Barry Libert

I am proud to announce that our article on Network Organizations (Uber, AirBNB and Alibab) was one of the ‘Ideas that Shaped 2014′ according to HBR.   To read the story in HBR, see the attached.

The post Ideas that Shaped 2014: HBR appeared first on OpenMatters.

The following article appeared in WSJ/CFO Journal in December, 2014 .

One glance at The Wall Street Journal will show you that digital business models are increasingly in vogue. Uber, Airbnb, DropBox, and WhatsApp are just a few of the more recent examples of this rapidly growing $10 billion digital start-up trend. CFOs of established firms are taking notice that going digital creates value.

Research by OpenMatters with Deloitte & Touche LLP, examining 40 years of data from the Standard & Poor’s 500, finds that investors assign higher valuations to organizations that embrace emerging technologies (big data, social media, the Internet of Things, and mobile, and so on) to create digital networks. This change is part of a broader trend of corporate value shifts from the predominance of tangible assets, including plant, property, equipment and financial assets, to value from intangible assets.^[1] As digital technologies increasingly disrupt age-old sources of value, this issue of CFO Insights, looks at how CFOs can tap into this value shift through business model innovation.

Four Business Models Driving Value

The rise of intangibles as a part of total market and corporate value has occurred in conjunction with the proliferation of new business models. Our research, in fact, shows that almost every company fits into one of four types business models, regardless of industry or function—and each one corresponds to a shift in technology and asset structure. Specifically, companies predominantly fall into one of the following categories, based on the way they create value:

1. Asset Builders. These companies build, develop and lease physical assets to make, market, distribute, and sell physical things. Examples include everything from automakers to chemical manufacturers, big box retailers, and distribution and delivery businesses.
2. Service Providers. These companies hire employees who provide services to customers or produce billable hours for which they charge. Examples include consulting firms and financial institutions.
3. Technology Creators. These companies develop and sell intellectual property such as software, analytics, pharmaceuticals, and biotechnology. Examples include software, big-data tools, and medical-device companies.
4. Network Orchestrators. These companies create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create and more. Examples include online financial exchanges, social media businesses, and credit card companies.

The models are differentiated by the underlying technology that was leveraged to develop them. For example, Asset Builders emerged from the Industrial Revolution, when business was fueled by factories; Service Providers developed in the mid-1970s, when companies started to service what they sold; Technology Creators flourished during the 1990s’ information revolution; and Network Orchestrators, the newest entrants, are the companies that have embraced technologies, such as the cloud, analytics, social networks, Internet of Things, and mobile technologies (CASIM) to create value through leveraging unique information, and by orchestrating value generated by network participants. Although a company’s business model may not reflect when a particular company was founded, it does represent what technologies and methods it uses to create value.

The business models are also differentiated by the increasingly lower marginal costs afforded by the technologies embraced. In fact, the OpenMatters/Deloitte research has found that evolving technologies produce a “multiplier effect,” increasing market valuation from 1x to 2x revenues as you move along the spectrum from Asset Builders to Service Providers. Above the “digital divide”—meaning companies that either fall in the Technology Creators or Network Orchestrators categories—companies receive valuations 2x to 4x higher than the other two business models. Moreover, those latter two business models also outperformed on other dimensions, including ROCE, ROA, and EBIT margin in both the short- and long-term.

Business models and the value shift

From 1972 to 1992, the most valued 5% of the S&P 500 were mostly Asset Building companies. From 1992 to around 2010, Technology Creating companies dominated the top valuations. Finally, 2001 to 2012 saw the rise of Network Orchestrator businesses, which are on a trajectory to make up the majority of the top valuations within the next decade.

Only a few companies, however, are capturing the extra value created by Network Orchestrators. In 2012, less than 5% of the S&P 500 had value multipliers higher than 6x revenue (mostly Technology Creators and Network Facilitators), while more than 60% had a multiplier less than 2x (mostly Asset Builders and Service Providers). In addition, few companies ever reach beyond established business models to capture the new sources of digital value. In fact, in the Q2 2014 CFO Signals report, half of CFOs surveyed said their company generates all of its revenue from just one business model, and about 80% said they generate at least 70% of their revenue from a single model.^[2]

For individual companies, the shift to intangibles is also reflected in the slow demise of book value. The major auto companies, for example, maintain enormous real-estate holdings (for example, factories), but managing those holdings drains cash, dilutes focus, and hinders innovation. On the other hand, Apple, which relative to its size has few tangible assets and thus a low book value, is a perpetual innovation machine and has the highest equity value—more than $620 billion—of any company globally. This crucial distinction calls into question the long-accepted belief that ownership of tangible assets is an essential path to sustained success.

Tapping into the value shift

The rise of intangibles—which typically consist of human capital, intellectual capital, and network capital—also has implications for finance and corporate strategy. These forms of capital can create both new cash flows and “real growth options” to enhance corporate value (see W.C Kester, “Today’s Options for Tomorrow’s Growth” Harvard Business Review, March-April 1984^[3]). Tapping into this value shift requires CFOs to consider the following:

1. Shifting mental models. Companies, through their leaders, invest in what they believe has value, and that is driven by the “mental model” of a company’s CEO, the CFO, its management team, and board of directors. For example, leaders of Asset Builders believe that value resides in developing and owning (or leasing) hard assets, which can be used for manufacturing, distributing, and selling physical things. On the other hand, Network Orchestrators’ top priorities are building and operating social and commercial networks that foster interactions and co-creation with their customers and suppliers. For CFOs, migrating a company’s mental model is the first step to capturing the value inherent in intangibles—and a topic we will explore more deeply in part three of this series.
2. Adjusting capital allocation. CFOs would agree that capital should be allocated to where value is created. Yet, while technological and cultural shifts have created opportunities for new, more-profitable business models, many finance chiefs are still allocating capital based on outdated thinking about risk and rewards. Based on our analysis of 40 years of company data and their asset allocations, our findings suggest that most leaders are not allocating their capital to today’s sources of value and technologies in order to harness the power of intangibles. For CFOs, who own the capital-allocation process, or at least have a material role in this process as catalysts or strategists (see the Four Faces of the CFO^[4]), it is important to revisit capital allocation and assess if it taps into the broader value shift. At the very least, we suggest that CFOs allocate 70% to their core business model, 20% to the adjacent business model, and at least 10% to activating dormant networks into value-generating initiatives, including crowdsourcing new ideas.
3. Rethinking business performance management. Financial data alone is no longer sufficient to convey the value that the new digital business models create (as evidence that more than 80% of today’s corporate value is generated by intangible and unreported “assets”). Given this reality, “big data” (which refers to the information gathered on everything from customer transactions to inventory levels, often in real time, and in quantities previously unimaginable) needs to be fused with financial data to constantly measure, monitor, and report the results from these new and often unmeasured and unreported sources of value (customer engagement on websites for example). For CFOs, this means finding ways to mine the information new technologies offer in order to help their organizations benefit from today’s hyperconnected, flat world.
4. Adjusting investor relations. Once a company crosses the digital divide, how it measures, manages, and communicates its value to its investor relations professionals and to analysts also must change. After all, if you are providing more value, you want to be recognized for it. It is not always a linear path, however. First, language has to change: new key performance indicators (KPIs) fueled by big data need to be developed to reflect the value added. And sometimes the audience has to change. When WWE transitioned to its business model to content as a subscription, it also changed how it communicated and as a result, the investment analysts that covered the company changed too. For CFOs, this means that companies can manage (and report) only what they measure and investors follow suit. So to receive the benefit of today’s high valuations, CFOs need to measure what is valuable, report it to their management team and board, and allocate capital to these intangibles to get investor buy-in and support. 

CFOs as strategists in the digital age

Given CFOs’ fiduciary responsibility to deliver shareholder value, it makes sense that they should be leaders in digital business model innovation. When the evidence shows that each marginal dollar can be spent to generate value at a multiplier of 1, 2, 4 or 8 times revenues, CFOs have a responsibility to actively engage as strategists or catalysts for digital business model innovation. They can harness the value shift by actively rebalancing their company’s investment portfolio and reallocating capital to create scalable and extensible intellectual property, and consumer, commercial or financial networks, that generate substantial additional value for their organizations.

Authors:

William Ribaudo, Partner; Dean, U.S Next Generation CFO Academy, Deloitte & Touche LLP,  wribaudo@deloitte.com

Barry Libert, Chairman and CEO, OpenMatters; Senior Fellow, SEI Center at Wharton. barry@openmatters.com

Ajit Kambil, Global Research Director, CFO Program, Deloitte LLP, akambil@deloitte.com

Megan Beck Fenley. Consultant, OpenMatters; Researcher, SEI Center at Wharton, megan.beck@gmail.com

NOTES:

[2] CFO Signals, Q2 2014; U.S. CFO Program, Deloitte LLP

[3] W.C Kester, “Today’s Options for Tomorrow’s Growth” Harvard Business Review, March-April 1984

[4] Deloitte LLP’s Four Faces Framework: http://www.deloitte.com/view/en_US/us/Services/additional-services/chief-financial-officer/four-faces-cfo/index.htm

The post The Value Shift: Why CFO’s should lead the change in the digital age appeared first on OpenMatters.

This article first appeared in HBR on November 20th, 2014.

When Facebook acquired the messaging service WhatsApp for $19 billion in the spring of 2014, the question on everyone’s mind was, does the service really merit a valuation of almost 20 times projected revenues?

WhatApp’s valuation may be extreme, but huge gaps between revenues and valuation are increasingly common. Cloud-based sharing service Dropbox received venture capital funding at a valuation of $10 billion, or 40 times revenues. Airbnb.com raised funding at a valuation of $10 billion, which would make it worth nearly 20 times its revenues — and worth more than Hyatt Hotels or Wyndham Worldwide. Taxi-replacement service Uber is currently raising funding and is expected to see a valuation of $30 billion, estimated to be more than 15 times revenues. Most recently, Alibaba’s IPO raised funds at a value approximately 10 times revenues.

These companies represent a new trend in the types of business that investors prefer. Leaders of more traditional companies are left wondering why these upstarts merit such high valuations. Are they more profitable? Do they see faster growth? Do they have higher return on assets and lower marginal costs?

Our answer is yes — to all of the above.

In collaboration with Deloitte, we examined 40 years of financial data for the S&P 500 companies to see how valuations trends have evolved along with business models and emerging technologies. Our research led to three key findings.

1. There are four business models.

To begin, we searched for a simple way to characterize the different types of business that were engaging the hearts and minds, and pocket books, of investors. Because today’s highly valued, fast growing businesses can be found in almost every industry, we quickly moved past standard industrial classifications and developed a new framework based on business model, which is the principal way an organization invests its capital to generate and capture value.

The four models are:

• Asset Builders: These companies build, develop, and lease physical assets to make, market, distribute, and sell physical things. Examples include Ford, Wal-Mart, and FedEx.
• Service Providers: These companies hire employees who provide services to customers or produce billable hours for which they charge. Examples include United Healthcare, Accenture, and JP Morgan.
• Technology Creators: These companies develop and sell intellectual property such as software, analytics, pharmaceuticals, and biotechnology. Examples include Microsoft, Oracle, and Amgen.
• Network Orchestrators. These companies create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create and more. Examples include eBay, Red Hat, and Visa, Uber, Tripadvisor, and Alibaba

We applied this business model framework to our dataset, the S&P 500 Index companies from 1972 to present, in order to see how the four models performed over time. Two different researchers categorized each company into its dominant business model, giving consideration to several factors: The company’s description of itself in annual reports; the revenue generated by different business units; capital allocation patterns such as R&D or COGS expenditure; and market perceptions including news articles and analyst reports.

Although most companies operate in several business model categories, we assigned to each company the most advanced business model that it uses for a significant portion of its business, or that it is making strong efforts to develop. For example, although most of Nike’s business is manufacturing and selling shoes, which we classify as Asset Building, Nike has also developed the Nike+ ecosystem, which connects these physical goods to the Internet where users track activities and share progress with their friends. For this reason, we classified Nike as a Network Orchestrator.

2. Network Orchestrators create more value.

Our business model classification and analysis yielded some surprising results. Network Orchestrators outperform companies with other business models on several key dimensions. These advantages include higher valuations relative to their revenue, faster growth, and larger profit margins.

Let’s look at the numbers in detail. Our analysis indicates that as of 2013, Network Orchestrators receive valuations two to four times higher, on average, than companies with the other business models. Further, trend data over the past decade indicates that this valuation gap is widening over time. We call this degree to which a business model drives the gap between revenues and valuation “the multiplier effect.”

A company’s price to revenue ratio – what we call its “multiplier” — is calculated based on its market valuation and revenues, two numbers that are difficult to manipulate with accounting. Market valuations reflect investor expectations for future cash flows, and indeed we found that companies with the highest multipliers outperform less valued companies on revenue growth, profitability, and Return on Assets for more than a decade.

When we looked beyond the impact of business model on price-to-revenue ratio, we also found that Network Orchestrators outperform companies with other business models on both compound annual growth rate and profit margin. We believe this occurs because the value creation performed by the network on behalf of the organization reduces the company’s marginal cost, as described in Jeremy Rifkin’s The Zero Marginal Cost Society. For example, TripAdvisor.com benefits from its customer’s reviews and AirBnb leverages its network’s housing assets.

3. Few companies operate as Network Orchestrators.

Fewer than 5% of companies are Network Orchestrators despite the positive impact of this business model on multiple performance measures. Why? We see several reasons.

• First, today’s network-based business models require new technologies and competencies. Most corporate leaders are skilled at building, owning, and managing their own physical assets or people. Network Orchestrators, however, rely on intangibles such as knowledge (Gerson Lehrman Group) or relationships (Facebook), or other people’s assets (Uber) as well as new “non-management” and “non-ownership” competencies related to facilitating a network of individuals and their individual assets and relationships.
• Second, Generally Accepted Accounting Principles (GAAP) categorize some assets as “assets” (plant property and equipment), others as expenses (people, training, and intellectual property) and ignores others (customers, sentiment, and networks) altogether, frequently resulting in the under-allocation of capital to intangible assets. This is especially problematic given that, today, intangible assets make up approximately 80% of corporate market value.
• Third, standard industry designations result in siloed thinking, leaving empty space where new business models can enter. For example, think back to the early 1990s. Most traditional retailers were slow to move into the online space because they didn’t consider themselves “technology companies.” The online market was left open, and in came a slew of new players such as Amazon, eBay, and Zappos, who gobbled up market share and changed the retail game. Today, the power of networks is creating a new cross-industry transformation. Consider what Uber and Lyft are doing to the taxi industry or how Airbnb is affecting the hotel industry.
• Finally, business models are tightly integrated into all parts of a company, and are therefore daunting to change. Changing business model requires changing capital allocation, but Research by McKinsey & Company shows that most companies follow the same allocation patterns year after year, despite dramatic changes in the business environment.

These four factors make it difficult for executives and board members to cash in on the value offered by new business models.

Networks are sources of information, capabilities, and assets that lie in and around every organization. Most networks, however, lie dormant and untapped. To become a Network Orchestrator and create more value and better performance, leaders must connect to and activate their networks, tapping into new sources of value, both tangible (Airbnb’s network of lodgings) and intangible (the expertise of Apple’s Developer Network).

4.  Four Steps to get started and realize value like Airbnb, Uber and Alibaba

We recommend that all leaders and boards consider the steps below:

1. Assess your business model. Understand which business models currently exist within your organization and also the preferences and biases of the leadership team members who have created these models through capital allocation.
2. Inventory your network assets. Take stock of your dormant network assets including customers, employees, partners, suppliers, distributors, and investors, and determine which have the greatest potential.
3. Reallocate your capital to networks. Divert at least 5% to 10% of investment capital to activating your networks. Take an experimental approach to early allocation and expect ongoing adaptation. This could be accomplished organically, or through acquisition or partnership.
4. Add network KPIs. Add to your standard financial metrics new network-oriented indicators such as number of participants, their sentiment, and level of engagement. These KPIs will provide direction for your network adaptation.

The bottom line: begin your evolution today and create the multiplier effect in your own organization. Activate your dormant networks by reaching out to your customers, employees, partners, suppliers, employees, and investors and figure out how you can co-create value with them.

Take this assessment on www.digitalgrader.com to determine your business model and learn how to build and leverage your network assets.

The post What Airbnb, Uber and Alibaba have in Common appeared first on OpenMatters.

The following article appeared in the November 3rd issue of FT’s AgendaWeek.

One glance at today’s most valuable companies and multi-billion start-ups tells the entire story: its time for all board members to cross the digital divide or put at risk the future of their organization. Alibaba, Facebook, Uber, DropBox, and WhatsApp are all just a few of the more recent examples of news-making digitally enabled businesses enjoying high investor valuations and customer numbers.

But these examples are just the tip of the digital iceberg, according to research by OpenMatters, with input from Deloitte & Touche. Our research, based on data from S&P 500 companies, shows that investors assign higher valuations to companies that embrace new technologies such as social, mobile and big data and other Internet technologies, and then use them to create digital networks. These systems ultimately shift the cost of making and selling knowledge to their own technological infrastructure, and reduce to nearly zero their marginal cost of operations. Some of the more traditional boards have realized trend and are beginning to “de-industrialize” their companies, reallocating their capital from tangible assets and traditional on-premise technologies to intangible assets such as human, intellectual and network capital as well as digital technologies. The real question is: has your board?

To profit from these highly valued, non-owned assets of your customers, we recommend four steps for all board members:

Assess your board member’s unstated mental model. Boards and leaders invest in what they believe has value, and that is driven by their “mental model.” For example, leaders of asset intensive companies believe that value resides in owning or accessing hard assets, which can be used to manufacture, distribute and sell physical things. On the other hand, digital natives such as Facebook and Alibaba prioritize building social and commercial networks that foster interactions with or among their customers. Boards must take stock of preexisting attitudes, behaviors and beliefs regarding what creates value so that they can realign their mental models with today’s investor and customer realities.

Realign your board’s capital allocations with today’s value realities. Boards are responsible for driving shareholder value and that means allocating capital to where value is created. However, our research shows that few companies are keeping pace with today’s digital technologies and many are falling prey to the organizations that are leading the fray. To meet these needs, we recommend that boards allocate at least 10% of corporate capital to activating dormant networks, be they customer, employee, partner, or investor, using today’s digital technologies.

Integrate big data with your financial and operating data. Financial data alone is no longer sufficient for boards to make informed decisions about capital allocation and sources of value. Given this information gap, boards must add new key performance indicators, or KPIs, to track intangible assets. We also recommend adding big data updates to standard board packets. The big data reports should include information gathered on everything from customer transactions to employee engagement levels.

Change what and how you communicate to your shareholders. Once a company adapts capital allocation and crosses the digital divide, it must change how it communicates these new sources of value value to shareholders and analysts. After all, if you are providing more value, you want your company to be recognized for it—particularly in terms of valuation. There must be a shift in language and in focus to match the new metrics that gauge success.

The fiduciary responsibility of board members is to tend to the health and value of their shareholders, and our latest research makes a strong case for crossing the digital divide. Now is the time for boards to act and protect the future of their organizations by assessing their existing strategies, reallocating their firm’s capital to new sources of value and technologies, and managing these new ‘intangible assets’ actively with new metrics. In today’s rapidly changing business environment, no one can survive on the wrong side of the digital divide, least of which are the people responsible for the long-term viability of the organization.

By Barry Libert and Megan Beck Fenley

Barry Libert is a digital board member, angel investor and technology advisor to boards and CEO’s. Megan Beck is a consultant at OpenMatters and researcher at the SEI Center, Wharton

The post Four Ways Boards Can Overcome Digital Disruption appeared first on OpenMatters.

The following article appeared in the October issue of Observe Magazine.

Amazon.com and its customers are in a symbiotic relationship. On a weekly basis, customers give Amazon not just their money, but also their interests (through browsing and clicking) and opinions (by rating products). In return, Amazon delivers myriad purchases conveniently and quickly to doorsteps around the world, and makes useful suggestions about what its customers ought to read, listen to and buy next. For many families, this arrangement works well enough that Amazon earns its own line item in the household budget. Indeed, Amazon should probably add its customers, and the steady stream of data they generate, as an asset on its balance sheet. Imagine if it did what that would mean to how much more attention and care we would all receive?

Perhaps that’s not such a ridiculous idea given the hyper-connected world in which companies now operate. Customers are normally not accounted for in financial reports, but the shopping habits and opinions of the millions of Amazon shoppers form quite a robust piece of intellectual property. The time may have come for companies to recognize their customers as assets and contributors, not just passive consumers. Further, if organizations want to prosper in the digital age, it is time for them to build and recruit management teams that understand these facts and have real digital acumen to deliver on this opportunity.

New digital technologies, those known as CASIM (Cloud, Analytics, Social, Internet of Things, and Mobile), are enabling a new and higher- order type of relationship between companies and their customers. Companies can use CASIM technologies to increase their presence in customers’ lives – hanging out on their mobile phones, participating in their social networks, letting them rate and review – and gathering data all the while.

Big data analytical capabilities allow companies to crunch and process all this free data, turning it into useful insights that can help nurture strong and lasting relationships. Where and when do customers shop? What types of products and services get purchased together? These are just the tip of the iceberg. Intimately knowing customers allows firms to improve internal operations and better serve them.

This is a win-win situation, but it requires a change of mindset and skillset for many executives and corporate directors. Customers are already there, eagerly sharing opinions on Yelp and TripAdvisor, helping design advertising for Danone yogurt, sharing their Nike+ enabled runs on Facebook, even developing Apps for Apple.   But most established firms are hesitating when it comes to this type of customer intimacy as it means releasing some control.

Some companies are taking radical steps today to build the technological capabilities needed to capitalize on their customer assets. But it will require a savvy leadership team and board to genuinely profit from this massive opportunity.

The post Do You Really Value Your Customers? appeared first on OpenMatters.

The following article appeared in Knowledge@Wharton on August 30th, 2014

Snapchat received a $10 billion valuation this week, joining an ever-increasing number of young IPOs and startup companies that are meeting consumers’ evolving needs to create extraordinary value for investors.

How can Snapchat, Uber and Airbnb be worth so much? An answer to that question may come from an unexpected place. American psychologist Abraham Maslow is best known for his seminal research on the hierarchy of innate human needs, but his work also has a surprising application for businesses models and shareholder value, according to Barry Libert, Jerry Wind and Megan Beck Fenley, who wrote this opinion piece.

In 1943, Abraham Maslow developed his formative work on the hierarchy and progression of human needs, “a theory of psychological health predicated on fulfilling innate human needs in priority, culminating in self-actualization.” Maslow insightfully noted that the human hierarchy of needs spans from the tangible, such as food and water, to the intangible, such as self-esteem and creativity.

Maslow would probably be surprised today to discover that a similar progression can also be observed in the business world. Many firms, enabled by new, digital technologies, are making the shift from providing goods and services — physical things — to providing information and connectivity — intangible things. This shift is already creating ripples of change in finance and financial markets. Companies that serve these higher, more intangible needs of customers are being rewarded by the financial market with higher valuations than those that serve the lower, more tangible needs of customers that include structure and sustenance. Snapchat, Airbnb and Uber are just the tip of the iceberg of $10 billion startups and $100 billion public companies.

The Future of Business and Finance

Put simply, the ways businesses meet the needs of their stakeholders, and the types of needs served, have changed over time along with the development and adoption of new technologies. Together, these needs and enabling technologies create different business models, each with their own scalability, capital and operating efficiencies and, therefore, valuation.

The bottom two levels of Maslow’s hierarchy relate quite closely to the agrarian and industrial revolutions in which large organizations were constructed to fulfill the physiological and safety needs of people. These industries include farming, water, utilities, irrigation, real estate and energy (physiological needs), as well as fire, police and the military (safety needs).

More recently, however, businesses, enabled by a host of new technologies, such as cloud, social and mobile, have begun to serve the intangible needs of human beings which sit at the top levels of Maslow’s hierarchy. These include:

• Belonging: Many companies now exist to facilitate communities. Facebook connects people with their friends, LinkedIn with their colleagues and Match.com with potential mates. There are also many highly specific communities for people dealing with unusual circumstances, such as rare diseases (e.g., RareConnect.org) or unusual hobbies (e.g., ArcheryTalk.com). Many of these communities had not been able to gather and communicate previously.
• Self-esteem: There are also many new ways for people to demonstrate, and be recognized, for their achievements. From the slightly frivolous, “How many likes did my new profile picture get?” to the utilitarian, “How many stars did my most recent Airbnb guest give my apartment?” we are now able to measure our quality and impact in myriad ways.
• Self-actualization: Finally, new organizations are enabling people to express themselves creatively and/or make a living in innovative ways. Instagram allows creative expression through photographs. Etsy gives artisans a forum to share and sell their handiwork. Uber and Airbnb allow people to take control of their careers and to make a living using their resources in a new way.

It is not surprising that businesses have grown in scope to serve these higher order needs, particularly in a world in which the middle class is growing and they have fewer physiological and safety concerns. What is surprising, however, is how dramatically companies and their investors have shifted their capital from tangible, asset-based businesses (aligned with the bottom two needs) to intangible, asset-light organizations (aligned with the top three needs). According to research by Ocean Tomo, in 1975, tangible assets made up 83% of the market value of the S&P 500 companies. By 2010, the numbers had flipped completely, and intangible assets constituted 80% of market/corporate value.

This fundamental change signals something profound about the future of finance and financial markets.

Put simply, the finance function, and generally accepted accounting principles (GAAP), must adapt in order to help organizations measure and manage these new sources value (communities of common interest, self-esteem, self mastery and self-actualization). Accounting practices have not kept pace with the changing asset base of business as well as many key intangible assets. In fact, many higher-order needs of individuals are either mis-measured (lumped into the Goodwill grab bag), or ignored altogether. Human capital, such as employees, is classified as an expense. So are employee training, education and health care. Worse, customers and their relationships are not measured at all. This situation does not serve business leaders well, particularly leaders of large, established companies that are trying to find the right way to develop and use more scalable and capital-efficient intangible resources together with today’s technologies to drive performance and shareholder value. This mismatch provides a large opportunity for accounting firms to help leaders understand these different sources of value and thereby change the landscape for how business is done and governments are run globally.

Helping leaders understand and utilize intangible assets becomes even more urgent when you realize that the financial markets have already adjusted their thinking and capital allocations in favor of these newer, intangibles-based business models that use today’s technologies to scale at zero, or near zero, marginal cost. Our research, conducted by OpenMatters in partnership with Deloitte, looked at 40 years of data from the S&P 500 companies and found that investors are rewarding organizations that satisfy these higher levels of customer needs, such as community, esteem and self-fulfillment, with valuations that are far greater than the organizations that satisfy the lower-order physiological and safety needs.

Our research identified four primary ways that companies create value for their customers:

1. Asset Builders that make, market, distribute and sell physical products. Examples include manufacturers (all industries), distributors and retailers.
2. Service Providers that hire people who provide services for which customers are charged. Examples include consulting firms, health care providers and financial institutions.
3. Technology Creators that develop and sell intellectual property, such as software and biotech. Examples include software and pharmaceutical companies.
4. Network Orchestrators that create and manage networks of consumers, businesses or investors to help the participants market and sell their wares on a peer-to-peer basis. Examples include financial trading markets, on-line social networks and credit card processing companies.

The later two business models, Technology Creators and Network Orchestrators, are rewarded by the financial markets (investors) with price to revenue ratios two to four times greater, on average, than Asset Builders and Service Providers due to their focus on highly scalable “intangible assets.”

What Does This Mean for Your Organization?

Simply, this: There is a great shift in value that is occurring globally as organizations climb Maslow’s hierarchy to serve our less tangible needs. In fact, we are just beginning to witness the power of firms that use today’s technologies to fulfill the belonging, self-esteem and self-actualization needs of individuals Twitter . From well-known network players like Facebook, Airbnb and Uber, to smaller startups like Behance.com and Spoonflower, to older established companies like GE and AT&T, the market is moving towards intangibles.

All companies have a network of resources in their customers, employees, suppliers, distributors and retailers, and investors. Given this research, how can you make use of these resources in your organization? Begin to climb the hierarchy of needs by following these four steps:

1. Orientation: Understand the needs of your networks that you have not fulfilled, including community, self-mastery and self-actualization. Example: Trip Advisor created a customer network that shares hotel and travel reviews, allowing them to be viewed as trusted experts.
2. Assessment: Inventory all your relationships — their number, sentiment, capabilities, level of engagement and resources. Example: AT&T’s The Innovation Pipeline (TIP) is a crowdsourcing program that enables employees to generate, and vote on, innovative ideas for the company.
3. Action: Determine which technologies, platforms or ecosystems are essential to connect stakeholders to each other so that they can fulfill their own needs and yours. Example: LinkedIn uses social software to connect the world’s professionals to enable them to be more productive and successful.
4. Measurement: Analyze the results of your actions and those of your network members to see the value that is being created and shared. Example: Amazon.com carefully measures and tracks the inventory and transactions of its network of third party sellers to that it can support and ensure quality from this revenue stream.

All organizations, whether for profit or not, are in the business of satisfying the wants and needs of their customers. Investors, on the other hand, are in the business of rewarding, with their pocketbooks, the companies that best serve the essential needs of their customers with the most efficient business models.

Given that we are now beginning to connect the dots between what customers value (their hierarchy of needs) and what investors reward (zero to low marginal cost businesses that scale through customer co-creation), it’s time for executives (particularly the CEO and CFO), leadership teams and boards to measure and invest in what matters — not just the tangible assets at the bottom of Maslow’s hierarchy (material and tangible), but also the immaterial and intangibles at the top — so that their companies develop the tools and skills that deliver what matters to their customers. The result: more value for their investors.

The bottom line: In following Maslow’s approach to value, firms will participate in people’s entire hierarchy of needs and generate extraordinary value in the process. What more can an investor and customer ask from a company?

Barry Libert is CEO of OpenMatters and a board member/senior fellow of the SEI Center at Wharton; Jerry Wind is director of the SEI Center and a marketing professor at Wharton; and Megan Beck Fenley is a digital consultant and researcher at the SEI Center/OpenMatters.

The post Maslow Was Right: Needs = Value appeared first on OpenMatters.

This spring, a new CEO was appointed to the helm of Microsoft (and by the way, Steve Balmer already resigned from the board and any responsibilities at the firm).

What is so amazing is that finally, this once great company has realized that the world has shifted from desktop to mobile and from on premise to cloud.  now let’s see if this behemoth can make their own digital shift in their business model.

Below is the opening remarks from their new CEO.  Enjoy the read and think about what this means to your company – are you mobile and cloud first?

‘Today is a very humbling day for me. It reminds me of my very first day at Microsoft, 22 years ago. Like you, I had a choice about where to come to work. I came here because I believed Microsoft was the best company in the world. I saw then how clearly we empower people to do magical things with our creations and ultimately make the world a better place. I knew there was no better company to join if I wanted to make a difference. This is the very same inspiration that continues to drive me today.

It is an incredible honor for me to lead and serve this great company of ours. Steve and Bill have taken it from an idea to one of the greatest and most universally admired companies in the world. I’ve been fortunate to work closely with both Bill and Steve in my different roles at Microsoft, and as I step in as CEO, I’ve asked Bill to devote additional time to the company, focused on technology and products. I’m also looking forward to working with John Thompson as our new Chairman of the Board.

While we have seen great success, we are hungry to do more. Our industry does not respect tradition — it only respects innovation. This is a critical time for the industry and for Microsoft. Make no mistake, we are headed for greater places — as technology evolves and we evolve with and ahead of it. Our job is to ensure that Microsoft thrives in a mobile and cloud-first world.

As we start a new phase of our journey together, I wanted to share some background on myself and what inspires and motivates me.’

So the question is:  is your company mobile and cloud first and if not – why not?  Further, have you added networks (customer, employee or partner) to your business model?  Again, if not, why not.  Think about how powerful and valuable Microsoft would be if their 2 billion users (more than Facebook) were members of their network and felt a sense of belonging?

Its time to start today to pivot your business and build a mobile, cloud and social first company or lose any chance you have of creating competitive advantage in today’s hyper connected and peer to peer world.

The post Our Mobile and Cloud First World appeared first on OpenMatters.

Summary: Research demonstrates it’s time for the Chief Financial Officer to reconsider historic models of value, investment, and return according to Michael Krigsman in ZDNet.

Discussions about digital business transformation usually center on marketing and the CMO. The popular notion is that digital transformation is primarily a set of online marketing activities such as e-commerce, building communities, and interacting with customers on social media.

However, more sophisticated observers recognize that digital transformation has significant implications for operations and business models. For example, during a CxOTalk conversation with Ganesh Bell, the Chief Digital Officer for General Electric Power & Water, he discussed the role of sensors, data, and analytics in improving GE’s industrial products and services. In GE’s case, the digital transformation involves marketing, product development, and other parts of the company.

The CFO connection. Although most people associate digital transformation with new business models, we do not hear much about the Chief Financial Officer role in discussions on digital transformation, innovation, and disruption. The lack of CFO prominence in this discussion is probably due to several factors.

The general perception of CFO as bean counter, rather than digital ninja, does not help the case for inclusion. In addition, the CFO often plays a background role when it comes to marketing, social media, communication about innovation.

Despite these CFO stereotypes, one fact remains true – business model change often means a shift in how a company invests resources and generates returns. By this logic, the CFO should be a natural partner in digital transformation efforts.

An interesting Wall Street journal post presents another reason CFOs are not in the forefront of discussions on digital transformation. Author Barry Libert, CEO of OpenMatters, argues that traditional CFO thinking about value creation has become outpaced by the digital age.

Libert says measures of corporate value in the pre-digital world relied heavily on physical assets such as property and equipment. However, these assets “now constitute 20% or less of total corporate value.”

As a result, Libert says CFO’s must adopt a new “mental mindset” that embraces digital thinking. CFO’s who fail to adopt this kind of thinking put their companies at risk. Further, companies whose CFOs continue to allocate their company’s capital to tangible assets using previous generations of technology could generate lower levels of performance and enterprise value than digitally and big-data savvy CFOs who are spending their organization’s resources on building and mining intangible assets powered by today’s technologies.

Researchers at OpenMatters and Deloitte & Touche analyzed 40 years of corporate data and concluded that companies fall into one of four categories. They call the top group Network Orchestrators.

Companies that use capital to create a network of peers in which every participant makes and sells products or provides digital content to the many other members of the network. Examples include online financial exchanges, social media businesses and credit card companies.
As shown in the following diagram, these companies generate value premiums far in excess of companies in other groups.

The article further explains that network orchestrators embrace digital business models, and are “most effective in delivering company performance and enterprise value [by] allocating their capital to growing business models that serve today’s empowered and digitally connected customers.”

To overcome traditional ways of thinking, Libert explains that CFO’s must learn to adopt a “mental model” based on, “building and operating social and commercial networks that foster interactions and co-creation with their customers.”

The imperative for CFOs to evolve a digital mindset mirrors the struggle that many Chief Information Officers face. The traditional CIO role focused on maintaining infrastructure and protecting corporate assets; today, however, savvy organizations look to the CIO as an enabler of corporate innovation. This CIO drama, therefore, plays out in parallel to shifts taking place in the CFO world.

I asked Dion Hinchcliffe, respected digital thought leader, ZDNet author, and Chief Strategy Officer at consulting company, Adjuvi, for a reaction. Dion pointed directly at research from Gartner on the increasing number of CIOs who report to the CFO.

Although the data is few years’ old, to the extent that the CFO controls IT priorities, it places a greater burden on the CFO to understand and support digital transformation. When corporate priorities push IT to show increasing deference to the CFO, the need for digital thinking in the financial office grows even stronger.

The bottom line. When physical property defines wealth, then accumulation is the primary goal. However, when networks of people become a significant driver of value, accumulation gives way to co-creation and shared experience. This remains a new kind of thinking for many CFOs.

The post Digital transformation and the innovative CFO appeared first on OpenMatters.

The following article appeared in the WSJ on August 11th.
Financial statements, according to research by OpenMatters with Deloitte & Touche LLP analysis, no longer capture much of the value organizations create in today’s digital and networked world. Moreover, the research, which examined 40 years of data from the Standard & Poor’s 500 Index companies, shows that investors assign higher valuations to organizations that embrace emerging technologies, such as big data, social media, the Internet of things and mobile, to connect to the world around them.

Barry Libert, chairman and CEO, OpenMatters and Senior Fellow of the SEI Center at Wharton; Bill Ribaudo, managing partner and leader of Deloitte & Touche LLP’s Technology, Media and Telecommunications industry practice; and Megan Beck Fenley, associate, OpenMatters, explain how digital technologies are disrupting existing business models and their underlying sources of value. They also describe what CFOs of more traditional companies can do to shift their business models and mindsets to improve their company’s value.

Q: Research shows that tangible assets now constitute 20% or less of total corporate value compared to more than 80% in 1975.* What does this finding mean for companies and their CFOs?

Barry Libert: Our research indicates that investors are paying more for companies with business models that embrace today’s technologies and emphasize intangible assets—customer, human and intellectual property—and that leverage ‘networks’ to co-create products and services with their customers. Meanwhile, organizations with more traditional business models that focus on tangible assets and older manufacturing and distribution technologies are viewed as less valuable.

Our research identified four types of assets in which companies can invest their capital: physical, human, intellectual and customers. These assets, in combination with enabling technologies, produce distinctly different business models. We also found that three of the asset types―human, intellectual and customer―are miscategorized or ignored by GAAP. This suggests that CFOs may underinvest in these asset types and/or undermanage and underreport them to investors and their boards. Our research also indicates that investors are valuing Technology Companies (regardless of industry) and Network Orchestrators―be they social, business or commercial―between two and four times more than manufacturers, distributors and retailers, as well services companies, regardless of industry. One reason for this valuation gap is that asset-intensive and service-centric businesses typically scale by investing in more assets and/or more people (both of which don’t scale well). The implication of our findings is that CFOs who do not embrace digital technologies, intangible assets and emerging networks could be creating strategic, operational and financial risks for their company, their board and their shareholders.

Q: If a shift to digitally enabled business models is necessary, shouldn’t that fall to the CEO or the entire leadership team, not the CFO?

Bill Ribaudo: Not necessarily. There are reasons why this is very much a CFO issue and opportunity. First, CFOs are the stewards of corporate value. Second, they have the finance background and understanding of market valuation of business models that are needed to comprehend the long-term financial implications of different business models. Third, they can act as catalysts of business model change due to their understanding of finance and different asset types.

Finally, this critical issue provides CFOs with a significant opportunity to be leaders and strategists by rebalancing their company’s investment portfolio via reallocating some capital to intangible assets powered by new technologies that may develop into more valuable business models. Our analysis of OpenMatters’ research suggests that companies that allocate capital to creating scalable and extensible intellectual property (IP), and consumer, commercial or financial networks, regardless of industry, can create additional value for their organizations.

Q: Can you offer an example that illustrates how CFOs can create value in this way?

Bill Ribaudo: Consider the information companies have about their customers, including number of interactions, level of sentiment and potential for product and service co-creation. This treasure trove of customer data is an enormous and often-untapped intellectual asset, and to our point, it’s not measured nor reported on the balance sheet―unless the company is involved in an acquisition―and only then is it categorized as goodwill. If you think about this asset and other intangibles in this way, and then inventory them, CFOs can gain a better grasp of their organization’s true potential. From there, they can create a plan for reallocating capital to their most valuable assets, whether they’re measured or not by GAAP, and then power them with today’s technologies, such as creating mobile- and cloud-first business models that some of todays’ greatest and most well-known brands are focused on to ensure their continued success.

Q: How can CFOs help their organization take advantage of digital opportunities and reshape their business model?

Barry Libert: Even if CFOs are convinced by our research’s findings, it’s not realistic for them to say to their board or other members of the executive team, “We should pivot our existing business model and become a technology company or network organization overnight.” An important part of our message is that you don’t have to, or even want to, reinvent your core business model overnight. CFOs can formulate a strategy for incrementally transitioning from an Asset Focused or Service-centric Organization to a Technology Firm or Network Orchestrator. To be successful, this transition has to be looked at as a long-term process—-a shift that occurs over the course of years, beginning with smaller initiatives outside the core. As these new initiatives show potential, they should be scaled to become more impactful to the company over time. John Hagel and John Seely Brown of the Deloitte Center for the Edge have developed a framework for making major institutional change via “edge [based] opportunities.” Applying their framework to business model transformations means identifying and leveraging an organization’s existing intangible assets such as IP and relationships together with today’s technologies.

Q: What are the first steps that a CFO of an organization with a traditional business model might deploy?

Bill Ribaudo: The initiative has to start at the top with strong and innovative leadership. There’s nothing more important than getting the CEO, board and management team aligned with the idea that digital technologies are critical to driving value.

From there, CFOs should consider a four-step process, starting by assembling the leadership team to create a vision for a new business model for the organization. The CFO has to provide the sponsorship to drive that new vision throughout the organization. The CFO will also need team members who understand today’s technologies and how they can drive new revenues and enterprise value for the organization.

Second, CFOs should conduct a complete inventory of the company’s intangible assets that can form the backbone for future value creation. This new inventory should include customers, employees, partners and other stakeholders, as well as their personal and professional networks, knowledge and capabilities.

Third, CFOs with their team should formulate a detailed plan, including converting traditional transaction-based revenue models to subscription and membership. As part of this step, CFOs will need to align their own finance functions’ capabilities with the new strategies they will be championing.

Fourth, CFOs should introduce new and real-time metrics that integrates big data with financial data so that senior managers, the board and investors have a full view of the organization’s health and growth prospects. Creating measures for decision-making—and not just financial results—is essential to nurturing fledgling business models, as well as for existing business success. As part of this process, the finance function will have to implement real-time sensing of customer and employee engagement, sentiment and product and service co-creation to track the benefits created by consumer and business networks.

Q: What other challenges can CFOs expect as they try to pivot their organization’s business model?

Megan Beck Fenley: A company’s current business model is shaped by the attitudes, behaviors and beliefs of the leadership team, which we call their “mental model.” CFOs should expect to invest significant time and attention to helping their leaders and board examine and shift their existing mentality as part of the process of reallocating capital to more valuable business models. Getting everyone on board and creating a new budget can take up to 18 months. The organization also will need to train and recruit new digital talent to the board and management team to implement today’s new, more scalable and extensible business models which have lower marginal costs of expansion and value creation.

As a point of caution for existing organizations, we have found that the first few years of building network-based businesses is less about current revenues and more about value creation (as can be witnessed in the public markets every day). That means leaders and boards of traditional organizations need to be patient and supportive in the early stages of development while providing the necessary funding and strategic support so the seeds of future can be sown and ultimately harvested successfully.

*Oceon Tomo, 2010

Related Resources

CFOs: Embrace Digital or Put Your Company’s Future at Risk

Scaling Edges: A Pragmatic Pathway to Broad Internal Change

Tomorrow’s CFO: Moving ‘Up and to the Right’ as Strategist and Innovator

Adding Innovation to the CFO’s Agenda

Realigning Your Organization’s Portfolio for Growth

Shifting Out of First Gear in Social Business: How to Drive Adoption

How CFOs Can Make Social Software Work for Their Companies

The post Adopt Digital Age Business Models to Prosper appeared first on OpenMatters.

The following article appeared in the CFO Journal in the WSJ on Monday, July 28th, 2014.

If the future for all businesses is digital, as many say, the real question for CFOs is, what does this mean to the future of finance? According to research from OpenMatters, with analysis by Deloitte, CFOs need to go digital or face putting their company’s future at risk.

Years ago, companies with physical assets could count on having a balance sheet that was approximately equal to their company’s market value. At that time, CFOs could generally provide an accurate accounting to the board and shareholders of the organization’s value-creating assets. This historic method of value creation and reporting is less valid in today’s digital world in which tangible assets, including plant, property, equipment and financial assets, now constitute 20% or less of total corporate value.¹

In short, digital technologies are increasingly disrupting age-old sources of value. And CFOs who do not embrace digital technologies could be creating strategic and operating risks for themselves, their company management and their board and shareholders.

Moreover, research by OpenMatters, with input from Deloitte & Touche LLP, shows that companies whose CFOs continue to allocate their company’s capital to tangible assets using previous generations of technology could generate lower levels of performance and enterprise value than digitally and big-data savvy CFOs who are spending their organization’s resources on building and mining intangible assets powered by today’s technologies. Further, CFOs who lack an understanding of digital and big data might over-invest in hard assets because that’s what they measure, track and report, while under-investing in intangible assets. These intangible assets include people, such as customers, employees and investors, as well as intellectual property, and social and business networks. In addition, those same CFOs, who may lack technology-specific knowledge and experience, are not likely to approve the necessary expenditures for new technologies—Cloud, Analytics, Social, Internet of Everything and Mobile, or collectively referred to as CASIM—that power these new types of intangible assets.

Software—and the social and mobile networks of crowds that software powers—are “eating the world,” in the words of Mark Andreessen, Internet entrepreneur and venture capitalist.² The reason is clear: digital technologies and the social and commercial networks that software enables are transforming how customers interact, employees engage and investors invest. In response, companies in every industry are beginning to adopt and embed CASIM into how they operate, create, communicate and conduct commerce. Those that haven’t or won’t adopt them are playing a risky game. We can all think of once-great companies that have fallen to new, disruptive competitors in the past decade—from door-to-door encyclopedia companies, to traditional book retailers, to film-focused camera companies, to brick and mortar DVD retailers—and the list will continue to go on.

The research OpenMatters conducted of the S&P 500, in collaboration with Deloitte, shows that businesses at the forefront of today’s digital revolution are cashing in with consumers and investors who are following, if not driving, this transformation. Yet, many traditional businesses are still struggling to embrace the disruptive power of CASIM.

The good news is that virtually every CFO, regardless of industry, has the potential to improve their company’s shareholder value and current performance by allocating capital to digital technologies and the new types of assets that are creating value. What makes transformation hard, however, is that some of these newer assets have been inaccurately measured as expenses (e.g., employees), while others have been under-measured (e.g., brands and other intellectual property), and still others have not been measured at all (e.g., customers and their interactions) as assets. Achieving the benefits of these new assets requires a mental shift for many CFOs who were raised in a different era with what are now outdated rules for measurement, management, investing and reporting.

Business Models and the Mental Models That Drive Them

OpenMatters’ research on 40 years of data from the S&P 500 companies shows that almost every company fits into one of four business models, regardless of industry or function:

• Asset Builders: Companies that use capital to make, market, distribute and sell physical things. Examples include everything from automakers, to chemical manufacturers, big box retailers and distribution and delivery businesses.
• Service Providers: Companies that use capital to hire employees who produce billable hours or offer services for transaction fees. These companies are similar to Asset Builders, but depend on an individual’s output rather than a machine’s output. Examples include consulting firms and financial institutions.
• Technology Creators: Companies that use capital to develop and sell intellectual property such as software, analytics tools and intellectual property. Once created, these assets can be sold multiple times. Examples include software, big data tools and medical device companies.
• Network Orchestrators: Companies that use capital to create a network of peers in which every participant makes and sells products or provides digital content to the many other members of the network. Examples include online financial exchanges, social media businesses and credit card companies.

According to OpenMatters’ research and the Deloitte analysis of that research, investors pay premiums for Technology Creators. And the same holds true for Network Orchestrators (whether they are consumer or business focused), with investors valuing these two classes of business models between two and four times more than their Asset Builder or Service Provider counterparts. In fact, the average multiplier (or price to revenue ratio) is roughly 2x, 3x, 5x and 8x, respectively, for businesses that are Asset Builders, Service Providers, Technology Creators and Network Orchestrators.

The bottom line: The organizations that are most effective in delivering company performance and enterprise value are allocating their capital to growing business models that serve today’s empowered and digitally connected customers. And investors are rewarding their efforts.

If business models drive value, then what drives business models? The answer is, the “mental model” of a company’s CFO, his or her management team, and the board of directors. Mental models drive capital allocation, meaning people invest in what they believe has value. For example, leaders of asset builders believe that value resides in developing and owning (or leasing) hard assets, which can be used to manufacture, distribute and sell physical things. Leaders of Service Providers care about hiring people and selling services (including billable hours). Technology Creators focus on developing and selling intellectual property, such as medical technology and software. Network Orchestrators’ top priorities are building and operating social and commercial networks that foster interactions and co-creation with their customers.

Companies measure what they think matters and then invest in it. So a good way to understand where a company is headed—and how likely it is to embrace today’s digital revolution—is to look at what their financial reports measure and how management and the board use the data to make capital allocation decisions. For services company CFOs, the key measurement is the number of employees and their billable hours and productivity. For asset companies, it is the output from their facilities. On the other hand, digitally savvy CFOs measure and report the number of participants in their social and commercial networks, their interactions and product and service contributions, as well as the number of subscribers, seat licenses and monthly recurring revenues for each customer.

Spend Dollars at the Margin on More Valuable Revenue and Business Models

Among CFOs’ main responsibilities in serving shareholders is helping management prepare the annual budget, monitor and report progress against the budget and then recalibrate the following year’s budget based on the progress achieved. Given that each marginal dollar can be spent to generate revenues that are either valued at a multiplier of 2, 3, 5 or 8, CFOs have a responsibility to help improve their companies’ performance and valuation by allocating resources to building and developing their business or consumer networks and developing the appropriate metrics to measure the costs/benefits and report back to management and the board.

Build the Finance Function of the Future: Go Digital, Embrace Big Data and Create Value

How can CFOs help their boards and fellow leaders become more digitally savvy—and begin to alter their business models to add more value to the enterprise? Following are three recommendations to consider:

—Assess your own mental model and business model biases to determine what you and your finance team believe are the sources of value (and risk) and what you measure and report to your management team and board. Are you and your team focused on hard assets? People and services? Technology and research? Networks and relationships? What you measure and report on will reveal what you prioritize.

—Begin to rebalance your yearly budgets to reallocate capital to more valuable business models to create value where no value previously existed. This includes codifying your intellectual property, building and selling technology offerings where they did not previously exist, and building and developing robust networks comprised of your customers, prospects, partners and employees.

—Use big data in concert with financial data to constantly measure, monitor and report the results from these new initiatives. And use today’s real time social monitoring tools to track your constituents’ interactions and engagement. In time, look to have them co-create new products and services for your organization as you create deep and long-lasting relationships with them as network members.

As demonstrated by the business model research, the stakeholders CFOs serve are already reallocating their capital to digitally savvy Technology Creators and Network Orchestrators, and are paying premiums to invest in them. It’s time for all CFOs to make the quantum leap into the digital world and acknowledge that going digital and mastering big data are critical to capturing the significant value that is not currently reported in financial statements and investing in digital and big data for longer-term growth. It is time to begin this journey, or risk being left behind!

Endnotes
1. Ocean Tomo, 2010.
2. “Why Software Is Eating the World,” WSJ online, August 20, 2011.

—Written by Barry Libert, CEO of OpenMatters and a board member/senior fellow of the SEI Center at Wharton; William J. Ribaudo, a partner at Deloitte & Touche LLP and national industry leader for Technology, Media & Telecommunications; and Megan Beck Fenley, a digital consultant and researcher at OpenMatters.

The post CFOs: Embrace Digital or Put Your Company’s Future at Risk appeared first on OpenMatters.