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September 4, 2003

Can You Put a Value on Your Data?
An Interview with John Ladley

John Ladley
President
KISolutions

For a question that’s asked so often, there’s a dearth of meaningful answers. Yet, if we could identify significant metrics for valuing data, just imagine the possibilities; producing ROI and gaining executive commitment for new projects, enhancing the corporate balance sheet, and of course, justifying pay increases for all those overworked data management staff!

John Ladley has been looking closely at this dilemma. As a consultant to CIOs/CFOs, and as a former Research Fellow at Meta Group, he has been in the Boardroom discussions and knows how important the business case for information valuation can be to the top levels of the strategy team. And from his days in the trenches of corporate IT, as a corporate DA, he has a firm grasp of the nitty gritty challenges that come with turning information into a high quality business asset.

Just last April, John gave a rousing opening keynote speech to the DAMA International Symposium and Wilshire Meta-Data Conference. Now, John’s no Pollyanna, and nobody would tell you he doesn’t speak his mind. So when he predicted in that speech that data management professionals are ideally positioned for a resurgent future, you can be sure he wasn’t merely playing to the hopes of his audience. He sees a new wave of opportunity emerging and he says that DM needs to get ready for it ASAP…
The complete interview is below.

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Tony Shaw, Wilshire Conferences (Wilshire): John, before we get started with the “Valuation” discussion, take us back to the points you made in your keynote speech. Could you reiterate why you are so sanguine about the future of data management? What are the macro-level trends that will drive the profession forward in the next few years?

John Ladley (Ladley): There are some fundamental changes in business right now related to information and knowledge. First, there is significant regulatory push to provide correct information results and safeguard privacy.

Secondly, there is really no longer any separation between information handlers and information users. All business people are information stewards in some way. This convergence of information technology and business places information management square in the realm of management science and accounting.

Wilshire: How does convergence help though? If business people can do it themselves, why doesn’t the role of the DM specialist become unnecessary?

Ladley: Well, I did not say that business people can govern information themselves. Perhaps an example will help. My adminsitrative assistant handles petty cash, but there are strict rules and governance for handling cash, starting with the IRS, as well as accepted accounting practices and our own internal procedures. There needs to be the internal standards organizations for information. Few of us would suggest each coprorate department set its own asset management standards. Why do business areas set their own information standards?

The key to convergence is the mindset - if business users understand convergence, there is no issue at allowing an IRM department to govern information. The DM specialist becomes the auditor, controller and governor. This is a division of labor the ensures accuracy and control - just like the controls on financial assets.

Wilshire: To the subject at hand then: how to put a value on information. Explain how you came to be involved in this question, at this particular point in time? You’re talking mostly to C-level execs nowadays. Why are they so interested in this subject?

Ladley: Obviously, the Sarbox type legislation makes them interested, as fines and jail time are no fun. But I also noticed, over the last several years, two distinct drivers for placing value on information. First, most executives realize they must have IT. In spite of much publicized ‘failures’ of business intelligence, etc., good executives realize that any information failures are the result of poor execution. No good executive can afford to give up on the quest for usable information. In light of the ups and downs of BI and IRM the past few years, executives are now looking for a clear business role for information, vs. pumping more money into IT deliverables. This is a crucial mind set change.

Second, given the large amount of investment in IT, it is only natural that someone start to ask what this does to the value of a company? Wall Street is now taking a keen interest in how companies manage and exploit information. It is worth a few points on a stock price. It follows then that the balance sheet and income statement may also need to reflect a company’s successful management of information. Information technology, as I said before, is hopelessly intertwined with day-to-day business and management.

Wilshire: What’s your sense of the role that DM is going to play, and how DM can influence the valuation process?

Ladley: DM has been (it seems to me) the ugly stepchild of IT. Many shops place people in DA roles when they don’t know what else to do. OR the DAs spend a lot of time doing project specific work. However, any DA that has been even partially productive knows more about a business than many functional heads and can - and this is the key point - cross the chasm between project-level abstraction to enterprise-level abstraction. The valuation of data as an enterprise asset will require this ability.

Wilshire: What are the emerging methodologies or techniques for actually measuring information value? Can you give us some specifics?

Ladley: A few high-end consultancies (including my own) have developed some metrics for assessing relative value of information. A model is developed of the relative value of information usage within a business model. For example, a business process model may be mapped to the results of an information usage survey.

In addition, there may be an audit performed that evaluates how well a company manages information. These methodologies present a comparative or relative score to management. They are not an absolute valuation of the information asset. The reason the absolute value is not presented is there has been very little guidance on this from FASB. FASB rules 141 and 142-address information valuation in terms of goodwill.

The real value of information has to be imputed from its usage. I.e. the value generated from using information effectively. The dollar signs of information usage come from imputing the present value and cash flows.

Wilshire: Any other measures? What about data quality – does “high quality” have measurable value in a hard-dollar sense?

Ladley: There are many other measurements that use information to produce interesting metrics (besides normal ones like income and profit). Customer lifetime value or customer profiles are uses that place a value on an intangible concept.

Data Quality is no different than any other quality control or quality assurance process; it has value, but appears in goodwill, or in the results of the program. Data quality is a process to improve the value of the information asset. I don’t think you can assign hard dollars on its own.

Wilshire: Can any of this be reduced to any simple heuristics? For the sake of an illustrative example, could you justify the purchase of a data cleansing tool to support a customer data file, based on some simple formula where each customer record is valued at an acquisition cost of $X and a lifetime customer value of $Y?

Ladley: Sure – but lets examine this example – are we placing the value on the customer or the record? You must be very clear. The value of the Customer data is because it is USED to track customer value. Therefore, the cost of the customer record is NOT offset by the customer value (a metric) but by the rate or return, or net present value of the cash flow from USING lifetime customer value.

Wilshire: OK, it’s time for me to ‘fess up now. I actually have an accounting degree, so I know how the bean counters look at this stuff. The accounting profession is driven by a set of fairly sensible, yet conservative principles that tend to resist what you’re trying to do here. Certainly in terms of corporate reporting, it’s extraordinarily difficult to get the value of any “intangible” asset recognized on the balance sheet until such time that the asset is sold and the “goodwill” is recognized in the purchase price. Yet we all “know” there’s value in the data. How is this tension being dealt with? And how useful is information valuation ultimately if that value can’t be recognized in official financial statements?

Ladley: The tension is NOT being dealt with. FASB has tabled all discussion in this area. At this time, the hard value appears in the stock price, or equity of the company. There is much interest, however, in intellectual property accounting, and I think the accounting changes for information will come from this direction.

Wilshire: I know you’ve also done some work in valuing “knowledge” as opposed to information. I’m interested to know about that as well. And perhaps for clarity we should first distinguish between the concepts of knowledge and information. A straightforward example might be that Amazon.com has certain customer-based information about me (my address, my credit cards details, etc) and that information has an intrinsic value based on the cost of attracting me as a customer, my ongoing purchases, and the cost of maintaining my record over time. But they also have “knowledge” about the book market, consumer buying patterns, Internet sales processes, how to enhance user experience, etc, such that all that acquired knowledge has an extraordinary value to the organization in terms of enabling it to be flexible, responsive, to manage its inventories and so forth, better than many of its competitors. Would you agree with my distinction? And from there, how are companies valuing knowledge as opposed to information?

Ladley: Again you are getting into Intellectual Property as the source of valuation. The “knowledge’ of the book market has resulted from Amazon’s technology and experience. This contextual setting provides the basis for distinguishing knowledge from information. The technology and process are IP. The value to Amazon of the knowledge is still based on how it is used. One thing different from info and knowledge (in the accounting sense) is that knowledge recognizes that some addition value has been applied – e.g. over time, with more context, information becomes more valuable.

Wilshire: John, you’re going to teach a half-day tutorial on “Valuing Information and Knowledge” at Wilshire’s Enterprise Data Forum coming up in the first week of November in Philadelphia. Is there anything you’ll be discussing in that session that we haven’t yet touched on?

Ladley: We will be taking a hard look at some simple techniques. We will also look at the organization impact of information value, and explore a few of the trends in other areas (Sarbox, FASB) etc.

Wilshire: Well John, thanks for your time today.

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