Think about the differences between an X-ray and a CT scan.
An X-ray is a one dimensional ‘picture’, and you only see the bones with any clarity. It is the ‘first port of call’ in a diagnosis, offering a limited view of the location and orientation of a skeletal injury. By contrast, a CT (computed tomography ) scan is multidimensional. You see not just the bones, but the soft tissue as well, and you can see it from a variety of perspectives. it is a far more complete picture.
This is a fine analogy for the value of information.
Financial information is just like an x-ray. It cannot tell you much beyond a one dimensional analysis of a current situation, and it is incomplete. A strategic analysis of information is more like a CT scan, you can see a dramatically increased information set, and examine it from a range of perspectives. This depth of information can deliver understanding and insight about the connections and interrelationships that exist.
An x-ray capability is relatively simple and cheap, whereas a CT scan is more complex and requires a far greater commitment of resources to deliver that far more detailed picture. CT scanning equipment costs in the region of 3 times as much as an X-ray set up, and in use, delivers perhaps 100 times the radiation of an x-ray. Not something to be undertaken without due consideration. A CT scan also requires a far better trained staff than an x-ray, generating greater operational and fixed costs.
So it is with the information you gather and analyse in your business.
Information is the currency of success these days. Various studies identify in excess of 80% of the market valuation of listed companies coming from intangible assets. Considering this fact, it makes sense to have an information strategy.
Leaving the IT department to develop such a strategy fails to recognise the importance of information as an essential foundation of success.
Our standard accounting processes include an asset register, on which all assets are recorded, often down to the pens and pencils in the stationary cupboard, but I have yet to see one that puts a rationally articulated value on the information held in the data files of an enterprise. Is it just because it is hard to do, or is it because there is no place for it on our balance sheets and in our statutory accounts?
There appears to me to be 4 parameters for considering the value of your data.
- Leading indicator: a source of information about what may happen
- Lagging indicator: a record of what has happened
- Focus is improvement of management discipline
- Focus is creating new value for stakeholders
Creating metrics for each of these is challenging.
Metrics are usually financial, and then usually only one dimensional, based entirely on the costs incurred as recorded. This data is available in some form in every business, but only tells a part of the story. There are opportunities to record and measure costs in other ways.
Elsewhere I have considered the 5 types of cost in every business, direct, indirect, opportunity, transaction, and short cut costs, and noted the challenges of putting numbers to some of them.
Financial data can also be ‘fattened up’ by consideration of several other parameters:
- The value of the information by understanding the costs that would be incurred if it was suddenly unavailable.
- What someone else might pay for it, particularly a competitor
- The extent to which this information contributes to the bottom line.
For example, these metrics could be considered in the context of the value of the customer and lead information in your CRM, how much does that information deliver to margins? These days that is often a readily available metric.
The additional valuation parameter is strategic:
- How complete is the information in delivering a picture of how the competitive environment in which you compete is evolving?
- How does that information inform your strategic decision-making, and what would be the costs of not having it measured considering the 5 costs?
- How does the information articulate the key drivers of performance?
- How well does the information contribute to the strategic outcomes being sought?
Tackling this challenge of quantifying intangibles, recognising the truth of Peter Drucker’s throwaway that ‘what gets measured gets done‘ is not easy, and not cheap, but like the difference between an X-ray and a CT scan, the results are worth the effort when done well.
Header photo from: https://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/. This is the second time I have used this graphic to make a crucial point about the value of intangibles in your business.
