The economics of information management

April 13, 2014

Information as a strategic asset

If your business relies on information (and it would be rare to find a business that doesn’t) then it’s important to manage that information effectively to maximise its value.

Unfortunately, many organisations don’t consider information to be a key asset but rather a by-product of business processes; consequently information management is often ignored.

In this post I will introduce a framework - based on common economic principles - that provides a logical mechanism to connect effective information management to business value creation.

Potential versus realised value

As a core strategic asset, information has both a potential and a realised value to your organisation. The former is the value of the asset if it was utilised to its full potential, the latter is the value you’re currently deriving from it.

By the same token, your information assets also hold both potential and realised risks for your organisation.

Effective management means striking the right balance between the realised value and potential risk of your information and knowledge assets - this depends on your organisation’s risk appetite and the competitive drive to extract value from your assets.

If this sounds familiar, it is because it is a standard economics-based cost / benefit approach to the risk / reward metric.

A balanced approach

Many organisations are all too aware of the resource cost and risk that significant information asset holdings involve. And as with most valuable assets, if it is of value to your organisation, it is of value to your competitors too.

Indeed the unique properties of information assets (when say, compared to physical assets) do present additional complicated risks - this means that many organisations take a defensive stance to information and knowledge management - one that is focused heavily on the risk side of the equation.

There needs to be balance: there’s no harm in taking a risk averse stance to information management, as long as it is a explicit decision within an appropriately specified cost / benefit framework.

An overly risk-averse approach raises significant costs such as resource wastage and missed opportunity.

The value of information from first principles

The formulation of information and its properties comes from the information theory discipline and forms the starting point for this cost-benefit approach to information management.

First, and at the most general level, information theory states that information serves to reduce uncertainty (also known as entropy); that is, as more information becomes available (or the available information is used more effectively), uncertainty is reduced.

This concept is important because (intuitively) uncertainty is inherently expensive – information theory provides a technical basis for our assertion that actions that reduce uncertainty hold value.

Principle 1: Actions that reduce uncertainty hold value; information is an input to the value-add / production process.

Second, information theory suggests the effectiveness of a process’ (or persons’) use of information directly affects the size of the reduction in uncertainty.

Principle 2: Information is akin to other inputs to production in that its realised value is dependent on the productivity of its transformation.

Finally, information theory implies that the characteristics of information storage and transmission affect its quality and form. It follows that different types information require differentiated treatment to be used effectively.

Principle 3: Information is not homogeneous; the production of value from information is affected by the technology used.

These three principles form the basis for treating information as an asset used in production; they also raise some questions:

  • If information is heterogeneous, what are its primary genera (categories)?
  • If information has productive value, how do we measure it?
  • If we can’t measure its productive value, does this matter?

Two fundamental forms of information

The information continuum is often referred to as:

Data > Information > Knowledge > Wisdom

While a useful mnemonic, I’m not sure how much it helps us build a theory-based framework for information management. I think a more useful treatment seeks to understand the characteristics of information which determine the technologies that will deliver the highest value-add transformation during the “production process”.

Information theory suggests the determining factor is actually the storage mechanism, because this determines precisely how information can be accessed and transformed. And, in the most general terms, information is stored in only two forms; data which is information stored in an information technology (IT) system - and knowledge - which is information embodied in people.

The two primary forms of information are:

  • Data: the embodiment of information in an information technology system
  • Knowledge: the embodiment of information in people

Now - in the strictest sense - some classify the human brain as an information system too, that aside, the data vs knowledge distinction is critical;

The effective management of information depends heavily on its embodiment; value and risk for an information technology system are of a very different nature than the value and risk related to the knowledge embodied in people.

I am going to discuss the implications of these two classifications shortly, but first I want to outline the value calculus around information, and why it’s not directly important.

Do we need to measure the value of our information assets?

The realised value of an information or knowledge asset is determined by how effectively it is used to address business needs - but this is an very difficult thing to accurately quantify.

Gartner’s Doug Laney introduced the concept of blunder funding to describe how many organisations value their information and knowledge assets:

Blunder funding

  • basing the level of investment in a business initiative upon the amount of loss incurred from a recent mistake or mishap
  • making a hasty outlay for a project to deflect or cover up for those responsible for a mistake
  • allocating monies or budget to fix a problem symptom rather than its actual cause

A more scientific approach suggests an experiment that controls the flow of information to a process in order to determine the value of that information to the process - in reality very few businesses are going to be willing to perform such experiments that, by nature, would harm their business (see the corollary from economics of the natural experiment).

Even though we might not be able to define the value of information assets in absolute terms, we can examine the type of actions that increase their value (and therefore increase the effectiveness of the business) and some methods that allow an ordinal ranking of the importance of those assets.

The objective of this framework is not to provide a mechanism to determine the absolute value of a set of information assets, but rather to rank their value and to understand the actions that would increase or decrease that value.

Ranking the potential value of your information assets

The framework requires that we rank the relevant information asset relative to other relevant information assets on their potential (not realised) value.

While this is far from an exact science, some questions you might like to explore include

  • what value would be added if:

  • Everyone who had a legitimate need to access to the information were able to access it?
  • Precisely when they needed it?
  • In the precise form they needed it?

You can also use more traditional asset valuation methodologies including a market approach, cost approach or income approach - but these are likely to give you more of an indication of the replacement cost of the information asset than its potential value.

The criteria above also provide a guide as to the parameters you should consider when thinking about how to maximise the realised value of your information assets.

Maximising the value of data assets

This are all pretty standard information management concepts; I repeat them here for completeness only.

  • Increase quality
  • Increase availability
  • Increase ease-of-use
  • Introduce new technology (to better transform and add-value)
  • Add new or external data sources

In the same way that increasing the quality and ease-of-use of proprietary data increases its value (and in turn increases the realised value of the data assets to the business), providing access to high-quality, easy-to-use external data also increases the ability of the business to meet its objectives.

Maximising the value of knowledge assets

Knowledge, as information embodied in humans, is only valuable to your business if it is:

  • Available to the right people
  • At the right time
  • In the right format

So while human capital is obviously key, IT has a critical part to play in enabling knowledge transfer between people in your organisation - to remove bottlenecks and key-person risk.

The converse: minimising the value of information assets

It might seem obvious how we make information more valuable (I hope so!) - but perhaps what is less obvious is the cost of inaction or of decisions that restrict access to information.

In some ways, value and risk are polar opposites – for example, the failure to realise value from an asset is a risk in itself, and increasing the realised value of information assets reduces business risk across a broad spectrum of activity.

To be clear - this is not an argument for free access to information - quiet the opposite - it is an argument for businesses to be more aware of the benefits and costs associated with how they manage (or don’t manage) their information.

This section could be a whole blog post by itself (and this one is already too long) so I will just include a few high level principles. If your organisation is not doing some or all of these, then you’re reducing the realised value of your information assets:

  • Make it easy for employees to access the information they need to do their job
  • Make it easy for employees to find and share knowledge within your organisation
  • Embrace failure and learn from it
  • Encourage change throughout the organisation

How important is IT in information management?

Much of information management is about setting organisational strategy and policy - in many organisations the IT and information management roles are distinct - but an effective information management strategy must be based on the support and direct engagement with the businesses IT function, if not directly part of it.

This is just a starting point

Information management is a complex area and effective information management is heavily dependent on the organisation and the resources available; that said, I believe any organisation can benefit from a discussion about IT and information that starts from a cost / benefit approach.

I hope that this framework is helpful for your organisation or even just for the way you think about information management.