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

ROI 2.0, Part 2: Storytelling and Business Cases

15 12 2008

Storytelling, in the various realms of life, is a powerful tool in spreading the word, creating rapport and inspiring others. It’s not uncommon to hear advocates of social media tell nice stories
about how they blogged or twittered about something and because of
that, somebody else was able to solve a problem that otherwise would
take much longer to address. I use it all the time, and enjoy when others do the same.

However, storytelling is not a substitute for a solid business case. While story telling is a legitimate way to communicate, anecdotal evidence showing a feel-good story on the power of social computing does not constitute proof that net returns are being achieved. Of course, that cuts both ways: the fact that a given person or team never got anything out of blogging or using a wiki cannot be used as a conclusive argument against it either.

The tale that goes untold is: how many of the blog posts, tweets or wiki articles went unnoticed, and how much time was spent covering numerous subjects that did not help the resolution of any problem?

User-generated content (UGC), be it in the form of blog posts, tweets, contributions to a wiki, photos posted to Flickr or Facebook, Amazon book reviews, TripAdvisor feedback or comments to newspaper articles, tend to follow a power law distribution, where usefulness or relevance tend to concentrate on a very small fraction of the whole. That pattern is expected, and it can be even considered an intrinsic part of the overall value embedded in UGC. The gems made possible by UGC exist in part because so much content of various degrees of quality was created, not despite of that.

The point that sometimes is missed in the ROI discussion is that one cannot ignore the total cost and investment to generate those gems when assessing the business value of enabling users to create content. There’s no doubt that the enterprise adoption of social media generates value, as can be attested by the multiple stories collected by Web 2.0 advocates in the last few years. But once discounted the costs, does it generate net business value? Any ROI analysis needs to take into consideration the returns, the investment and the time horizon. Therefore, the questions that need to be answered are: how much, how often (or how soon) and at what cost. Add storytelling to that, and you may have a winner in your hands.

Click here for Part 1 of this ROI 2.0 Series: Bean Counters vs Innovators – The need for a real exchange of ideas

ROI 2.0, Part 1: Bean counters vs Innovators – The need for a real exchange of ideas

11 12 2008

This year I’ve been talking to a very large number of clients around the globe and across multiple industries about the business value of Web 2.0 and Social Computing, and inevitably the topic of ROI surfaces. It seems to be more the subject of a book than a blog post due to its complexity and scope, and it’s also a dry subject, not as flashy as talking about Twitter or cool beer ads. Nonetheless, blogging is my way of thinking out loud, so I’ll give it a try here, but breaking it down into manageable chunks.

Discussions on the ROI for Web 2.0 and Social Computing tend to be very polarized. Many early adopters, enterprise 2.0 thinkers and so-called evangelists tend to dismiss the need to articulate ROI for innovation, with arguments ranging from quick – and shallow – “nobody asks for the ROI of email or phones” to some elaborated points of view. Andrew McAfee, Associate Professor with the Harvard Business School and a recognized thought leader in Enterprise 2.0 wrote a blog post back in 2006 about the challenges of building business cases to justify IT investments using ROI or NPV figures. He quotes the book Strategy Maps, by Bob Kaplan and David Norton, who say:

“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.”

On the other side, there seems to be a strong demand by the ones holding the money – often the decision makers – to better articulate the financial returns on social computing initiatives. Pat LaPointe, from MarketingNPV, stated in a blog post he wrote in September 2008:

“(…) we marketers don’t do ourselves any favors by trying to disconnect [Social Media] from financial value just because it’s hard to make the links. Maybe we should take a page from how our companies decide to invest in R&D – with clarity of purpose, explicit assumptions, and rigorous experimentation in escalating risk scenarios. In the end, that will accelerate corporate adoption of social media much faster. So rather than trying to spin the tangential metrics, help those grounded in the P&L to “get it”. Remember, if they don’t “get it”, neither will you. Budget that is.”

John T. Gourville, associate professor at Harvard Business School, writing about the psychology of new-product adoption for the Harvard Business Review (Eager Sellers and Stony Buyers), described a similar conflict between product developers and consumers. The former, like innovators, are likely to see a need for their product and see them as essential, while the latter are reluctant to part with the incumbent product, and are unable to see the need for a change.

As in any polarized discussion, the arguments quickly escalate to become very dogmatic, and no real dialogue takes place. Which side is right, the innovators or the bean counters? Both, to some extent, as it’s often the case. ROI models are far from perfect and benefits derived from social computing are hard to measure. But in a corporate world of limited resources and high scrutiny, investments on Web 2.0 compete with more ordinary needs such as employee compensation and basic infrastructure improvements, so if you don’t have a business case, chances are that you won’t get much funding either. Hype will only take you so far. Past the smoke and mirrors, if there is real net value in Enterprise 2.0, it must be clearly articulated.

To get this conversation started, both sides need to focus on their common objectives: a solution that will benefit both the individuals and the companies they work for. That’s why, at this point of the Social Media evolution, we need more bridges than evangelists.