What is your company's information worth? In today's competitive environment, perhaps it's time to value itHow do some organisations wring business transformation and competitive edge out of their IT investment, while others get little or no return? Why is it that study after study either fails to reveal any positive relationship between IT investment and overall financial performance or else finds IT investment impacting badly on performance? And how do you explain a recent study of four Australian banks that found after several years spent developing systems to support their core business, only the one that had spent the least had gained competitive advantage?
According to two Australian specialists with a seminal proposition to put to the world, you start by noting that the successful bank got its edge by integrating its customer information. (In other words, technology was no more than the means to the end of information delivery, with information the underlying asset used to win strategic advantage.) And then, according to Daniel Moody from the Department of Information Systems at the University of Melbourne and Pete Walsh from Simsion Bowles & Associates, a Melbourne-based IT consulting firm, you follow that notion to its inevitable conclusion. If organisations that succeed in using IT for competitive advantage achieve so much more than their competitors while spending less because they focus on the information itself, information is clearly one of the organisations' most valuable assets. And if information is a valuable asset, it's high time someone found a way to quantify that asset.
Certainly there are solid reasons why information is unlikely to appear as a balance sheet item in the foreseeable future. For one thing, the nature of information, as an economic good, is poorly understood. For another, current taxation laws conspire against recognition of information as an asset -- it's far better for organisations to write off information costs as an expense in the current accounting period than to capitalise them over their lifetime. But in a paper presented at the European Conference on Information Systems earlier this year in Copenhagen, Moody and Walsh presented their conviction that information assets should at least be included as an off balance sheet item and used for internal management purposes.
By the time of the conference, their concept -- born out of Moody's background in data management (he is currently the Australian president of the Data Management Association), and Walsh's in accounting -- had survived its first test on the data held within Simsion Bowles. Now a number of large Australian corporations have expressed an interest in taking the concept further. "What we want to do is start valuing some of the information in those organisations, and get people using those valuations," Moody says. "Whenever we've presented it, people have liked the idea; but you need to test it out in practice and see how it can help you make better decisions."
Measuring the value of information could bring several advantages, Walsh says. For a start, information has been historically undervalued compared to other assets, partly because it's never appeared on the balance sheet. Change all that and you can raise awareness of the value of information as an organisational asset: organisations inevitably value most highly those resources whose value they've quantified.
Putting a dollar value on information should also improve accountability, giving the organisation a more accurate take on the cost of the information and whether it is getting value from the investment. "While lots of people are extremely interested in our approach, to be perfectly honest, we don't really know at this stage if it is useful or even possible to value information as an asset," Moody says. "Over the next couple of years, we aim to find the answer to both of these questions. We plan to apply the method in a variety of organisations, evaluate its usefulness in making decisions about information, and use the experience to improve the method."
Most organisations never quantify the enormous hidden costs involved in collecting, storing, analysing and maintaining information. Moody and Walsh's approach calls for management to analyse all the hidden costs to ensure resources are being used in the most cost-effective manner, in the interests of increased accountability and reduced waste.
Valuing information also makes it far easier to measure IT effectiveness, because it measures the value of the product (information) rather than the production equipment (systems and technology). Direct measures of the information "bottom line" -- the value created by IT in terms of information delivered to users -- should be the primary basis for developing IT strategies and evaluating proposed IT initiatives. And valuing information helps with cost-justification of executive information systems (EIS), decision support systems (DSS), management information systems (MIS) and data warehouses, none of which conform to the traditional cost-displacement model of systems development that applies in operational systems.
Information Bottom Line
The most expensive part of any information system tends to be the information stored rather than the hardware and software used to store it, Walsh says. To enter and maintain customer information in a customer information system requiring $500,000 worth of hardware and a $2 million in-house software system to operate costs one organisation more than $10 million dollars a year -- costs hidden in the salary budgets of user departments.
"To be most effective, IT strategies should be focused on enhancing and sustaining the value of information (the product) rather than on systems and technology (the production equipment)," Walsh says. "Business strategies are generally evaluated in terms of how they contribute to the value or profitability of the firm -- the bottom line'. Similarly, IT strategies should be evaluated in terms of how they contribute to the information bottom line' -- value of information delivered to users. To do this, we need some way of measuring the value of information."
But can information be truly valued as an asset? Moody and Walsh give a definitive "Yes". Information, they say, fits all the definitions of an asset. It can be expected to provide future services or economic benefits, it is controlled by the organisation, and it is the result of past transactions. "In fact, information satisfies the definition of an asset much better than employees or customers [do], which are also commonly referred to in the literature as assets," Moody says.
"When employees resign and customers change suppliers, the company loses their benefits without compensation. True, information is a non-physical or intangible asset, but it is the service potential and economic benefits, not the physical form of an object, which is relevant in assessing whether an asset exists," he says.
But information is distinctly different from other organisational assets. Certainly, like them it has a cost: to acquire, store and maintain it; and a value: its worth to the organisation. But that's where the similarity ends. "Information simply doesn't obey the same laws of economics that other assets do," Walsh says. "It has some unique properties, which must be understood in order to be able to measure its value. We have attempted to define the nature of information as an asset by identifying a number of general principles or laws' which govern its behaviour as an economic good."
"These laws need to be understood in order to manage information effectively, in the same way that it is necessary to understand laws of human behaviour to manage people effectively, or laws of economics to manage finances effectively," Moody says.
1st Law: Information is (infinitely) shareableArguably the most unique characteristic of information as an asset is its ability to be shared between any number of people, business areas and organisations without losing value.
Other assets behave entirely differently. Share finances, equipment or staff between business areas and each business area receives some proportion of the total value of the assets. Share information between business areas -- as many as you like -- and it has the same value to each as if they owned it exclusively. From the organisation's perspective, value is cumulative, not apportioned across different users.
Information hoarding -- where people deny others access to information -- causes a loss of business opportunities by preventing the potential value of information being realised. It also leads to duplication; but duplicating information does not double its value: two copies have the same value as one, because no "new" information is created.
Redundant data costs money, through rekeying, storage costs, additional systems development effort, interfaces to keep data consistent, and manual reconciliation effort. In most organisations the costs of maintaining such levels of redundancy are enormous. That it is allowed to happen in such an apparently uncontrolled manner reflects the lack of financial accountability in information management activities.
2nd Law: The value of information incrreases with useA car, a plane or a piece of factory machinery decreases in value the more it is used. Information increases in value the more it is used -- that is, it exhibits increasing returns to use. The main costs of information lie in its capture, storage and maintenance. The marginal costs of using it are almost negligible.
But things can only be assets if they provide future services or economic benefits. Unless information is used, it can't possibly generate those economic benefits. Unused information should be seen as a liability, because no value is extracted from it, and the organisation incurs future costs of storage and maintenance. It is also a liability if it is badly stored, difficult to locate and hard to use.
"Information is at its highest potential' when everyone in the organisation knows where it is, has access to it and knows how to use it. Information is at its lowest potential' when people don't even know it is there," Walsh says.
"In most organisations there is a huge amount of computer-based information that could be used for business advantage. However, the opportunities for using information are often not realised because people don't know it exists. As obvious as it seems, few organisations have a catalogue of their information assets and where they are located -- an information asset register', yet such a situation would be intolerable for physical or financial assets," Walsh says.
"And getting benefit from that asset also demands high levels of information literacy," Moody adds.
3rd Law: The value of information incrreases with useInformation is perishableLike most other assets, the value of information tends to depreciate over time, the speed at which it loses value depending on the type of information.
Information has a relatively short useful lifetime at the operational level, but its shelf life for decision-support purposes can be much longer. Yet operational systems often discard information once it has exceeded its operational shelf life, making it unavailable for subsequent decision-making purposes.
"Data warehousing provides a mechanism for storing historical information which has exceeded its operational life, and making it available for decision support and analysis," Moody says.
4th Law: The value of information incrreases with useInformation is perishableThe value of information increases with accuracyIn general, the more accurate information is, the more useful and therefore valuable it is. Inaccurate information can be very costly to an organisation in terms of both operational errors and incorrect decision making, with some information demanding 100 per cent accuracy.
But there is a point of diminishing marginal returns, where increasing the accuracy further provides little additional benefit. Rarely required in a business context is 100 per cent accurate information. When the accuracy of information falls below a certain level, it becomes a liability rather than an asset. At this point, it becomes "misinformation" and people will stop using it.
That makes knowing the accuracy of information as important as having accurate information for decision-making purposes; yet the accuracy of data is rarely measured in practice.
5th Law: The value of information increasess when combined with other informationInformation becomes more valuable when it can be compared and combined with other information -- merging sales and customer information to help marketing efforts, for instance.
Producing decision-support information generally requires consolidation of information from a wide range of different operational systems. Yet, in most organisations the lack of integration of information in operational systems is a significant impediment to producing decision-support information.
Integrating 20 per cent of the data generally leads to 80 per cent of the benefits, while integrating beyond this point may produce diminishing returns, or prove totally counter-productive. "The dream of total integration as promoted by early data management advocates is neither realistic nor justified from a business viewpoint," Moody says.
6th Law: More is not necessarily better
Like money, the more of a resource you have the better. Management may spend vast amounts of time deciding how to allocate limited resources like people or finances among a number of competing causes. But information is anything but scarce, and the biggest single problem facing most organisations today is not the lack of information but its overabundance.
Decision-making performance decreases once executives begin to suffer information overload; but there's a paradox. Economic theory says the more people have of a given commodity, the lower its value to them. However, the perceived value of information to decision makers continues to increase beyond the point of overload. In short, human decision makers tend to seek more information than can be optimally processed, leading to reduced performance but increased confidence and satisfaction with the decision by the decision maker.
"The explanation for this is that people seek more information than can be efficiently processed in an effort to avoid mistakes and reduce uncertainty. This suggests that people believe that more information is better' and are not aware of their own information processing limits," Moody says.
7th Law: Information is not depletable
Most resources are depletable: the more you use, the less you have. However, information is self-generating -- the more you use information, the more you have, since new or derived information is often created as a result of summarising, analysing or combining different information sources.
A Good Incentive
With the Seven Laws as a foundation, the authors have begun valuing information assets using a modified version of the historical cost method of valuing assets. They say the approach gives the organisation more incentive to make existing information available to more people and to find more uses for it, rather than simply creating more information.
"Information that is not used has a cost but no value," Walsh says. "Valuation of information using this approach will help to highlight which information is most valuable -- in other words, most highly used -- and has the best return on investment, measured as cost compared to value," he says.
The full paper can be read at http://www.dis.unimelb.edu.au/research/seminar/papers.htmlMeasuring the Value of Information: An Asset Valuation ApproachEuropean Conference on Information Systems (ECIS'99) Page 8European Conference on Information Systems (ECIS'99) Page 1
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