You often hear people say “Information is our greatest asset”. If that’s true, why can’t we find “data” assets on the financial balance sheet? Some organizations do indeed capitalize IT investments, but primarily in order to spread the costs over a number of years and not because they are valuing their data assets. Occasionally you might find data on the balance sheet such as the customer lists valued at $14.5B on AT&T’s 2007 financial statements – but again this was a one-time event related to the acquisition of Bell South and not because AT&T systematically values their data.
But, so what. Is it a problem that companies don’t formally value data assets? Yes – because it takes much more than financial assets for companies to generate shareholder value in today’s economy. For evidence you need only look at the ratio of book value to market value of various firms; some firms have a high stock price relative to the value of assets while other firms in the same industry have a low relative stock price. The difference is a result of intangible assets such as a strong management team, innovative employees that produce breakthrough improvements, and proprietary information that no-one else has. By some estimates, intangible assets account for more than 50% of the value of the firm yet they are not represented on the balance sheet.
Furthermore, if data is not an asset, then it is treated as a cost. Since the natural reaction of business is to minimize costs, IT organizations are treated like cost centers with continuous pressures to reduce expenditures rather than looking for ways to increase the value and bottom-line earnings of the assets. Examples of valuable information assets include product research data, manufacturing cost data, geological data for energy reserves, and customer relationship, risk, and behavior models. Yet if this data is treated simply as a cost from a management perspective, it will not receive the appropriate level of attention from an investment perspective and will remain under-leveraged.
Judy Ko gets the credit for starting this discussion in her recent blog, Managing Data As An Asset - Walking The Walk, where she discusses some of the more practical aspects of treating data as an asset. I am picking up this train of thought with a series of blog postings planned for the next few months. The topics I have in mind at the moment include:
- Should data be on your balance sheet? (this post)
- Valuing data using managerial accounting practices
- A market-based approach to valuing data
- Case study in managing data assets
- Data can be an asset – it can also be a liability
- The future: Agile Data-Driven enterprises
From an accounting perspective, assets are economic resources owned by a firm. Assets have a value that generally can be turned into cash (although cash itself is also an asset and some assets may be less liquid and harder to convert to cash). The balance sheet of a firm records the monetary value of the assets it owns. Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets such as inventory and fixed assets such as buildings and equipment. Intangible assets are nonphysical resources and have a value to the firm because they give it some kind of advantage in the market place. Examples of intangible assets are copyrights, trademarks, patents, and computer programs.
Formally putting data on your balance sheet is a big decision and I for one would not recommend it until you have first established the internal organizational disciplines for managing and valuing data as assets. I will turn to this topic in my next post – Valuing data using managerial accounting practices.