I hope you have had a chance to read my earlier blog about the steps that an organization can take to become data-driven. The more I thought about that particular blog, the more I realized that it does make a very significant presumption: that companies should become data-driven. Which begs the question – why would a company want to become data-driven?
Why Be Data-Driven?
Every company tries to provide value to their customers. The more value they provide to their customers, the more the value of the company goes up (at least in theory). But one may ask – How do you measure the value of a business?
The financial industry has come up with various ways to measure the value of a business. Two of the most common financial measures that people look at is EV (Enterprise Value) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The ratio of EV/EBITDA is commonly used when comparing a firm’s fiscal performance.
The lower the value of the ratio, the more attractive your company is for private and individual investors. Alternatively, the best way to decrease the value of the fraction is by having a high EBITDA value. Calculating EBITDA for all non-financial purposes is the same as EBIT, which is revenues minus expenses. Therefore, the higher the revenues and lower the expenses, the higher the value of the business, which completely makes sense!
So the question now becomes, can data-driven organizations increase EBITDA?
To answer this, let’s look at a few pieces of research. There are various research reports done by consulting companies that very clearly prove that a data-driven culture directly impacts the bottom line in terms of EBITDA. I want to site three examples of such research:
- This paper by PWC claims highly data-driven companies are 3x more likely to report significant improvement in decision making
- This research done by McKinsey shows clear larger growth in EBITDA earnings for big data leaders compared to other companies. The research also points out that companies who are data-driven are more productive.
- This research from Economist Intelligence Unit clearly shows a strong correlation between organization financial performance and their use of data.
The Value of Data
The value of the data is also increasing. The market capitalization of data-driven companies has grown at a higher rate than other companies in the past decade. In addition to this, the market capitalization directly impacts the EV of a company making the company very attractive for mergers. It’s not abnormal for companies to be acquired just for the data they own. IBM’s acquisition of The Weather Channel is a great example of that. Now with the arrival of Artificial intelligence(AI), data has become even more valuable to companies. I remember a great quote from a IBM spokesperson: “ There is no AI without IA (Information or Data Agenda)”
CFO and CIO collaboration
By now, it should be clear that Big Data technologies, and IT in general, can be used not only to cut costs but also to find efficiencies in operations, finance, supply chain, customer service and various business functions of the company. Additionally, it can be used to generate revenue growth, enter new markets and become more valuable to investors in various industries. CFO’s can take advantage of the extensive research that outside agencies have done in tying business growth to technology and data. For example, this research shows 48% of the CFO’s who say that analytics is a very high priority had EBITDA growth of greater than 10% over the past three years. Data and analytics is typically a CIO function, but there is a huge need in the industry for more collaboration between the CFO and CIO functions. Having a data-driven champion in both roles would accelerate digital transformation and creating a data-driven culture.
Hopefully, we have shown a clear relationship between the value of a business and the way data is managed by the company. With this as a foundation, companies can confidently start investing in the data-driven transformation goals.