There are many that factors that keep a chief information officer – despite their job title – focused on technology rather than information.
First is the simple fact that, as head of IT, it is their ultimate responsibility to make sure the systems that allow their organisation to operate are up to date, and up and running. But another, so far intractable, reason is the fact that organisations do not know how to value their information assets.
This is not surprising. Information is an abstract resource that does not behave like ordinary assets. Its value depends on context – what is vital information for one organisation might be useless trivia for another. And thanks to modern technology, it can be reproduced effortlessly, confounding conventional inventory accounting principles.
This makes it almost impossible to peg IT investments on their impact on the quantity, quality, timeliness or accessibility of information available to the organisation. Instead, when organisations calculate the return on investment of a given technology investment, they either focus on cost- reductions compared with pre-existing technologies or they attempt to establish some operational output such as productivity.
This has been the case since the dawn of IT in the 1940s, and no easy method of valuing information assets has emerged yet. But current trends in enterprise IT arguably make this a more pressing issue than ever before.
Technology investment decisions are being taken out of the hands of the IT department. Cloud computing, most importantly software as a service, means that business units do not need to wait for the IT department and its project finance mechanisms to deploy applications –they can choose what they want and buy it with a credit card.
Meanwhile, innovation in mobile devices is being driven by the consumer market, meaning that ceding device selection to the user – also known as ‘bring your own device’ – is for many organisations an inescapable compromise.
This has some benefits for the IT department and its financial affairs: for one thing, it should relieve some pressure on the IT budget.
But the IT department is still left with responsibility for the organisation’s information assets, or at least it should be. This means that it must find ways to justify investments in information – such as data quality, master data management, integration, even security and storage – that are not tied to the business case of a specific technology deployment.
That, it stands to reason, demands the ability to recognise the value of information assets. However, for all the talk of treating data as an asset, there is very little guidance on offer as to how an organisation might actually do that.
One man pursuing an approach to IT management that recognises the value of information is Gartner analyst Doug Laney. He calls this ‘information economics’, or infonomics.
For Laney, the issue of the economic value of information came into sharp focus after the 9/11 terrorist attacks.
“As an analyst, I started receiving calls from clients lamenting not only their tragic loss of life but also their loss of data,” he recalls. “Companies had submitted claims to their insurers for the value of the data that they lost, and the insurers said: we’re happy to reimburse you for the value of the hardware that has been lost, but as far as we’re concerned the data has no discernible value.”
This seemed to be backward – for the businesses themselves, the hardware was simply the means to an end; it was the data that really mattered to them. “So I started to enquire into why insurers don’t consider information an asset.”
Laney found that standard accounting practices in the US and internationally do not provide for the capitalisation of information – i.e. they do not offer a mechanism through which information can be added to the balance sheet as an asset. Even worse, he says, in the wake of 9/11, the US Financial Accounting Standards Board specifically asserted that information could not be reported as an intangible asset (an abstract resource, like a brand or intellectual property, that can be added to the balance sheet).
Similarly, the US insurance industry specifically excluded electronic data from general commercial liability after 9/11. A number of companies have gone to court over reimbursement for data lost in a catastrophe, but the legal rulings have been inconsistent, says Laney. Insurers can always argue that, if a business does not treat information as an asset, then why should they?
The failure of the accounting and insurance industries to treat information as an asset is at odds with the reality of modern business, Laney argues. “Organisations are wielding information like an asset but the accounting profession and the insurance industry have doubled down on antiquity,” he says.
One method that Laney has used to demonstrate the economic value of information and its effective exploitation has been to compare the value of listed companies’ assets and their market capitalisation.
To do this, he used an economic measure called Tobin’s Quotient, devised by Nobel prize-winning economist James Tobin in the late 1960s. Tobin’s Q is the ratio between the replacement cost of a given company’s reported assets and its market value. If the ratio is higher than one, it suggests either that the company in question is better than average at exploiting its assets or that it has assets that are not being identified on the balance sheet (the current average Tobin’s Q is around one, up from about 0.4 in the 1940s).
Laney identified companies that he assessed to be ‘information-centric’, based on the number of information-related roles they recruit for, such as data governance manager or data scientist. He found that companies identified as ‘information-centric’ had an average Tobin’s Q of 2.4 – more than twice the overall average.
“The finding suggests that if you want to potentially double your market value, become more information-centric,” says Laney. “I think that is a message that will resonate with the highest level of executives and boards of companies.”
Laney acknowledges that it is hard to tell whether these ‘information-centric’ companies simply have more information assets than are being reported, or they are better at exploiting the information assets they do have, or both. But the point still stands – investing in information management practices appears to create economic value.
How to value information assets
Laney’s experiment lends weight to the argument that information assets have real economic value that is not currently recognised by standard accounting principles. But how can an individual organisation go about identifying the value of its own information assets?
There are a few different approaches, Laney says, that each serve different objectives. If the purpose is to evaluate the true value of a company based on its information assets, in advance of a sale or merger, for example, then standard asset valuations can be applied – to a degree.
A common valuation technique among accountants is to assess the market value of an asset – i.e. if the company did not have the asset in question, how much would it have to pay to get it? Of course, this only works for classes of information asset for which there is a defined market, such as name and address data, marketing preference data and certain kinds of competitive intelligence. But there are many more forms of information, such as the history of interactions with a given customer, that has clear value but no market.
Another technique for valuing an information asset is the income value: how much money does the company make due to having the information? A useful way to think about this is to consider business processes, which should have some measurable output, and figure out how they are enhanced by the availability of information.
This may require some experimentation. Laney says a company could take a business process within their organisation – a sales process, for example – and give the information under scrutiny to just some of the people conducting that process. “If we give some of our sales people access to some competitor pricing data, for example, and compare that to those who don’t have access to that data, it gives a very hard and fast number to the income value of that data.”
Laney concedes that few businesses are inclined to experiment with their business operations in this way. “I don’t think many organisations have the stomach to run experiments, and I think that’s a shame,” he says. “In particular, I don’t think IT folks typically have the mentality to run experiments.”
Obviously, any measure of the contribution of information must be balanced against its cost. “You have to look at what you spend on administering information, integrating it, cleansing it, tagging it, managing it, and deploying that information so it can be applied to business processes,” explains Laney.
“Once you figure out the contribution to income for all the business processes for which it’s relevant, then subtract the cost to acquire, administer and apply it, you’ve got some empirical figures that can tell you the value of information.”
Infonomics in action
Laney says that figuring out how best to apply these techniques, and for which circumstances, is still a work in progress. “We’re still at the early stages of rolling this out,” he says.
Still, it is a field of growing interest to his clients, he says. “I get five to ten calls every week from people asking how they can quantify the value of data.”
One client is a “major global financial institution on Wall Street” whose chief financial officer wants to create a supplemental balance sheet recording the value of its information. “He told me, ‘We have so much data, and no-one will take ownership of it,’” Laney says. “He hopes that by tagging the data with a dollar value, people will be clamouring to be the guy that owns that data. And he thinks that when people take ownership of the data, it will improve in quality, availability, etc.”
Mergers and acquisitions are also a common use case for infonomics. Other clients want to improve their information management practices by identifying the information with the highest value, while many are looking for an economic framework to justify IT investments.
“Cost justifying IT investments is going to be the low-hanging fruit [for infonomics],” says Laney. “For example, a lot of people ask us how they can justify their business intelligence projects. I tell them that the best way is to look at the information that comes out of the BI systems, how it is being consumed by business processes, and then gauge the lift to those processes.”
He adds, though, that thinking about the value of information could also help businesses think about what information they do not possess but which could be useful. “When companies are involved in big data initiatives, there are opportunities to acquire and integrate from outside sources, like commercial data sources, data from partners, or even social media data,” he explains. “So before they go about just accumulating all that data, they should really assess its economic potential.”
Thinking about information through a lens of economic value has led Laney to envisage some interesting future directions for the ‘information economy’. One idea is that of ‘information banks’, which do for a business’s information assets what conventional banks currently do for their financial assets. “What banks do is store your financial assets, allow you to access them, and enhance them though interest,” he explains. “And then they loan them out for other people to use.
“I see the day coming where that kind of institution arises to replace much of what an IT or information management operation does today,” he explains.
“We are already seeing hosting providers offering storage services for data,” he says. “I think that they will evolve to differentiate themselves by managing the data, cleansing it, offering some basic analytics, enriching it with outside sources, and even lending it to other organisations in a way that doesn’t expose your private information.”
“This was a hair-brained idea that I had ten or 11 years ago,” Laney says. “I still think it will happen, but I don’t know when.”