Big Data has infiltrated the corporate valuation scene by making its indelible mark on companies goodwill and reputation. Recent research confirms that corporate reputations suffer following mishaps involving data within the corporations control. Todays companies must appreciate that their use, misuse and governance of Big Data can have an impactful effect on their goodwill and resulting valuation.
How Modern Enterprises Are Valued
In todays data-driven economy, many organizations value is derived from much more than the sum of their tangible assets. As opposed to tangible assets of the brick and mortar variety, goodwill which has no physical component qualifies as an intangible asset. The value of goodwill is the difference between a companys purchase price and the fair market value of the tangible assets involved in the acquisition.
Certain subjective elements of goodwill include reputation, the value of a companys brand name, customer lists, and positive customer interactions. Goodwill has no expiration date, as it is inextricably linked to a business itself, and it cannot be sold or transferred separate and apart from the entire business.
In its 2010 study on Intangible Assets and Goodwill, KPMG identified that most industries typically allocate more than 50% of the purchase price of a business to goodwill. Internet and E-commerce companies reflect the highest allocation percentage at 70.4%.
In the modern corporate environment, intangible assets can sometimes substantially trump the value of tangible assets and are critical components impacting a companys successful future. No longer relegated to the background as an undefined metric that might be incapable of calculation, a companys reputation is increasingly recognized as a crucial component of a companys overall valuation.
In a 2013 study, Exploring Strategic Risk, Deloitte reported that 300 executives from around the world identified reputation as the #1 strategic risk area. Social media, specifically because of its lightning fast speed and global impact, was cited as one of the primary reasons that companies are growing increasingly concerned about their reputation. According to the study, the top five technology threats to business models are: social media (47%), data mining and analytics (44%), mobile applications (40%), cloud computing (38%) and cyber-attacks (36%). Moreover, 91% of companies participating in this study stated that they have altered their business strategies as a result of the development of mobile, social, big data and other extensive technology innovations. Todays companies face the risk of losing control of their reputation messaging on both internal (employee-based) and external levels, particularly because social media drives public perception at breakneck speed.
Valuation of Todays Most Data-Dependent Companies
Big Data has an enhanced role in the valuation of modern business enterprises, particularly for social media companies. While goodwill is at the forefront of factors affecting valuation, others include the number of users, revenue (including advertising), and ability to capture market share. According to Appraisal Economics Inc., the value of a user of social media website constitutes a unique valuation derived from the worth of virtual goods and services. The Average Revenue per User (ARPU) for companies like Facebook, Twitter, LinkedIn, and Pandora, is tied directly to the amount of data these sites acquire from and maintain about their users, such as, location, credit card information, relationships, and personal preferences.
The value of Big Data to modern enterprises is well illustrated by Facebooks IPO, which was the largest opening valuation for an American tech company. Its staggering and continually high valuation is rooted in how valuable its users are to advertisers and companies, particularly as to how they like, share, and respond to various sources of data.
Legal Issues Surrounding Data Use, Misuse and Governance
Depending on the data at issue and its location, a variety of laws and regulations impact how enterprises collect, store, and use data. The issues are even more complicated for multinational companies. Further, in addition to international laws, a patchwork of US laws, including 47 different state breach notification laws, need to be considered in the event of a data breach. The sale and resale of data can also trigger various laws.
Entities should consider in advance the legal implications of their intended use of Big Data and how that use will be perceived by the public. Even if the intended use of data is compliant with law, companies should consider how customers and the public at large will react to disclosure of the companys data practices. Uses that are considered intrusive, unethical or creepy can generate bad press. For example, Facebooks manipulation of news feeds to ascertain the impact on users moods and Ubers collection of suspected one night stand data, its so-call Rides of Glory research, generated negative headlines. Both companies apologized following public outcry. As business and the public become more savvy about data practices, however, its not a stretch to envision customers refusing to entrust their data to entities that will use it in ways that might anger or embarrass them. Todays companies should ensure before Big Data projects are undertaken that their use of data is consistent with how they want to be perceived and with their brand.
Companies also must consider the impact of data-related litigation on their reputation. In addition to typical consumer class actions (that usually contain all sorts of unflattering allegations against the defendant) that follow many breaches, lawsuits are now being filed against corporate officers and directors, asserting that poor management led to the breach. Regardless of the legal merits of those suits, and putting aside the cost to defend against them, they can generate bad publicity for everyone involved. Reputational harm can also result if companies have not prepared a breach response plan and practiced how they will publicly respond to a breach, before one ever happens. Again, planning in advance is the key.
Conclusion
Clearly, Big Data and all its implications, is not just an IT problem. Since data is the lifeblood the new oil for companies that want to compete and thrive in the global marketplace, deciding in advance how data will be collected, stored, secured, sold and used should be a top business priority, and all decisions should be consistent with and reflect the companys core values. Failure to do so can have long term effects on the enterprises bottom line, reputation and valuation.
