QA Protects Your Company's Market Value

In 2011, Marc Andreessen famously said "Software is eating the world." Back then, executives at S&P 500 companies may have viewed such claims as hyperbole. Nowadays, Amazon makes more profit from Amazon Ads and Amazon Web Services than from all the goods they sell.

Every time you receive a box from Amazon, they deliver proof to your doorstep of how valuable software can be to a company. Think about it: in 2021, Amazon delivered enough packages to reach from the Earth to the Moon six times, yet their software is even more valuable.

The true value of software, however, often does not appear on a company's balance sheet. Accounting practices only let companies amortize the cost of software development, but software as an asset is usually worth far more to a company than the money it takes to develop and test it.

As companies rely more and more on websites, apps, and enterprise software, QA protects the reliability of these intangible assets that account for a growing proportion of company value. But how much should companies invest in protecting their software with QA? After all, how much value are we talking about?

One way to consider how much value software contributes to a company is to examine its price-to-book ratio (P/B ratio). By comparing market value to book value, one can see if investors believe a company is worth more than the value of its assets minus liabilities. If software firms are valued for their technology yet internally-developed software is only listed at book value, then one would expect companies that have a software edge over competitors to have a higher price-to-book ratio.

Take Tesla and Toyota. In 2022, Toyota sold just under 10.5 million vehicles, which for them is a typical year. Tesla, on the other hand, sold only 1.3 million vehicles, despite 2022 being Tesla's best year ever. Tesla, however, is known for its research into self-driving vehicles and other industry-leading software. As investors have placed a high value on Tesla's technological edge, Tesla's P/B ratio is currently 17.01, far higher than Toyota's P/B ratio of 1.19!

With so much of a company's value riding on public perception, QA provides a valuable service by protecting the reliability of the software that enables a company to provide products and services. However, people tend to notice the value of QA more when reliability is lost.

The introduction of Google's Bard AI provides a cautionary example. After OpenAI created a sensation with ChatGPT, the pressure was on Google to demonstrate that it was still technologically competitive. To reassure investors, Google released a video of Bard, its generative AI tool, responding to a prompt about the James Webb Space Telescope. The video looked great, except for one problem: it gave a wrong answer to the prompt!

On account of this bug, Google lost $100 billion in market value in one day. Scrambling to stem the damage, a Google spokesperson responded:

"This highlights the importance of a rigorous testing process, something that we're kicking off this week with our Trusted Tester program... We'll combine external feedback with our own internal testing to make sure Bard's responses meet a high bar for quality, safety and groundedness in real-world information."

So how much is QA worth? If for Google it may be worth $100 billion, odds are at your company QA might be worth far more than you think.