Industry classifications are stuck in the past

Every day, thousands of Analysts across finance compare companies. Whether Private Equity or Banking, it’s vital to understand how prospects compare with their peers.

But there’s a problem. Industry classifications are stuck in the past, which leads to bad data, invisible peers and missed opportunities. Here we’re going to explore some of the issues, and what we’re doing to fix them.

Today companies are classified by industry. Every company is allocated a Standard Industrial Classification code (SIC Code). We’ll focus our attention on the UK for now, but this issue exists everywhere. This used to work pretty well, because the economy didn’t change that much and sectors like Manufacturing are well-defined. In a technology-driven world, this approach is no longer dynamic enough to work.

Out of a total of 730 SIC codes, there are roughly 250 classifications for companies involved in Manufacturing, covering every type imaginable from broom manufacturing (32901) to male underwear production (14141). Software, on the other hand? Just one. This matters, because if you’re comparing companies on out-dated classifications, (i) you’ll get irrelevant benchmarks (noise) and (ii) you won’t find appropriate companies. Imagine looking for payroll software and getting a peer that facilitates online Doctor’s appointments — these businesses are unrelated. This is why everyone in finance largely maintains their own peer comparisons, rather than relying on data platforms. This costs time and requires regular refreshing.

With all the amazing technology at our fingertips, it doesn’t have to be this way. We think there’s a better way of doing it. Industry classifications should be flexible, and change with the economy. It’s why at Scribe we’ve trained a Natural Language Understanding model to define companies by what they publicly say about their own activity. This means that when you search for “payroll software”, you’ll get payroll software competitors.

Simple, but extremely powerful.

Scribe is a data platform for company information, powered by research-based AI. We help Banks and Private Equity to uncover deep insights about private companies and end data entry from PDFs. Welcome to the future of company knowledge.

Header Image by Janno Nivergall (Pixabay)