information assets so they can manage and wield them more effectively. Supplemental balance sheets that include information asset value can be an effective tool for planning, measuring and demonstrating information management maturity. They will also give CEOs a better overall picture of corporate value; give CFOs a tool for gauging investments and performance; and give CIOs, who manage and help business units brandish information as a strategic asset, a seat at the strategy table.
Accounting treatments aside, if you're not measuring the actual benefits generated from information assets versus their potential, then you're in a poor position to recognize and close that gap. That is, you are possibly incurring greater “inventory carrying costs” for information than the economic value they’re generating. Especially in this era of Big Data, that differential manifests as an ever-ominous IT budget line item. But at the same time it represents a massive opportunity and clear impetus to aggressively identify and implement ways to monetize your information assets, both indirectly and directly.
Doug Laney is is a research vice president for Gartner, where he covers business analytics solutions and projects, performance management, and data-governance-related issues.
