Before we answer the "what" question on social networking ROI it is important to understand why organizations are interested in embracing social networking. In this article I explore both the motivations for enterprise social networking and how one might think about enterprise social networking ROI.

In much of the Western World we face the challenge of our aging demographics. Our work force is getting older. A lot of our collective expertise, invested in the “Baby Boom” generation, is about to enter retirement age. The demographics are unrelenting. Since 1965 birth rates in the United States and Canada have decreased by a third. The workforce population is decreasing even though the economy has continued to expand. Something has got to give!

How have organizations addressed this growing gap -- a declining workforce versus a growing economy? One way has been through outsourcing to areas of the world where there is an abundance of credentialed workers to fill jobs. Another has been through encouraging immigration from these areas. And yet another is the implementation of social networking to create a community of shared expertise within an organization where experienced and new workers can interact through communication and knowledge exchange.

That is why organizations today are looking increasingly at ways to use social networking both outside and inside the firewall. Outside the firewall it is hard to ignore the Facebook Nation, a global community of close to 400 million. But there are enormous issues in using a public social network space as a platform for creating collective wisdom within an organization.

[Editor's Note: See related article Business Social Networking: Public and Private -- There is a Place for Both.]

A public social network is by its very nature open and security is fairly loose. So instead organizations can look at inside the firewall social networks where privacy can be maintained while information freely flows throughout the business with reasonable assurance of security. But how do you measure the effectiveness of deploying such a social network? What is the ROI? We can measure two ways: by looking at the cost of retaining staff and by measuring the value of retaining the collective knowledge essential to the running of the business.

Retention of Staff

In assessing the value of your employees there are a number of activities every organization undertakes. These include planning, acquiring, maintaining, developing and retaining people. Human resource specialists apply numbers to each of these activities. One can measure inputs and outputs and determine a per employee cost for each activity.

The cost of employee retention has been studied for years. I recently read an article that stated a minimum wage employee being paid $8.00 an hour costs an employer $3,500 to replace. In that same article sources were quoted indicating that the replacement cost of an entry-level employee represents 30-50% of annual salary, whereas a middle level employee represents a 150% cost, and a senior staff member as much as 400%.

In that same article the author goes on to calculate the cost of replacing 10 supervisors earning $40,000 per year. The number turns out to be 125% of the total annual salaries with a bottom line impact 10 times the replacement cost, or $5,000,000.

So when looking at the cost of implementing a social network that can be used to help retain employees one very good measure is to apply that cost against the replacement costs associated with the loss of personnel.

Retention of Collective Knowledge

How do you measure the value of collective and individual knowledge within an organization? The retirement of Baby Boomers is a critical challenge to organizations as they plan for the future. Baby Boomers have accumulated experience. They represent collective knowledge that is very hard to replace.

How do companies cope with the net loss of this collective wisdom? There are a number of ways.

  1. Some encourage employees not to retire using phased retirement programs and flexible work hours.
  2. Others implement succession planning strategies and target individuals within their organizations as likely candidates for vacated positions.
  3. Many create mentorship programs, harvesting the knowledge capital of Baby Boomers.
  4. Some are implementing social networks as effective knowledge management solutions, encouraging both formal and informal knowledge sharing.

In an article by Brad Kamph, he calculates the raw costs of knowledge retention within an organization. Kamph argues that measuring knowledge costs is not just calculated by totaling the training budget or consulting payouts to former employees. His cost of knowledge model is a mathematical tool that measures employee experience and salaries, the cost of new-hire training, the cost of developing standards and procedures, equipment problems caused by inexperienced handlers, and the rate of work productivity loss when using employees with lower skill sets.

In an example using 15 new hires, some with experience at $50 per hour labor cost, some requiring a longer period of training at a cost of $30 per hour, he uses a 20-year time period to come up with a baseline number for knowledge costs. The price of business as usual is calculated at over $26 million per year with over $15 million of that representing unplanned downtime. That downtime is a function of employees quitting, absence, and retirement. By applying a little over $1 million to workforce knowledge building programs, Kamph’s model estimates savings of $3.5 million in the first 5 years, and $11 million over 10 years.

When Kamph wrote this article in 2006, behind the firewall social networking was still in its infancy. Nevertheless, the costs described here are a real eye opener.

Now let’s compare them to the cost of implementing a social network focused on staff and knowledge retention.

What is the Cost of Implementing a Private Social Network?

Like any marketplace there are high priced, lower priced and “free” solutions available today. The solutions described below are all hosted remotely.

When you look at free tools such as Ning, they are not really free. You can build a private social network on a Ning platform but that does not factor in the time and dedicated people requirements to do the build and maintain the social network you create.

There are many high priced solutions that are proprietary and provide custom-designed private social networking applications. Among these vendors are industry leaders such as Microsoft and IBM. Joining them are some newcomers like Jive Software.

Microsoft has created a social networking application that integrates with SharePoint, and its Office suite of tools. The cost to implement varies from as little as $2 to as much as $10 per user per month for a hosted service. This is a hosted solution. Costs do not include customization, integration with existing corporate server-based Microsoft solutions. The Microsoft advantage is one of familiarity. Much of the functionality within the applications requires little in the way of learning curve.

Jive Software has created Clearspace social networks designed to embrace internal employees as well as customer and supplier communities. A hosted solution, Clearspace pricing starts at $59 per year based on a 25 user minimum. With customization a Clearspace initial implementation may require a substantial outlay but once in place the annual cost of operation is not significant. One company’s recent experience with Jive ended up costing $250,000 during implementation because of extensive consultation, customization and project management requirements.

Enable Consultants, a Toronto, Canada-based company, delivers a number of solutions with functionality similar to Jive, providing hosted social networking solutions for business, called WorkingRooms, solutions for not-for-profit organizations, sports clubs and associations, called CommunitiRooms, and social networks built for schools, called Recess.

Enable’s social networking platforms have all the features commonly found in public social networking platforms such as Facebook and MySpace, so they feel very familiar to users who already have experienced social networks. But what Enable adds is calendar, document and resource sharing, virtual meeting rooms, a loyalty rewards program for active online participation, a mentoring gallery to encourage knowledge sharing and coaching, and other business-friendly applications. A typical implementation of WorkingRooms or CommunitiRooms represents an investment of $1 per month per user with initial setup fees approximating $25,000. Schools can implement Recess for $1,500 per year plus $49 per classroom. This makes private social networking implementation affordable even for small organizations facing the same Baby Boomer challenges as big companies.

Can You See the ROI?

When comparing the expense of implementing and maintaining hosted private social networking applications with the costs associated with staff losses and the associated knowledge losses, it would appear that implementing behind-the-firewall social networks is a good investment.

Let me leave you with a recent case example that I discovered when doing my research for this article.

John Parkinson, the CTO of TransUnion, a credit rating company, recognized that more than 2/3s of the employees were on Facebook on MySpace and were pressuring him to allow them to create a company social network on these public sites. Instead he decided to harness the familiarity with public social network platforms by implementing a private social network that included personal profiles, a wiki, instant messaging, a forum for questions and answers, polling and other common features. The cost of implementation was $50,000.

As employees started using the network, Parkinson studied usage and soon discovered who among the employees were best at problem solving. The result - the company created new roles for forum experts. “It was never very clear to us, looking in, who the authoritative sources were, who was good at solving problems,” Parkinson states. “Now it is. The benefits are incalculable.”

Parkinson wasn’t implementing the social network because he was trying to retain staff or create knowledge sharing. He was trying to stave off the demand from TransUnion employees who were avid Facebook and MySpace users.

Parkinson calculated the ROI on the investment made in a private social network as yielding savings of more than $5 million in the first year. Compare that to the cost of implementation -- $50,000.