Big Data’s undeniable impact on companies’ goodwill and reputation has permeated the landscape of corporate valuation. Recent research confirms that companies need to face the new normal whereby corporate reputations suffer after mishaps with data under their control. Today’s companies must appreciate that their use, misuse and governance of Big Data can have an impactful effect on their goodwill and resulting valuation.
Valuation of modern corporate enterprises
Companies need to face the new normal whereby corporate reputations suffer after mishaps with data under their control.
In today’s data-driven economy, many organizations’ value is derived from much more than the sum of their tangible assets. Goodwill—which has no physical component—qualifies as an intangible asset, as opposed to tangible assets of the brick and mortar variety. The value of goodwill is the difference between a company’s purchase price and the fair market value of the tangible assets involved in the acquisition.
Reputation, the value of a company’s brand name, customer lists, and positive customer interactions qualify as certain subjective elements of goodwill. There is no time limit to goodwill since it is inextricably linked to a business itself, and it cannot be sold or transferred separate and apart from the entire business.
In the modern corporate environment, intangible assets can sometimes substantially trump the value of tangible assets and are critical components impacting a company’s successful future. Gone are the days where reputation is treated as an inconsequential and undefined metric. Instead, a company’s reputation is increasingly recognized as a crucial component of a company’s overall valuation.
KPMG identified in a 2010 study on “Intangible Assets and Goodwill” that most industries typically allocate more than 50 percent of the purchase price of a business to goodwill. Internet and e-commerce companies reflect the highest allocation percentage at 70.4 percent.
According to the 2014 Reputation Institute’s Annual Reputation Leaders Study, number one of the top 10 questions asked by the Reputation Leaders Network Membership was: “How do we measure the business value from improving our corporate reputation?” Participants in the study indicated that reputation is a major contributing factor to business success. The study highlighted that one of the four critical competencies necessary to manage corporate reputation is “Intelligence & Strategy,” which revolves around the analysis of Big Data and the development of a business strategy based upon research identifying public views of a corporation.
In a 2013 study by Deloitte entitled “Exploring Strategic Risk”, 300 executives from around the world identified reputation as the No. 1 strategic risk area. One of the main reasons companies are growing increasingly concerned about their reputational footprint is the omnipotence of social media, specifically due to its lightning fast speed and global impact. According to the study, the top five technology threats to business models are social media (47 percent), data mining and analytics (44 percent), mobile applications (40 percent), cloud computing (38 percent) and cyber attacks (36 percent).
In light of those results, it’s not surprising that 91 percent of the companies participating in the study have altered their business strategies as a result of the development of mobile, social, big data and other extensive technology innovations. Clearly, today’s companies must confront the inevitable risk of relinquishing control of their reputation messaging on both internal (employer-based) and external levels, particularly because social media drives public perception at breakneck speed.
How today’s most data-dependent companies are valued
Big Data has become a still-evolving but flourishing factor in the valuation of modern business enterprises, particularly for social media companies. Though goodwill inhabits the forefront of factors impacting valuation, others include the number of users, revenue (including advertising), and the 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, Instagram 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.
Facebook’s IPO is a prime example of the value of Big Data to modern enterprises since it was the largest opening valuation for an American tech company. Its astounding and continually high valuation derives from 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
Companies need to consider a variety of legal issues before launching a Big Data project. 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. In addition to international laws, a patchwork of U.S. laws, including 47 different state breach notification laws, need to be considered in the event of a data breach. Decisions around the storage, 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 the law, companies should consider how customers and the public at large will react to disclosure of the company’s data practices. Uses that are considered intrusive, unethical or “creepy” can generate bad press. For example, Facebook’s manipulation of news feeds to ascertain the impact on users’ moods and Uber’s collection of suspected “one-night stand” data, its so-called “Rides of Glory” research, generated negative headlines. Both companies apologized following public outcry. As business and the public become savvier about data practices, however, it’s 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. Today’s 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, such suits 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.
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 company’s core values. Failure to do so can have long-term effects on the enterprise’s bottom line, reputation, and valuation.
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