Blood and oil are not priced according to valuation models. They are traded on a market, which defines their price. You can build models to establish their value but such models are as a result of the buying and selling (the demand and the supply), not the cause of it.
The obvious lesson for records managers here is to attempt to sell the company's records and then see if anyone wants to buy them.
Thanks Matt, in an earlier version I did get into how blood and oil are accounted for as assets - which is through valuation models established in accounting standards that do generally refer to a market, purchase or replacement price, but the post got too technical - so I went with the simple idea that we know what they're worth so we treat them like they are worth that much. Maybe that wasn't the right way to go, but I felt it got the point across with far fewer words.
I don't agree with you on the selling the company's records point, I know what you're getting at, but there are a bunch of problems that I don't think that approach can solve.
The biggest is subjective valuation - the records of an organisation are often only valuable to that organisation, or their market value is significantly lower to the market than the organisation, or you need blood really badly. An example would be the code for a computerised targeting system on a destroyer. That might be interesting on the market, but targeting is not exactly an unsolved problem and the code is useless without the targeting system - so the price is likely to be low if you could find a buyer at all. If on the other hand, you own the targeting system and you’ve lost the code, the $50M you spent getting the targeting system coded will hurt - it probably makes the value of that code about $50M to your organisation unless you want to roll in the value of all the targeting systems that are useless without it.
I also can’t see it working inside an organisation for the basic problem that you’ve got a monopsony on a non-rival good. So no one’s going to pay you for the targeting system code, even though deleting it would cost the organisation $50M in re-development expense.
Basic accounting says that we should manage that asset like it has a $50M replacement value - but I’m yet to see that. We “value” by risk traffic lights, and retention schedules. We should use money, it’s simpler, people take it seriously, and in the absence of a standard set of valuation models enforced by accounting standards we should just create and implement them.
So unless you have a way of actually testing your valuation model in a market, it risks being a fanciful intellectual exercise.
Another way of establishing the value of an organisation's records would be to hold them to ransom and see what the organisation would pay for them (which is similar to your "cost to replace" example). But the challenge is to make this real (so that people have skin the game in terms of the valuation).
I would also note that most accounting valuation models inevitably end up relying on market trades for validation.
Having just bought a house at auction, I am acutely aware of the process of valuation.
What's also true is that there is already a valuation model operating and it's not based on how valuable the information is to the organisation. The last day valuation model of "I can't be bothered, I'm dumping this in a pile" is an excellent example of the kind of thing I'm talking about.
However wrong we are with the valuation model, we have more opportunities for correction with an explicit model, than an implicit one.
C level buy in is key. There's way too much quoting of stuff from research reports, and not enough people with a stopwatch or a calculator in their own organisations, doing the numbers.
Blood and oil are not priced according to valuation models. They are traded on a market, which defines their price. You can build models to establish their value but such models are as a result of the buying and selling (the demand and the supply), not the cause of it.
The obvious lesson for records managers here is to attempt to sell the company's records and then see if anyone wants to buy them.
Thanks Matt, in an earlier version I did get into how blood and oil are accounted for as assets - which is through valuation models established in accounting standards that do generally refer to a market, purchase or replacement price, but the post got too technical - so I went with the simple idea that we know what they're worth so we treat them like they are worth that much. Maybe that wasn't the right way to go, but I felt it got the point across with far fewer words.
I don't agree with you on the selling the company's records point, I know what you're getting at, but there are a bunch of problems that I don't think that approach can solve.
The biggest is subjective valuation - the records of an organisation are often only valuable to that organisation, or their market value is significantly lower to the market than the organisation, or you need blood really badly. An example would be the code for a computerised targeting system on a destroyer. That might be interesting on the market, but targeting is not exactly an unsolved problem and the code is useless without the targeting system - so the price is likely to be low if you could find a buyer at all. If on the other hand, you own the targeting system and you’ve lost the code, the $50M you spent getting the targeting system coded will hurt - it probably makes the value of that code about $50M to your organisation unless you want to roll in the value of all the targeting systems that are useless without it.
I also can’t see it working inside an organisation for the basic problem that you’ve got a monopsony on a non-rival good. So no one’s going to pay you for the targeting system code, even though deleting it would cost the organisation $50M in re-development expense.
Basic accounting says that we should manage that asset like it has a $50M replacement value - but I’m yet to see that. We “value” by risk traffic lights, and retention schedules. We should use money, it’s simpler, people take it seriously, and in the absence of a standard set of valuation models enforced by accounting standards we should just create and implement them.
The thing about valuation models that are not tested on the market are that they are:
- often built on arbitrary assumptions
- fluctuate wildly based on who build them
- are therefore not taken seriously by senior people
Mark Ritson critiques brand valuations on these grounds: https://www.marketingweek.com/what-is-the-point-of-brand-valuations-if-those-doing-the-valuing-are-so-off-target/
So unless you have a way of actually testing your valuation model in a market, it risks being a fanciful intellectual exercise.
Another way of establishing the value of an organisation's records would be to hold them to ransom and see what the organisation would pay for them (which is similar to your "cost to replace" example). But the challenge is to make this real (so that people have skin the game in terms of the valuation).
I would also note that most accounting valuation models inevitably end up relying on market trades for validation.
Having just bought a house at auction, I am acutely aware of the process of valuation.
All of this is true.
What's also true is that there is already a valuation model operating and it's not based on how valuable the information is to the organisation. The last day valuation model of "I can't be bothered, I'm dumping this in a pile" is an excellent example of the kind of thing I'm talking about.
However wrong we are with the valuation model, we have more opportunities for correction with an explicit model, than an implicit one.
C level buy in is key. There's way too much quoting of stuff from research reports, and not enough people with a stopwatch or a calculator in their own organisations, doing the numbers.