ROI 2.0, Part 3: We don’t need a Social Media ROI model

19 02 2009

Malcolm Gladwell, in his hilarious TED talk on spaghetti sauce, tells the story of Howard Moskowitz’s epiphany while looking for the perfect concentration of aspartame to use in the Diet Pepsi formulation:

Howard does the experiment, and he gets the data back, and he plots it on a curve, and all of a sudden he realizes it’s not a nice bell curve. In fact, the data doesn’t make any sense. It’s a mess. It’s all over the place. (…) Why could we not make sense of this experiment with Diet Pepsi? And one day, he was sitting in a diner in White Plains (…). And suddenly, like a bolt of lightning, the answer came to him. And that is, that when they analyzed the Diet Pepsi data, they were asking the wrong question. They were looking for the perfect Pepsi, and they should have been looking for the perfect Pepsis.”

Tangent note: Most TED talks are a treat, but this one is particularly funny and thought-provoking. If you haven’t seen it yet, consider paying it a visit. If you have an iPhone or iPod Touch, you may like the TED app too!

Over the last few years, many in the Social Media space have been on a quest to find the perfect ROI model for blogs, micro-blogs, wikis, social networking, social bookmarking and other animals in the ever growing Web 2.0 zoo. You’ll see opinions ranging from “we don’t need ROI for Social Media” to “Web 2.0 has to rely on a lagging ROI” to “ROI 2.0 comes from time savings”. In a way, they are all right and all wrong at the same time. Paraphrasing Doctor Moskowitz, there is no perfect Social Media ROI model, there are only perfect Social Media ROI models.

Since 2006, I’ve been talking to several senior executives in multiple industries and across geographies about the business value of Web 2.0, and have noticed a wide range of approaches when deciding whether or not (and how much) to invest in social computing. For companies in the forefront of the social media battleground, such as newspapers, book publishers and TV channels, investing heavily in new web technologies has often been a question of survival, and decision makers had significant leeway in trying new ways of delivering their products and services, with the full blessing of their stakeholders. On the other side of the spectrum, in sectors such as financial services, social media is not yet unanimously regarded as the way to go. I’ve heard from a number of banking and insurance clients that, if Social Media advocates don’t articulate clearly the returns they are expecting to achieve, they won’t get the funds to realize their vision.

Most players in Government were also very skeptical until the Obama effect took the world by storm, creating a sense of urgency that was not as prevalent before. Since then, government agencies around the globe seem to be a bit more forgiving with high level business cases for social computing initiatives inside and outside the firewall. However, to balance things out, in most of the other industries, investments in innovation are being subject to even more scrutiny than normal due to the tough current economic environment. So, having a few ROI models in your pocket does not hurt.

The following ROI models are emerging, and we can expect a few more to appear in the near future.

1. Lagging ROI

Last year, I spoke to the CIO of a global retail chain and he had an interesting approach towards strategic investments in emerging technologies. Instead of trying to develop a standard business case based on pie-in-the-sky ROI calculations, he managed to convince the board of directors to give him more flexibility to invest in a few projects his team deemed to be essential for the long-term survival of the company. For those, he would provide after-the-fact ROI metrics, so that decision makers could assess whether to keep investing or pull the plug. He also managed expectations by saying upfront that some of those projects would fail, but doing nothing was not an option. By setting aside an innovation bucket and establishing a portfolio of parallel innovation initiatives, you can hedge your bets and improve your overall success rate.

2. Efficiency gains or cost avoidance

Many of the early Social Media ROI models are based on how much time you save by relying on social media, converting that to monetary terms based on the cost of labour. While this is certainly a valid approach, it needs to be supplemented by other sources of business value. Unless you are capable of mapping the saved minutes with other measurable outcomes derived from having more time available, the most obvious way to realize the value of being more efficient is to reduce head count, as in theory the group can do the same work as before with less people. If that’s the core of your business case justification, it may fire back in the long term, as some people may feel that the more they use social computing, the more likely it is that their department will be downsized.

3. Proxy Metrics

Some of the ROI examples in the Groundswell book and blog rely on proxy marketing metrics, i.e., what would be the corresponding cost of a conventional marketing campaign to achieve the same level of reach or awareness. For example, when calculating the ROI of an executive blog, the authors measure value by calculating the cost of advertising, PR, SEO and word-of-mouth equivalents.

4. Product/Service/Process Innovation

The value of customer or employee insights that end up generating brand new products, services and processes or improvements to existing one needs to be taken into account. Measuring the number of new features is relatively straightforward. Over time, you may want to figure out the equivalent R&D cost to get the same results.

5. Improved Conversions

Back to the Groundswell book, one of the ROI examples there shows how ratings and reviews can improve conversion rates (i.e., from all people visiting your site, how many more buy products because they trust the input from other consumers, compared to typical conversion rates).

6. Digitalization of knowledge

By having employees blogging, contributing to wikis, commenting or rating content, creating videos and podcasts, companies are essentially enabling the digitalization of knowledge. Things that used to exist only in people’s heads are now being converted to text, audio and images that are searchable and discoverable. It’s the realization of the asset that Clay Shirky calls the cognitive surplus. That was an elusive resource that didn’t have much monetary value before the surge in user-generated content. Naturally, a fair portion of that digitalized knowledge has very little business value, so you need to find metrics to determine how much of that truckload of content is actually useful. You can infer that by using cross-links, comments, ratings or even number of visits.

7. Social capital and empowerment of the workforce

There is certainly business value in having a workforce composed of well connected, well informed and motivated employees. What metrics can be used to assess the degree of connectivity/knowledge/motivation of your human resources? Several social computing tools give you indirect metrics that provide a glimpse of the metrics you can exploit. Atlas for IBM Lotus Connections, for example, gives you the ability to see how your social network evolves quarterly, and can help determining how many people are associated with some hot skill (full disclosure: I work for IBM).

As you can see in several of the emerging models listed above, there are often three types of inputs to develop ROI calculations:

  • Quantitative metrics that can be obtained directly from the system data and log files
  • Qualitative metrics that are determined using surveys, questionnaires and polls
  • Dollar multipliers that attribute arbitrary monetary value to hard to assess items such as a blog comment or an extra contact in your social network

For the monetary value, I would suggest to adopt a sensitivity analysis approach, working with conservative, average and aggressive scenarios, and adjusting them over time. Just don’t go overboard. As I stated in a previous post, there’s an ROI for calculating ROI. ROI models should be easy to understand, as decision makers will often frown upon obscure calculations that require a PhD degree in financial modeling.

In summary: we don’t need one Social Media ROI model, we need many of them. None of the ones emerging now is perfect, none will ever be. You may need to have a few in your toolkit and develop a sense of which one to use in each case.

Previous ROI entries:

ROI 2.0, Part 1: Bean counters vs Innovators – The need for a real exchange of ideas
ROI 2.0, Part 2: Storytelling and Business Cases

Government 2.0: The smarter planet initiative and Obama’s inauguration speech

21 01 2009

Yesterday at 12:00 noon EST, several parts of the world came to a standstill to watch Obama’s inauguration ceremony. It felt pretty much like a FIFA World Cup game in Brazil. I found interesting that, at 12.01, the White House site published a blog post entitled “Change has come to”., written by Macon Phillips, who has the revealing title of “Director of New Media for the White House”. Macon wrote:

Participation — President Obama started his career as a community organizer on the South Side of Chicago, where he saw firsthand what people can do when they come together for a common cause. Citizen participation will be a priority for the Administration, and the internet will play an important role in that. One significant addition to reflects a campaign promise from the President: we will publish all non-emergency legislation to the website for five days, and allow the public to review and comment before the President signs it.

We’d also like to hear from you — what sort of things would you find valuable from If you have an idea, use this form to let us know. Like the transition website and the campaign’s before that, this online community will continue to be a work in progress as we develop new features and content for you. So thanks in advance for your patience and for your feedback.

That’s promising, but still a 1.0 approach: online forms are very 1994. I’m looking forward to see what they mean by “new features”. I would expect to see a conversation that’s more transparent than e-mail and forms. Something like the very cool service provided by debategraph. If you never heard about it, I highly recommend a visit now.

In 2008 we saw a major surge in interest in Government 2.0 in Canada. I spent a good part of the year working in Ottawa, and also speaking in events directed towards all levels of government. However, just by visiting the publick websites of federal and provincial government agencies, you won’t see much of a change yet. I really would like to see that changing from interest and words to action, and I hope 2009 is the year we see that happening in Canada and around the globe, and the White House site will certainly be a major influencer, one way or the other.

Other fact that came to my attention is that this is the first time “digital” is mentioned in an inaugural speech. This is not surprising, as the term was not widely used 16 years ago, but it was not accidental either.

This is an excerpt from Obama’s speech:

For everywhere we look, there is work to be done. The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.

The words above seem to align nicely with this piece IBM published yesterday in the Washington Post, The Wall Street Journal and The New York Times:

In the past, we had to make trade-offs between the imperatives of energy, transportation, infrastructure, security, commerce, the environment and more. But in an ever-more interconnected world, these vast, complex systems are no longer separate from one another. They are now interwoven and interdependent. Which is good news—because the solutions we develop for one system will ripple across many others.

Those solutions are possible because we now have the tools to literally change the way the world works. Computational power is being put into things we wouldn’t recognize as computers: phones, cameras, cars, appliances, roadways, power lines, clothes. We are interconnecting all of this through the Internet, which has come of age. And we are applying sophisticated analytics to make sense of the world’s digital knowledge and pulse.

As we look at investments to stimulate our economies, we have a lot more options and can get a lot more bang for our buck. We can ask ourselves: Do we want an airport, or a smart airport? A highway, or a smart highway? A hospital, or a smart hospital? We can think about new industries and societal benefits spawned by a smart power grid, a smart water system, a smart city. About how innovation across all these systems will multiply the number of new jobs and spread new skills.

Similar to what I said before, while I find the two excerpts above inspiring and encouraging, nothing has been done yet, so it’s still not time for celebration. But we certainly need a vision and charisma to not get lost during the execution, so the first step was a good one.

Update: I forgot to mention, but the White House blog does not seem to allow blog comments either (please let me know if I missed how to do it, other than sending emails). That’s also very web 1.0, I hope them to open it up a bit, by allowing at least moderated comments there. Not a 2-way conversation when only one side has the mike.