With a wealth of whiz-bang information systems and a dearth of profits, New Economy firms are measured by traditional financial yardsticks about as well as Jell-O is nailed to a wall. The Massachusetts Institute of Technology, however, hopes to change that with its nascent New Economy Value Research Lab (NEVRL), which was born earlier this year thanks to a $10 million, five-year commitment from Arthur Andersen's consulting division.
NEVRL will test valuation and performance measures with data from New (and Old) Economy firms, along with business modeling and systems design research. For example, says Barry Libert, partner at Arthur Andersen and one of the founders of NEVRL, "How do you report the value of eyeballs?" The question, of course, refers to the difficulty of documenting the value of a Web site's customer base, but Libert, who co-authored Cracking the Value Code, a book proposing a new accounting framework that considers customers and employees as assets rather than expenses, hopes the question won't remain rhetorical.
"Our thesis is that the measurement system is broken, and we wanted to get some empirical evidence on this," says Libert. He cites the disparity between America Online Inc.'s whopping $114.7 billion market cap and the relatively modest $1.2 billion it recorded as net income in 1999 as one example. Seen through today's lens, Libert says, the stock valuation is "ridiculous." But AOL's customer base, acquired at enormous expense, is a huge asset. "Traditional measurement systems obscure that," he says.
While the quest to quantify intangibles is not new, Andersen's advocacy was "a crystallizing agent" for previously disparate research efforts, says lab head S.P. Kothari, a professor of accounting at MIT's Sloan School of Management. The lab, which is really just a suite of offices, boasts 16 affiliated faculty members to date. One of them, Erik Brynjolfsson (along with Lorin M. Hitt at University of Pennsylvania's Wharton School and Shinkyu Yang of New York University's Leonard B. Stern School of Business), recently studied 1,031 large firms over a period of eight years, and found that every dollar a company invested in computers yielded at least a $5 increase in the company's market valuation. More important, the research correlated IT investments with changes in organizational structures and found even greater increases in valuations.
Focus on Finance
One of NEVRL's challenges will be to maintain a focus on finance and accounting outcomes versus more general research on the Internet. Besides its own E-business center, MIT faces competition from such places as Stanford, where Ebay and The Charles Schwab Corp. helped found the Center for Electronic Business and Commerce, and The Wharton School, buoyed in its E-business initiative by Big Five firms and other consultancies.
Efforts to measure value aren't limited to academe. For example, Holt Value Associates began capitalizing research and development costs and treating them as a depreciating asset in its cash flow ROI analyses earlier this year.
New Economy CFOs, however, still seem spooked by the idea. None of the CFOs contacted for this article was willing to comment. But that won't stop the experts at NEVRL and elsewhere from trying to pick their brains. "We've got the economics and accounting expertise," says David Larcker, an accounting professor at Wharton. "Now we're looking for playmates."