Financial institutions recognize the importance of valuation of intangible assets, but few of them recognize just how valuable their data is, and how critical it can be to the success of the digital transformation process.
A definition for what constitutes the “Enterprise Value of Data” — or EvD — has only
EvD and digital transformation intersect in a number of ways. One example is the valuation of personal data through the eyes of the shareholder. Personal data is worth whatever a shareholder is willing to pay to acquire client data from a data-centric company, as was the case when Facebook acquired WhatsApp and Instagram for what to an outsider appeared to be wildly excessive valuations. At the time of their acquisitions, neither app was profitable, so their valuations were based on their respective user base and data, and how Facebook believed it could monetize them. In the knowledge economy, the ability to maintain the quality and strength of that relationship over time is where value resides.
Another example is accounting for the revenues generated by customers and estimating the value of a client as a function of the net present value it will generate for the company in the future. This can be predicted by using customer transaction data, enabling decision-makers to pursue the most profitable business actions. Doing so estimates the value of the commercial relationship the company has with individual customers, providing a maximal range of personal data valuation. The personal data collected by a company, and that data’s connection to individual customers, tbecome intertwined. The practice of monetizing data collected digitally is accelerating, with the number of data brokers and data exchange centers expanding at a rapid pace.
Just as protein is broken down and absorbed by the human body, products and other components of the corporate value chain can be broken down into their component parts and absorbed into the body of an organization. This “absorption” process is multi-faceted, includes data from internal and external sources, and has varying business outcomes, depending on the variation in how those sources interact. The ability to put a value on each component of the value chain can be an important element in determining EvD. The challenge, however, is that most enterprise data resides in vast data lakes (or, more likely, data swamps) and financial institutions usually only realize what is at stake when they lose access to this critical business information. For this reason, EvD is an important counterpart to an enterprise cybersecurity strategy.
To unlock the hidden value of data, financial institutions should begin to treat the data itself as an integral part of their business models, because data affects the entire ecosystem in which a firm operates. Determining not only what EvD means today, but what it will mean for a financial institution in the future, is a critical part of the process. A firm’s data may ultimately become more valuable than its traditional products and services, as the WhatsApp and Instagram cases illustrate.
Traditional firms such as commercial banks are not spared the need to address how data impacts their business models and value creation strategies; they may need to do so even more than other businesses already focused on data valuation. These traditional firms labor under the weight of legacy operating systems and dated modes of thinking, making the concept of EvD and digital transformation seem too intangible to have value. Such thinking is precisely contrary to the direction most organizations need to go to remain competitive and have a meaningful long-term orientation. Financial institutions, in particular, are prime candidates for harnessing the potential power of EvD, which resides precisely where risk and reward intersect. Because of the vast stakes at hand, banks should deploy a multi-dimensional approach to identify and unlock the potential value of data.
As data dependency continues to grow, regulators and public accounting standards may demand that financial institutions demonstrate that they have risk mitigation strategies to protect and properly value data and information assets. Traditional accounting practices do not accurately capture the financial and economic potential of data as a balance sheet asset because most accounting is retrospective in determining asset value. Financial institutions’ accounting methods should evolve to become a strategic management tool to properly value intellectual capital assets, identify and drive the monetization of data, and optimize digital transformation decisions based on data, analytics, technology and security.
But making this leap may require cultural changes throughout an organization to foster creativity, experimentation and a willingness to make data-informed decisions. Breaking down the internal siloes and stovepipes, where data and digital transformation are typically treated as an IT issue, are essential to this process. Decision-makers must be willing to challenge, adapt and refine their approach to strategy and execution, based on the management of data. Financial institutions should integrate data as a foundation for cross-functional analysis, while simultaneously developing ways to measure, track, and value data — particularly when data is in motion or utilized in core business processes. Doing so allows them to empower the connectivity of front- and back- office functions through better access to the right information and the insights that data may contain, while providing an opportunity to reassess how a business operates on a holistic basis.
Getting out in front of EvD will require dedication of substantial resources to get it right. This is especially true for financial accounting standards and the advent of EvD measures that are compatible with generally accepted accounting principles. Accepting proper stewardship of data by setting data governance, reporting and control standards, and by recognizing the central role data occupies in the value creation process, will enable firms to harness the value of data in their long-term strategic planning, while creating a pathway for future growth.
