What’s IT Worth?

Most companies fail to report the true value of their software assets, according to a new study.
Laura CameronDecember 10, 2007

Though global spending on IT exceeded India’s GDP last year, a new study suggests that companies aren’t getting their money’s worth. The report, commissioned by UK software company Micro Focus and carried out by Soumitra Dutta of French business school Insead, claims that companies mistakenly manage software “not as an asset for value creation but as an expense to be minimised.”

The study found that only 40% of the 250 CFOs and CIOs surveyed could place value on the software used by their companies. “Deep knowledge about [a] firm’s products, services and its processes are embedded in its core software assets,” according to Dutta. Thus, the value of software should be leveraged in the same way as other intangible assets such as a company’s brand or its patent portfolio. The ultimate goal of the valuation exercise, Dutta says, is to boost a company’s enterprise value in order to gain competitive advantage.

Don’t tell this to Nicholas Carr, whose widely read book Does IT Matter? (Harvard Business School Press, 2004) argued that the commoditisation of IT has led to a “corrosion of competitive advantage.” But Dutta reckons Insead has developed a “novel technique” to value software assets. Using conjoint analysis — “a time-tested and widely used robust technique in marketing science,” Dutta claims — companies can place a value on software by identifying its individual attributes, compiling trade-off data from employee surveys and crunching the resulting numbers using “a complex form of analysis of variance.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Brian Singleton-Green, corporate reporting manager at the Institute of Chartered Accountants in England and Wales, worries that any such valuation will be arbitrary, given that software doesn’t generate cash flow on its own. That’s a problem for companies using these values to help guide strategy. The report, he says, doesn’t explain why the value of software should play such a key role.

Dutta and his team are undeterred. They are currently polishing their methodology and “validating the results in real business settings.” In addition, they are — somewhat ironically — developing new software to help perform the analysis.