Accounting for Social Media

What are generally accepted accounting standards for Tweets?
David RosenbaumFebruary 10, 2012

LinkedIn, the professional social-networking site, reported yesterday that its profits jumped 30% and its revenue more than doubled in its last quarter (from $81.7 million last year to $167.7 million), strongly suggesting there’s a financial reality underpinning the buzz and hype surrounding social media.

That reality was reflected in last week’s PricewaterhouseCoopers “4th Annual Digital IQ Survey” of nearly 500 U.S. business and technology executives, which reported that 80% of PwC’s “top performers” (defined as companies in their industry’s top quartile for annual revenue, growth, and profitability) expected to increase their use of Twitter to engage with customers, and 62% planned to invest in social media for either internal or external communications. Sixty-six percent of those companies also said they’ll be collecting more customer data this year, presumably via channels that include social-media feeds.

The question of how to account for all that data is, of course, the CFO’s to answer. Or, as PwC principal and survey co-author John Sviokla says, “How do I think about the data I need to get to drive business value without distracting myself? CFOs never had to ask those questions. The controls CFOs use are the same they used a hundred years ago: return on invested capital, gross margin, inventory turns.”

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Currently, Sviokla continues, “We have sentiment analysis in the social-media space. Is our brand trending up or down? Are influencers saying good or bad things about us? What do web statistics mean? Click rates? What does a Yelp rating mean?” Sviokla suggests that CFOs need new statistical techniques outside traditional GAAP accounting that blend in social-media information to create systems to measure financial activity.

This, Sviokla emphasizes, does not mean that dividing net income by total assets to derive return on assets no longer applies — “You have to do that; it’s just as important as it’s ever been,” he says — but CFOs need to figure out how to add sentiment and social measures to their calculations.

Does Inventory Have Feelings?
“The CFO does an analysis of the pattern of demand and the carrying cost of unused inventory (overage) and underage (what I lost by not having it on hand). You compare the two numbers to take inventory to the proper level,” says Sviokla. But a nonquantitative metric gauges how the customer might react to the outage. That’s a behavioral factor that can be derived by tapping into social-media spaces.

If you can do that, adds PwC principal and study co-author Chris Curran, “you can make a better calculation. It’s daunting, but the way to think about it is to go through discussions and prioritize the decisions you as an organization need to make to get better. From that, you drive information needs and investments.”

The Pain of Investment
No CFO wants to spend money unnecessarily. But neither does she or he want to see revenues and market share shrink. And although last month Gartner forecast a 2.2% decline in IT spending growth for 2012, global IT spending is still an estimated $3.8 trillion. Sviokla believes the choice not to invest is extremely high risk.

“Information and technology assets are long lived,” he adds, “so you can fool yourself into thinking they’re okay relative to the competition. I wish software would rust, because then people would upgrade and do maintenance.”

Sviokla gives the example of a company with a high-volume, high-transaction customer that has allowed four separate databases to grow up around that customer’s business, forcing service people to go to four different databases to manage the relationship. “That’s like not putting a roof on your house,” he says. “You’re going to have to bite the bullet and put a roof on. If there’s remediation to be done, that’s a stay-in-business kind of investment.”

That doesn’t mean blindly spending money to collect and analyze ever more data. Curran cites an insurance company that was spending $40 million annually to capture all the data it could. Then management said, “We need to figure out why we’re collecting all this stuff,” he says.

“CFOs need to think more outside-in because of the availability and relevance of third-party information, such as that from social media. Most of us think inside-out: our products, our services, our people. Now we have new datasets from other people generated outside our control but available due to the openness of online platforms. Gathering and integrating internal and external data, well, no ERP system can do that,” he says. But analytics that fail to include that third-party data will be less than relevant.

One key to figuring out whether you need to make a technology investment, Sviokla suggests, is “if the customer coming to your website knows more about their relationship with you than you do. If that’s the case, you’re underinvesting.”

In the social-media arena, Sviokla says, people are talking about you. If you don’t know what they’re saying, there’s an asymmetry to the relationship that is not in your business’s favor. “The best B2Cs integrate social-media analysis and their call centers in real time in order to analyze and respond,” he says. If your company can’t do that, he concludes, it’s underinvested in technology and assuming an existential risk.

“Can all these data streams be integrated, made a part of your accounting?” Sviokla asks rhetorically. “I don’t know. Do they have to be monitored and managed? Yes. Unless you’re planning on retiring soon, get used to it.”