How Can The Value Of Information Be Measured?

There are many sources of information.  Books, Newspapers, Reports, Accounts, Journals and Directories have all been around for some time. More recent sources include the Census (demographic information), Databases, ID cards, RFID tags, Sensors, Web Cameras, GPS, Cookies, the Internet and Loyalty cards.

Human expertise & skill (also called Intellectual Capital) is another form of information which, although it is obviously present, can be difficult to pin down to a particular value. Indeed, with some firms, particularly those operating in a medium such as news or software development, intellectual capital is their primary asset.

Information is far from static and its value can change constantly according to who has it, other information available and the timeliness of it.

“IS [information systems] development … should be understood as a complex social activity that is influenced by the organizational context in which it takes place.” (Lederer & Nath, 1991; Cannon, 1994; Willcocks & Margetts, 1994 cited by Goulielmos, 2004, p.364).

The value of the information is not the same for the receiver as the giver. A firm will not invest in information if they do not get a positive cost-benefit ratio from the exercise (see Financial Methods below). The information must be worth more to the buyer, than to the seller. So, the value of information can change with context – different entities put different values on the same information.

Also, adding new information can obsolete old information or can make clear what has previously been obscure (Van Alstyne, n.d., p.328). In addition, like the adage ‘In the blind mans’ world, the one-eyed man is king…’, some information, if it is all you have, even if it is old or not that relevant, is better than nothing.

Furthermore, separate pieces of information may be synergised to produce a sum greater than the parts of which it is made. Much of science operates this way. Scientist X makes one discovery, itself interesting but not necessarily hugely important. Scientist Y makes an unrelated discovery, possibly in a totally unrelated field. Scientist Z, who has examined both pieces of information, makes a new discovery by uniting (synergising) the two previous discoveries.

Example: Gene Centred Theory of Natural Selection

Gregor Mendel, a Moravian Monk, the ‘Father of Genetics’, discovers that discrete particles of information are inherited from parent to child in certain ratios - genes (Edelson, 2001). Independently, Charles Darwin (1859) notices that finches on different islands in Galapagos look different depending on food availability and competition – the theory of natural selection. Richard Dawkins (1976) combines both theories and describes a gene-centred approach to genetics changing the way scientists view natural selection – genes and natural selection combined into a single theory.

Data costs, but information, being transformed and imbued with context and meaning is generally [always] beneficial. Information benefits can be both tangible and intangible. Tangible benefits are those whose value can be easily measured in financial terms. Intangible benefits, by their very nature, are difficult to quantify.

Selling Information

The most explicit example of a tangible benefit is the selling of information for money; in this case it possible to measure the value of that piece of information explicitly, in financial terms.

Example – Spam Lists

Alan Ralsky runs a ‘spam’ junk mail company. He makes $6,000 per week by charging a commission on sales. Sometimes he charges a flat fee, up to $22,000, for a single mailing to his entire database of 250 million valid addresses (Wendland, 2002, para. 25,30&34).

Other tangible information is created by deriving a score based on particular data combinations.

Scoring

Data Mining (DM ) can be used to find patterns that are good predictors of purchasing behaviours. Large data warehouses consolidate data from multiple sources (see Sources above) in order to gain a greater understanding of customers and the business. Automated queries search huge volumes of database stored data to find both high value customers who can be tempted to stay and low value customers which can be tempted into the high value category. The scoring exercise tries to limit offers made to only those customers most likely to, for example, switch their contracts to competitors. A numerical score is assigned to each record in the database and indicates the likelihood of a customer exhibiting a particular behaviour. Customers are targeted according to this score. Accurate targeting saves the company time and money – offers are less likely to be made to those customers who would renew contracts anyway from inertia (Evans, 2002, p.136-137).

Competitive Matrix Valuation

There are also customer-centred valuation techniques which are commonly used. Customer Value Management (CVM) seeks to identify how potential customers evaluate competing offerings. The aim of this is to be able to construct a competitive matrix which identifies the value of a customer for the company and its competitor and also to be able to use the improved understanding of customer satisfaction to create goods and services the customer wants (Evans, 2002, p.135-136).

Depreciation

The value of this information is highest when it is recent. “Recency is the number one most powerful predictor of future behaviour.  The more recently a customer has done something, the more likely they are to do it again.” (Novo, 2004, para. x). The longer the term that has passed between the collecting of information and its use, the less likely it is to be accurate and therefore, the less valuable the information is. Where information can be valued, there is an accounting process known as amortisation, which allows for depreciation of the asset.

Difficulties of Accurate Valuation

Van Alstyne (n.d., p.329) also describes the ‘buyer’s inspection paradox’ to describe a curious problem which may occur when buying and selling information, namely that a buyer cannot inspect information with a view to purchasing it because having seen it they no longer need to buy it. This can further complicate measuring the value of even tangible information.

Both CVM and DM are information based systems which can contribute value to the firm as a whole, as well as creating a type of tangible information, but identifying how much will always be an issue that is difficult to quantify. Within the firm itself there are many variables involved in the process from collecting data, to creating information, to generating knowledge, to target identification, to marketing, to successful enquires and finally to sales.

Externally there are also environmental factors such as the economic climate, the time of year, trends and even fashion. These are all beyond the control of the firm and any and all of them could affect sales or costs of sales. These factors are also hard to measure and may unknowingly affect the balance sheet, leading to false conclusions regarding the effectiveness of a new information system. Even if information systems are effective, it may take several years for their true benefits (or costs) to be seen.

Other benefits of information are intangible and difficult to measure accurately. Different countries, even within the EU, define intangibles differently.

Definition

The IASC’s (International Accounting Standards Committee) definition defines an intangible asset as “an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. An asset is a resource controlled by an enterprise as a result of past events; and from which future economic benefits are expected to flow to the enterprise” (IASC, (1998) cited by Stolowy, 1999, p.7).

Examples of an intangible in this sense would be: the technical skill of a programmer; the vision and communicative abilities of a manager; the experience and adaptability of a team working together on shared projects.

But, by 2001 there was still no consensus regarding what constituted an ‘intangible’ (Guthrie, Petty, & Johanson, 2001, p.367).

Associated Terms

Nonetheless, in common parlance, intangible benefits commonly use relative subjective terms such as ‘better’, whereas tangible benefits use relative objective terms such as ‘more’. Better is a qualitative term; more is a quantitative one. Some examples include: quicker implementation of strategies; better services; increased quality of, and access to, information.

Example: Better task management

Lockheed Martin Aeronautics Co. have implemented an internet based information & communication system which allows designers and engineers in different locations to work together over the course of a project in real time, reducing drawing time from 400 hours to 125 (Laudon, 2004, p.61).

How can ‘better’ task management be measured? What might make it better? Here are some possibilities…

As is shown, some factors are measurable directly in terms of profit or other financial based methods. The most obvious way of attempting to measure the value of an information system is by looking at the accounts of a business in the year following the implementation of an information-based strategy and comparing them to previous accounts.

In financial terms, the accounts are balanced annually. In theory at least, profits should be higher, however, large investment in information goods, including both information itself and the technology or process by which it may be accumulated, may show as unfavourable figure on the balance sheet using the following formulae:

To measure an organisations profit or loss:

• Sales – cost of sales = Gross Profit
• Gross profit – Expenses = Net Profit

It can easily be seen, therefore, that higher profits result from any of the following factors:

• Higher sales (either in quantity or value)
• Lower costs of sales 
• Lower expenses

Information Goods Financial Valuation

Hence, we can expect any information strategy which affects sales, cost of sales or expenses to affect the profit of the organisation. But some benefits as we have seen are intangible and are not reflected in the balance sheet. There are several accounting methods currently in use by which information goods, specifically, are measured.

Long Term Strategy

“The worth or value of an organization cannot be given by the values in the balance sheet alone.” (Robinson & Kleiner, 1996, p.36)

Too tight a focus on time or money may well overlook issues that can affect the overall performance of the firm on the marketplace (Grantham, 1995, p.11). Many business strategies are long term. Attempts to value information strategies in monetary terms may not always take, or be able to take, long term strategy into account. In some cases, investing in an information system, no matter its cost, may be the only way for the firm to survive.

Example: Pamida  

Too many out-of–stock items, no systems for re-ordering the right clothes at the right time & out-of-date warehouse management software meant that Pamida were becoming less profitable. It was only when they updated their warehouse management software and consolidated their warehouses that they began to recover. (Laudon & Laudon, 2004, 34-35)

Locating Benefits

Implementing a new information system can disrupt the internal workings of the firm it is being implemented in, making it very difficult to measure the advantages of the system. The internal workings of a firm may be much more interlinked and complicated than is first realised and benefits may not be found where expected (Grantham, 1995, p.11).

“Technology is merely part of the value creation process. It needs to be combined with organisational change and the resultant process applied in the organisation.” (Soh & Marcus, 1995, cited by Peppard, Lambert & Edwards, 2000, p.292)

Responsibility for information acquisition and conveyance may be transferred as a result of implementing a new information system, again making it difficult to measure added value. This can transfer

1. from the management to the staff - doctors in an Australian hospital were asked to use PDA’s to improve efficiency and help rationalisation (Doolin, 2004);
2. from the staff to the customer - many e-commerce web sites, e.g. Ryan Air;
3. from the receiver to the supplier - stockless inventory system e.g. Baxter Supply Chain Management System (Laudon & Laudon, 2004, p.96-97);

Firms are currently experimenting with ways of identifying, measuring and reporting intangible assets within organisations (Guthrie et al, 2001, p.367) so as to reflect the true state of the firm.

Intellectual Capital Statements

A company called Skandia has created intellectual capital statements in an attempt to account for this discrepancy. These statements combine numbers, images and stories to account for organisational value creation. These can be difficult to create as there are no accepted accounting formulas or standardised techniques that can be applied. (Mouritsen, Larsen & Bukh, 2001, p.x

According to Van Alstyne (n.d., p.329) “Intangibles such as information or financial instruments can be measured indirectly based on their ability to function or produce useful results, as distinct from valuing them directly.” One problem with this method of measuring value is that intangibles can only be approximated.

Value Discrepancy

“Without a proper measure of intellectual capital, the firm cannot be properly valued and management is not able to set strategy.” (Robinson & Kleiner, 1996, p.36).

In many cases of companies whose primary assets are that of intellectual capital, there is a large discrepancy between the book value and the market value of the company. Brennan has stated that of 11 listed Irish companies, 9 had significant discrepancies between these two values. He concluded that these companies had a substantial level of non-physical, intangible, intellectual capital assets. (Brennan, 2001 cited by Guthrie et al, p.372)

Interestingly, according to Thorsgaard-Larsen et al (1999) the return on a stock portfolio of knowledge-based firms at the Stockholm stock exchange was significantly higher than the return on a portfolio that was based on firms with a higher dependency on tangible assets. This is possibly because these firms had lower overheads, and hence higher likelihood of profits.

Information always has a value, but this can change over time and is context dependant. In addition, information can have different values for different people, groups or entities. Information can be both tangible (measurable) and intangible. Being intangible, it is difficult to measure; it is even difficult to define.

Many firms which have a large amount of intellectual capital may have a huge discrepancy between their book and market values. Some firms try to account for this by the use of intellectual capital statements, which use images and narrative as well as numbers to explain the inconsistency, but many have intangible assets and benefits which they cannot account for in their financial statements. Various research bodies are currently looking at creating standardised methods with which to account for intangible assets such as intellectual capital.

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