Those that invest strategically in D&A technologies and talent will ultimately improve their profitability, but the added value does not stop there.
According to an independent report commissioned by KPMG, institutional investors and equity analysts are increasingly taking into account companies’ D&A strategies in their valuation opinions. They believe that the use of data and analytics has a substantive and often dramatic impact on the companies and sectors they cover.
Nearly half (45 percent) of buy-side and sell-side decision makers said they are likely to change valuation or investment opinions as a result of a company’s D&A strategy. Sixty-two percent of respondents say that they would view investing in a company in their sector more favorably if it used D&A to improve operating performance.
Specifically, respondents emphatically stated that they would view investing in a company in their sector more favorably if it were to use D&A to control costs, shrink inventory, and optimize resource allocation. In other words, a company’s valuation can be directly affected by whether it is implementing D&A as part of its business strategy.
But the research also provided a deeper understanding of how investment decision makers view the impact of D&A. Fifty-two percent of those surveyed believe D&A strategies have begun to deliver better business performance or will do so in the near future. Overall, investors and analysts believe that D&A strategies will improve company performance and bring higher valuations with the greatest opportunity in the areas of improving operating performance along with topline growth and product innovation.
Technologists have long argued that with enough software and computing power, Big Data will transform commercial, social, and economic behavior. It is from that point of view that D&A is disrupting the competitive dynamics of markets and companies. Like other catalysts of market disruption, D&A will create opportunities for innovation from new entrants and potentially pose threats to market incumbents that are less able to extract value from the data that underlies their businesses.
Our findings revealed that the use of D&A by issuers (publicly traded companies) has already begun to alter the competitive dynamics of nearly all industries, with a vast majority (82 percent) of investors and equity analysts expecting some level of disruption from D&A during the next three years.
As D&A reshapes the competitive dynamics of industry sectors, investors and analysts remain focused on finding great new investment opportunities and monitoring companies’ financial and operating performance in search of latent strengths and weaknesses.
The investors and analysts we surveyed also revealed that while companies generally have ready access both to data and the tools to analyze it, their integration of data, analytics, and business strategy often falls short. At the same time, fully 40 percent of analysts and investors say the companies in the sectors they cover don’t devote enough attention to D&A strategy.
But that’s not the only challenge. According to the analysts, companies have more work to do in explaining how D&A contributes to their overall business strategies. Just 40 percent of the respondents in our survey said companies in their sector explain D&A strategies very or even fairly well. On the flip side, companies that tell their D&A stories to investors and analysts persuasively are at a clear advantage.
Reflecting on these findings, there are a number of ways that companies can ensure their place among those that successfully realize the opportunities offered by D&A.
For one, organizations should apply D&A to the business objectives that are aligned with core strategy. The most beneficial D&A –driven objectives are likely to differ from company to company but ultimately they should support and reinforce overall business strategy.
Companies also need to understand that realizing the opportunities of D&A is largely a strategic challenge, not an IT issue. Having high-quality data and analytics capabilities is not enough. Building the right D&A business strategies out of data and analytics capabilities will go some way toward achieving chosen objectives.
Finally, companies must effectively communicate their D&A strategies and results to investors and sell-side analysts. Those who tell their D&A stories to this audience well are at a solid advantage. It’s critical for companies to make their D&A information clear and concrete and offer simple and straightforward explanations of their strategies. And companies should focus on business outcomes, highlighting how their D&A efforts have tangibly improved their financial and operating performance.
As the payoff from effective D&A strategies becomes more visible and the influence that companies’ D&A plays in investors decision making increases, there are a few outcomes we can expect.
Investors and sell-side analysts will require more and better D&A information proactively from companies. Analysts will also increase their overall coverage of companies’ D&A. And the most competitive companies will become better at explaining their D&A strategies to investors and analysts.
We are already seeing D&A winners and D&A losers. And in the years to come, many more companies will fall into one of these two ranks. From the two-person startup in Silicon Valley to the mid-cap businesses and multinational Fortune 500 companies, D&A will continue to influence investment decision making and valuations.
The results of our study illuminate one of the key variables in the complex process of capital markets valuation. Those who take the time now to develop and implement their D&A strategies—and understand how to effectively articulate these plans—will be the ones to see the greatest rewards in the coming years. For companies across all industries, the rise of D&A in valuations marks a new era in the competitive landscape.
Wilds Ross is a Principal in Data & Analytics at KPMG. A data scientist by training, Wilds is involved in executing D&A strategy across a broad range of services, with an emphasis on the Financial Services Industry.