RETURN ON INVESTMENT is a term that’s risen to prominence in the last 20 years, to become a standard indicator of business performance. However, I predict in the coming years we will witness the emergence of a new business metric – return on data, or ‘ROD’.
The ability to analyse data in new ways continues to be a focus for business leaders, with more examples of innovative data mash-ups delivering business benefits coming to the fore.
The examples are there: improved customer insights in the mobile sector, greater competitive advantage in sports and innovation in healthcare. ‘ROD’ involves looking at the data you have and understanding how to add it to your bottom line – an issue close to the heart of many CFOs.
The ability for businesses to sweat their data assets and achieve strong ‘ROD’ will become a key performance measure for businesses in the coming years. As monetising data assets becomes a core competitive practice, rather than innovative novelty, business leaders will want to measure and value their data assets on the balance sheet.
As difficulties in the economic environment persist and the benefits of the cost-cutting drives that started five years ago begin to dry up, our focus will shift to finding new ways of getting value from our existing assets. If we don’t, we could see the asset stripping of the last century re-emerge for data rich companies that have failed to monetise their data assets. In the same way that corporations that valued commercial property on a historic cost basis were acquired and broken up for profit in real-estate appreciation, those companies that have failed in ‘ROD’ could trigger a new wave of acquisitions in the same vein.
Consider Blockbuster, the movie rental chain, which failed to adapt its business model to the changes in technology and shift in customer buying habits. Its database of customers’ names, addresses, film preferences, routine habits and food preferences was definitely worth something to someone. The obvious ones would be Netflix or LoveFilm, but also cinemas, restaurants or takeaway, delivery and holiday companies. In fact, the use cases are endless for mining vast consumer data banks like this – it’s all down to the questions being asked of the data.
Another example highlighted by a recent report from the Centre for Economics and Business Research (Cebr) is Facebook. The report assessed the broader issue of measuring data assets, outlining how Facebook had a £90bn gap between its valuation and its book value – a prime example that the value of big data is recognised, as Facebook’s valuation takes into consideration the anticipated use of its data assets for monetisation.
Finance teams need to understand their data and its potential and work out how to set meaningful measures. Data analysts will be key. As data volumes grow exponentially, the successful businesses will be those that use the data most effectively to gain value, competitive advantage and, ultimately, boost the bottom line.
There are many factors to consider when looking at the value of data: how data can be used to drive innovation, streamline processes, gain customer insights and develop new markets, in addition to the external market value of the data. So the killer question is – how do you attribute a value to the data, taking in account all of these considerations? The dynamics of this will vary from business to business as trading in data becomes a more common business practice.
In reality, the valuation of data is part of the conundrum that has faced accountants for generations: how to value intangible assets? The challenge for us is that technology has helped the intangible become tangible and, most importantly, portable outside of our business. Our task as finance leaders is to ensure these new tangible assets are stored, backed up, protected, valued and monetised to drive maximum value to our business.
Steve O’Neill is CFO for EMC in EMEA North