The Bean Counters Strike Back
- 24 August, 2000 12:01
SAN FRANCISCO (08/24/2000) - Like many startups, the Massachusetts Institute of Technology's New Economy Value Research Lab so far exists only in the minds of its faculty and as a wisp of a Web site. Its 3,000-square-foot home in MIT's Sloan School of Management building will open for business this fall.
There's no glitzy Internet atmosphere here, though, no server racks or Aeron chairs. These well-worn faculty offices will be home to eggheads running regression models while academic journals pile up on the faded carpet.
As the Internet Economy continues its journey from science fiction to conventional wisdom, MIT is again at the forefront. Where the Media Lab chanted the mantra of "bits over atoms" and laid out grand visions of future technology, MIT's newest research outfit, informally referred to as the "Value Lab," is trying to bring some old-fashioned accountability to the business side. Its holy grail? A general theory of valuation in the new economy.
If anyone has a shot at finding that grail, MIT does. At a time when technology was the driving force behind innovation, the Media Lab capitalized on the school's deep resources and the international reputation of its computer-science faculty. Now, as the business reasserts itself, the Value Lab is again drawing on MIT's awesome resources. It has all the elements in place to become the prime clearinghouse for e-business arithmetic: high-profile academics from MIT's far-flung research disciplines and a cash-rich founding sponsor - Arthur Andersen - eager to up its value by reinventing bean counters as hip consultants.
"If we publish 100 papers and come up with just one idea in the next five years that affects how people view the new economy, we've achieved our goal," says the lab's director, S.P. Kothari, a professor of accounting at Sloan. His agenda is as ambitious as it is broad: "We want to understand the way to do business in a changing world. We might have to make completely different kinds of investments in human capital, databases and customers, and we might have to change the way we organize and manage companies."While the nearby Media Lab is still tinkering with wearable computers, invisible networks and electronic paper, the Value Lab is devoting its resources to decidedly unsexy topics like business-model design, risk management, systems and processes, as well as measurement and reporting techniques. Drawing from the MIT pool of research facilities, from the Artificial Intelligence Lab to Sloan's own recently minted Center for eBusiness (which specializes less in research than in executive education and MBA training), Kothari hopes to come up with a standard way to map, visualize and measure the businesses of the future so managers, venture capitalists and investors don't have to stick their fingers in the wind when the latest fad hits Sand Hill Road and MSNBC.
Such a task is vitally important in a world where companies enjoying multimillion-dollar market caps have no real assets, profits, revenues or other traditional metrics by which to measure their worth.
It helps that the new lab has a generous donor with an urgent need to produce a recipe for the secret sauce of dot-com success. Kothari's lab received a $10 million check from Arthur Andersen to get started.
The accounting and auditing powerhouse has been busy recasting itself as an e-consulting brand since it began nasty divorce proceedings from Andersen Consulting in 1997 (recently finalized in a court decision Aug. 8). The guys who once combed through Swiss bank ledgers on the lookout for Holocaust money are now exhorting you to "be the first CFO on your block to quantify your intangibles." Breathing down its neck are Net-centric e-consulting newcomers and traditional accounting competitors.
The lab's core so far consists of five academics who focus primarily on corporate finance, but they'll be supplemented by other researchers lured with project grants. Kothari also hopes to sign on at least 100 firms to share proprietary data on value creation for a secure data-mining project.
"Traditional accounting reports result only when revenue is realized, which can take years," explains Kothari. Instead, the researchers want to get their hands on numbers as companies evolve to find new ways to visualize the mess - using 3D models, for instance.
MIT's reputation also helps recruit academics for the new lab. "It was a no-brainer to come here," says Antoinette Schoar, an economist from the University of Chicago. She wants to develop a model for how the new economy's flaky workforce, aka free agents, affect a company's governance, management style and distribution of income among its stakeholders. In other words, if all your assets are people and they can walk anytime, how do you let them have their say and how do you reward them?Metrics are hot in academia. Within MIT and throughout the research community, pressure is intense not only to cover the Internet, but also to define it.
Researchers at high-profile business schools like Harvard, Stanford, the University of California at Berkeley and the University of Chicago are cranking out studies and hosting executive conferences on all things e-business.
"We're past [the first] stage," notes Kothari. "The new economy is here to stay and now it's increasingly amenable to serious data analysis."To his advantage, the field is still in its infancy and fragmented. No other institution yet has an equally concerted effort under way. "We should be in the forefront of this, given the core competencies that emerged from MIT," says lab member David Scharfstein, citing the Media Lab.
One lesson the Media Lab learned well is the role wealthy corporate partners play in making or breaking a research institute. Arthur Andersen partner and lab co-director Barry Libert, the man who brought the idea for a new lab to MIT, was clearly paying attention.
Before his company wrote the check to MIT, he co-authored a book with Arthur Andersen managing partners Richard Boulton and Steve Samek called Cracking the Value Code, which addresses many of the issues now on the table at the Value Lab. Book in hand, Libert set out to create some real value. He says he approached Harvard about a joint venture with his firm, but was turned away.
"[They] felt that these issues were too close to the intellectual core of their future, and ... wanted to control the research agenda." Harvard wouldn't comment on the discussions.
In Libert's view, the heart of the matter is the "business genome," made up of five elements or asset classes: physical, financial, employee and supplier, customer and organization. Shift them around like the squares on a Rubik's Cube and, voila - the miracle of value creation is solved. Never mind that the book provides no real underlying methodology. Neither does it break new ground when it proposes more social accounting - an idea that has been kicked around in liberal circles for at least 20 years.
It might be academically unsatisfying, but it creates value for Arthur Andersen. Libert's book and sponsorship of the MIT lab are a one-two punch to establish credibility in e-consulting. The firm plans to fund three more value research labs later this year at business schools in London, Brussels and either Hong Kong or Japan. Says a well-tanned Libert, just back in Boston from an Internet Economy schmoozefest in Los Angeles: "We're working with a measurement system that's 500 years old. We'll develop a new [framework] so we can say to big companies and governments, 'Gentlemen, here is the measurement system of the future!'"MIT's Kothari is not so sure Libert's genome model is the only path across the new frontier. "It's just one idea of how to go about determining value," says the professor, "but not the only one." He is still looking for other sponsors.
With lots of open questions swirling around, Libert is certainly up to speed when it comes to his own intangibles. He claims he and his co-authors have filed 59 patents on the book's theory. He might need Kothari's V-team to figure out if they're worth anything.
(Steffan Heuer is a contributing writer in New York.)