Continuing from my prior post Valuing Data Using Managerial Accounting Practices, you don’t actually need to put data assets on the public balance sheets to achieve the desired management focus You could use internal management accounting methods such as EVA (Economic Value Add). In EVA, operating costs that have long-run benefits (such as R&D, brand advertising, certain IT investments) are recorded as assets rather than operating expenses. EVA is generally calculated by line-of-business as EVA = NOPAT – (WACC * NOC)

• NOPAT = Net Operating Profit After Tax
• WACC = Working Average Cost of Capital
• NOC = Net Operating Capital

This metric has an advantage over simple revenue or margin goals since it removes the cost of IT from operations and instead treats it as an asset with a period cost equal to the cost of capital. Furthermore, EVA encourages management to pay attention to the liabilities side of the balance sheet (such as accounts payable) which causes business units to operate like investment centers rather than simply profit centers.

Let’s take a look at how EVA might play out in a real-world scenario. We will start with a $100M business which has an operating cost of $80M resulting a $20M net profit. Let’s say this business has an opportunity to invest $2M in a customer master data hub which will generate an incremental $2M in revenue per year with an incremental annual operating cost of $.5M.

In a traditional Profit-and-Loss model where the project costs are accounted for as period costs, the resultant profit is $102M – $82.5M = $19.5M. which is less than not implementing the project and simply maintaining the status quo. In this scenario it is not likely that the decision will be made to invest in the enhanced data assets.

But in an EVA scenario, the $2M investment is treated as operating capital from a managerial accounting perspective. NOPAT works out to be $102 – $80.5 = $21.5M. If the working average cost of capital is 10%, then we would subtract (.10 * $2M = $.2M) from this to end up with a net Economic Value Added of $21.3.  In other words, we have just increased the value of the business by $1.3M.  The decision to invest in IT assets under this scenario is an easy one.

Granted this is a rather simplified case, but nonetheless it is a pattern that is played out in organizations countless times each year. The bottom line message is this – by treating data as an asset from a managerial accounting perspective, business leaders are encouraged to invest in IT assets when there is a well-defined future benefit.

Stay tuned for the next posting in this series where I address the question of how it might be possible to value data assets using a “market based” approach.