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How do we begin to quantify the impacts of social business software on organizations or are we simply trying to chase a proverbial unicorn?
In 2006, Andrew McAfee, associate director of the Center for Digital Business at the MIT Sloan School of Management, coined the phrase "Enterprise 2.0" to describe the phenomenon of "web 2.0" concepts, wikis, blogs and web based social communities being adopted within corporations to improve dialog, innovation, business processes and employee engagement. Some of this shift happened at the hands of innovators who saw the potential of these technologies to change business, while another segment panicked at rank and file employees disruptively using social technologies that existed outside the corporate firewall. Others saw it as a passing fad to see out.
Since that time the corporations implementing these tools have progressed through the Technology Adoption Lifecycle from bleeding edge Innovators, into Early Majority and perhaps Late Majority adopters as well. Certainly the organizations that approach us for our ThoughtFarmer social intranet product have changed a lot in the last five years. The terminology has also matured. After years of hype and hyperbole, no one calls anything "2.0" anymore. "Social business" is the current winner on the label front.
But the one thing that is not progressing as social business becomes widely adopted is the constant fretting over social business ROI. Perhaps majority adopters are naturally more conservative and therefore crave solid numbers for their business case? If this is true, then the notion of social business ROI will remain an issue throughout late adoption as well. While the roots of social business ROI date back at least as far as 2004, arguably enough case studies exist today that those asked to take up the social business ROI challenge now have firm ground to tread on.
Let's examine five key approaches to social business ROI that are being applied both at the business case stage and in reviewing social business project success.
1. Hard ROI
Hard ROI refers to classic Return On Investment that any business person would be comfortable with. If you can invest $100 and see $1,000 in your wallet in a reasonable timeframe, you've got hard ROI.
There are three major things that make hard ROI unique and the preferred choice of finance departments everywhere:
- It is quantified in dollars and cents or the currency of choice.
- There is a direct cause and effect relationship between the investment, its result and the return observed.
- The benefit needs to be realized -- that is, new money must appear in a real bank statement somewhere, or costs must actually disappear from the balance sheet.
During the first wave of corporate web enablement projects in the late '90s and early 2000's, portals and intranets delivered hard ROI in two main flavors -- Digitization and Automation.
Digitization
Digitization was the reduction of physical goods and/or shipping costs. Instead of ordering a palette of paper each month, we now order one box. Instead of printing the Benefits manual every November, staff download a PDF version. Instead of shipping software on a CD, it is downloaded. Instead of issuing paychecks, everyone gets direct deposit and electronic pay stubs. These costs actually disappeared from the balance sheet.
Automation
Anywhere manual labor in business functions or process could be eliminated, Automation ROI could be found. For example, instead of clerks entering expenses into a spreadsheet for reimbursement, companies built expense applications that downloaded corporate credit card charges right from the credit card company, allowed cost codes to be assigned in an ordinary web browser, and submitted for approval online. This allowed companies to manage expenses with fewer staff (again, hard ROI needs to be realized).
As most companies completed web enablement programs years ago, there is less and less hard ROI to be reaped. As Adjuvi Chief Strategy Officer Dion Hinchcliffe pointed out, social business benefits are two to three cause and effect steps from the effort and investment, making it difficult to quantify the dollars, link to the initiative and realize the benefit.
If your organization will only support a business case backed by hard ROI, you're going to have to be creative to quantify returns for your social business initiative. You may need to do one or more of what I call bundling, piggybacking or skunkworking.
Bundling
Bundling involves taking your softer ROI projects or features and grouping them together into a package whereby as a group they have more compelling ROI than if they stood alone.
Piggybacking
Piggybacking refers to adding a small social business project on top of another project that has clear, quantifiable ROI. If the primary project has a definitive and substantial return, your social business project could ride on its coattails. Ironically, many of the original corporate web enablement projects were actually funded by piggybacking off the Y2K replacement projects of the day that no one questioned.
Skunkwork
As a last resort, you may need to turn to under the radar "skunkworks" projects or small pilot projects that are cheap, don't integrate with other systems and require minimum IT support. You may have to work within the signing authority of your boss and call in a few favors. Hopefully you'll find benefits in the rear-view mirror of your project that can be quantified as hard ROI and used as evidence to support a wider rollout.
2. Intangible ROI
At the other end of the spectrum, there are several players in the social business space who strongly believe that social business simply can't be quantified and is not a valuable discussion.
In his book, "Enterprise 2.0: How to Manage Social Technologies to Transform Your Organization," McAfee states that correct measure of social business initiatives should be progress rather than ROI. In doing so, he leans on corporate measurement gurus Robert Kaplan and David Norton.
Their 2004 book "Strategy Maps: Converting Intangible Assets into Tangible Outcomes" argues that, never mind social business, much of IT as a whole can't be measured for ROI. They write,
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None of these intangible assets has value that can be measured separately or independently. The value of these intangible assets derives from their ability to help the organization implement its strategy .... Intangible assets such as knowledge and technology seldom have a direct impact on financial outcomes such as increased revenues, lowered costs, and higher profits. Improvements in intangible assets affect financial outcomes through chains of cause-and-effect relationships."
McAfee asserts that many CFOs and CIOs simply need to understand the opportunity costs involved to evaluate the relative benefit of a social business initiative. For example, would it be worth spending x dollars and commit key people for a defined period of time in order to get a social business tool? How would the benefits compare relative to a project that would have a similar impact on the business?
Some corporations go beyond the question of opportunity costs and act on faith. They believe so strongly that they must change the way they do business that they view it the other way: what is the cost of doing nothing? They accept that they can't quantify the benefits and move forward anyway.
3. Lagging ROI
Lagging ROI is a notion developed by web 2.0 blogger Aaron Kim.
The cycle of a Lagging ROI program is as follows.
- Establish a social business innovation bucket of funds. This bucket will be used to fund several initiatives which are treated like an investment portfolio -- some will succeed and some will be absolute failures, but hopefully the portfolio should succeed as a whole.
- Make it clear to funders that there will be failures.
- Report back regularly on the performance of the portfolio after the fact.
- Funders will use that information to decide to continue whether to fund the innovation bucket or not.
4. ROI of Solved Problems
This approach looks at ROI from a different angle. Instead of asking "if we have this new application, what would we get back?" this approach asks, "if we solved this annoying business problem, what is that worth to us?"
John Mell, the lead for Social Business at IBM UK references a Jive Software case study where an organization identified that telephone support costs averaged $12 per call while providing support via a wiki cost $0.25. From this perspective, ROI only makes sense when applied to a specific business problem.It may be easier to quantify the ROI of eliminating that business problem, rather than building a generic business case for embarking on a wiki, blog or social software project.
A well referenced case study from Wachovia Bank justified its social business ventures by solving business challenges around dispersed employees working with each other across time zones, connecting employees with each other, documenting the tacit knowledge of veteran members of the team and engaging younger employees.
More recently, Dion Hinchcliffe and fellow Dachis Group alumnus Peter Kim addressed social business ROI in their book "Social Business By Design." Not only did they identify examples of solved problem ROI, they provided benchmarks for expected returns:
- Improved global sales processes: 10 percent revenue increase
- Ramping up new hires more rapidly: 35 percent increase in access of expertise
- Quicker location of expertise: 30 percent faster access to expertise
- Overcoming distance and time zone barriers: 20 percent reduction in travel and communication costs.
5. KPI Lift ROI
The ROI of Key Performance Indicator (KPI) Lift is one I propose based on principle. If you have developed KPIs in your organization that are actively monitored and managed, you will generally have consensus that the value they measure is critical to your business. If this is the case, there should also be agreement that when a KPI improves, the business will benefit even if the result is not quantified in dollars and cents.
Final Word: Know the Best ROI Fit
Knowing these ROI approaches often ends up being half the battle. The other task is to clearly understand which approach will get traction in your organization. This may well be one of those bits of knowledge that is not documented anywhere. It is something you will gain insight into over time as you learn the culture and personalities involved.
Then again, maybe someone has snuck a skunkworks Slack channel into you organization where you can just ask.
Title image by yosuke muroya (Flickr) via a CC BY-NC 2.0 license
