CFOs should read Doug Laney's book, Infonomics

Doug Laney's book, Infonomics, is a must read for farsighted CFOs, especially those in incumbent industries that are increasingly coming under pressure from an ever-expanding set of new entrants that operate from the playbook of companies like Amazon, Uber, Airbnb, and others. The new rules combine a ruthless focus on the customer with a high degree of automation and self-service, rigorous capture and algorithmic use of data to improve processes and provide new services. Characteristics of these new entrants include providing the same or increased level of service with far less repetitive human activity, and often at a lower cost. CFOs and executives faced with this competition have suddenly found that physical assets matter much less than in the past, and information capabilities are the source of differentiation.

There are many reasons incumbents across many industries have come under pressure from new digital entrants. Laney observes that "The importance of information has not only increased dramatically in business, but the importance of information itself has supplanted traditional assets in generating revenue, and therefore contributing to market value…" Strikingly, as mentioned in the book, intellectual capital research group Ocean Tomo that found that the portion of corporate value due to intangibles has gone from 17% in 1975 to an estimated 85% in 2015.

Yet in spite of the value of information to competitiveness, efficiency, and profit, information assets are almost nowhere to be found on balance sheets. The failure of the accounting standards to keep up with the changes in how value is generated is partly to blame (information, with a few exceptions, is explicitly not treated as an asset under current GAAP standards).  

Doug's book is rich with examples from incumbent firms who have been able to compete effectively with information including Belk, Walmart, Rite Aid, Kroger, Lockheed Martin, DBS Bank, Westpac, Sigma Aldrich, Coca-Cola, USAA and others. His examples include ample firsthand interviews with practitioners ranging from some of the world's oldest and well-known companies, to novel applications of analytics in the developing world, healthcare, and government.

Infonomics focuses on the poor state of our ability to leverage standards and best practices to measure, manage and value data of which most of the existing information management standards are in Doug's words "lacking in adoption, completeness, integration and/or usability." A poignant observation is that companies may have entire departments devoted to managing and tracking laptops and cellphones - physical assets - while possessing almost no collective view on the value of analytic repositories and data. Pointing to the future, Doug relates the relevant aspects of a large number of analogous standards from disciplines as varied as supply chain (SCOR), asset and service management (ITIL, ITAM ITSM), Library Science, HR (People Capability Maturity Model), ISO security and IP, and even biology as inspirations for a future set of yet unwritten standards.

In my work, I have observed an increasingly large number of incumbent industry CFOs taking a leadership role. While GAAP standards are deficient concerning the measurement and valuation of data, prescient CFOs are increasingly aware of the value of information creating healthy growth and value, and impacting the income, balance sheet and cash flow as well as setting strategic direction. In my work, what often first gets the attention of the CFO is exploding costs, increasing numbers of data and analytic roles and lack of commensurate realized value. An increasing number of CFOs are getting involved in not just controlling costs due to the data sprawl so many organizations experience, but also in reorienting spend and investment to realize the potential economic value of information. Doug rightly suggests data practitioners directly engage with CFOs in setting this vision and strategy. 

Finally, Doug presents many thoughtful approaches to beginning to adopt formal information valuation models, including the pros and cons of each method and suggestions on implementation. The book shares thoughts on valuation formulas such as intrinsic, business value, performance value and financial value (cost, market, economic) alternatives and suggestions on when combined models can provide more value than a single model alone.

This book is an excellent culmination of Doug's years in the industry, building relationships, studying alternative approaches from outside the narrow confines of data and analytics. It issues a challenge to the next generation of standards authors, to CFOs and executives operating within today's gaps and to data and analytic practitioners who need to actively engage at the highest levels to effectively drive real change. If you are committed to the success of an incumbent enterprise, read this book; it will change and expand your perspectives.

How should CFO's start to leverage these ideas?

• Take inventory of existing analytics people, process and technology
• Identify critical information assets
• Estimate current costs to support and manage these assets
• Begin to leverage some of the valuation approaches in Doug's book to quantify information value
• Engage with the business, IT and gain outside perspective from competitors and other industries on potential information monetization opportunities
• Clean house: identify where current costs can be curtailed - incumbents do not always have the luxury of building new capabilities while continuing to use outmoded and costly practices and tools at the same time
• Task the business and IT to adopt and adapt the most relevant existing standards, including borrowing concepts from other domains where current information management standards are lacking (note: the lack of mature standards also present an opportunity for competitive advantage
• Begin to communicate the value of information to your board and investors; do not let limits of GAAP create blinders for realizing true economic potential
• Consider having your organization take a leading role in setting information strategy; with or without a CDO (Chief Data Officer) in place, finance has a unique role to play