ROI is so Business 1.0: not

ROI is so Business 1.0: not

Summary: As social computing technologies start to make their presence felt in larger enterprises, the ROI question looms large in people's minds. Or rather the CFOs mind.

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As social computing technologies start to make their presence felt in larger enterprises, the ROI question looms large in people's minds. Or rather the CFOs mind. Like it or not, any enterprise project is going to require a check cutting and unless it is something that goes under the departmental budget radar then it needs financial justification.

In the past, enterprise applications have been sold on TCO - a now defunct measure except for utility computing technologies. New technologies almost always have to come up with an ROI measure. The question on social computing advocates lips is whether this is the right way to look at how applications are acquired. Jeffrey Walker, a fellow Irregular and president of Atlassian says:

ROI? Wrong question. That may not be a popular thing to say in a CFO’s office, or perhaps a CIO’s office, but these people are not the ones driving 2.0 adoption, or buying 2.0 tools, in the vast majority of instances.

What’s the ROI on email? What’s the ROI on IM? If there’s a study, I guarantee it’s crap. ROI studies on any software are famous fiction.

Jeffrey may well be right but at this stage of development I'd venture he is making an incorrect comparison. We accept email as a necessity for which the cost is lost in other applications. It has become a utility although I'm sure another Irregular Vinnie Mirchandani will argue about delivered cost. The same cannot be said of social computing technologies because although cost is one dimension, it is not the only one.

Adoption costs are not trivial once you step beyond the enthusiast level. One one large project with which I am engaged, the training costs designed to help the community self start run many $,000s. That's not consulting greed but a recognition there is a lot of work associated with overcoming cultural norms as precursors to the project being rolled out to a large community. Simply declaring social computing to be a 'good' is not good enough. There is much to be done that has associated cost.

The moment you step beyond small scale implementations ROI is something you can't avoid. The difficulty I have is the reasons most frequently given by the social computing mavens. They appear as attempts to sweep the topic aside. Take this from Luis Suarez:

If social computing is supposed to revolutionalise the way we share our knowledge, connect with others, collaborate, communicate and innovate, then I think it is about time we move into the 21st century, progress further in that Knowledge economy and try to figure out how to get the most value out of it, because figuring out its ROI, in my opinion, is going to be a waste of time, energy and resources.

I know that Luis is a very smart guy and I don't have a problem with value delivery. But this is not the way to approach the topic. The assumption is that ROI is always about payback. While that is often true, you need a value figure with which to develop the calculation. Forrester has already tripped up over this one, concluding, as do many others, that the benefits (are these the same as value?) are 'soft' and therefore difficult to measure. The fact something is difficult is not an excuse yet this is how ROI is positioned.

In his discussion, Luis references Jay Cross who talks about social computing from the learning perspective. He suggests three broad measures:

Sales force readiness. You think you have a problem keeping sales people up to speed? Consider Cisco. On average, Cisco acquires a new company every month. If systems engineers tried to learn via traditional methods, they would have no time left for customers. Instead of training, Cisco “Googe-ized” product knowledge, sales presentations, and competitive information, making it available on demand throughout the company. Sales people learn by using that information, not by being trained.

    Benefits: better-informed sales force, more competence on sales calls, more cross-selling, better presentations, easier to bring partners up to speed, avoid cost of product training.

Eliminate bureaucracy. Knowledge workers waste a third of their time looking for information and identifying the right people to talk with. They often spend more time recreating information hidden in someone else’s file cabinet than creating original material. I just heard about a company where the workers think doing their email is the work; that’s how they spend almost all of their time. Expert locators, bottom-up knowledge management, instant messaging, organization-wide wikis, and organizational network analysis all attack this plaque in the organizational arteries.

    Benefits: speed flow of information, cut time wasted searching for answers, streamline organizational process, cut email by half, cease re-inventing the wheel, increase worker throughput 20% to 30%.

Conversation. Conversation is easily the most important learning technology ever invented. Conversations carry news, create meaning, foster cooperation, and spark innovation. Encouraging open, honest conversation through work space design, setting ground rules for conversing productively, and baking conversation into the corporate culture spread intellectual capital, improve cooperation, and strengthen personal relationships.

    Benefits: faster cycle time, improved problem-solving, more time on mission, higher morale, lower turnover…

While I can argue with the detail (who says knowledge workers 'waste a third of their time?') the basic premises are eminently reasonable as value indicators that could form part of an ROI equation. Unfortunately, Jay then goes on to alienate the very people the social computing crowd should be wooing:

Hold your breath a moment, for some of you will choke on this one: ROI and accounting are inappropriate measures of performance. ROI is a relic of the industrial era, when assets were tangible and repetition was the path to success in the factory. Today, the intangible assets you cannot see are far more valuable than those you can.

It doesn't matter that ROI may appear to be a relic. As a partially reconstructed ex-CFO I have some sympathy with Jay's view, but he seriously misunderstands the ability of CFOs to understand value beyond tangible assets. His declaration is something that MBA students have known for as many years as Paul Strassmann has been talking about Google although I sense the world has moved on from Strassmann's view that CFOs and CIOs are disconnected by different mindsets. CFOs routinely spend time with those on Wall Street analysts who are arbiters of intangible corporate value. Jonathan D. Becher who authors Managing By Walking Around (an HP mantra) points the way of the future where he suggests:

As most of you probably know, I think that CFOs should stop thinking of themselves as just finance executives and instead recognize that they are charged with the overall performance of an organization. I’ve often joked that we should rename the position Chief Performance Officer.

In making this assertion, Jonathan is drawing upon one of many consistent surveys that demonstrate a need and desire on the part of CFOs to become more engaged with the business. This is something I see in my everyday life where CFOs and senior finance professionals wrestle with the 'how' of engagement.

Instead of panning CFOs as looking at the 'wrong' stuff and generally pillorying them as retarded, social computing pundits might ask how the flat world of which many profess becomes a reality. The current tone is one of erecting walls and not pulling them down. It won't win friends and it won't persuade those who need to review ROI that alternative if more difficult measures have equal if not better utility.

Topics: Banking, Collaboration, Social Enterprise

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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21 comments
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  • This is like asking, "What is the ROI on marriage?"

    Some things are better not quantified in dollars and cents.
    kd5auq
    • Marriage is just an accepted cost center

      Anyone making money on a marriage should write a book and tell the world how
      Brakiss
  • RE: ROI is so Business 1.0: not

    Dennis: Thanks for the mention. You might be amused to know that I'm responsible for both finance products *and* social computing technologies here at SAP, although we rarely try to market both to the same people. We firmly believe that Enterprise 2.0 solutions have a strong ROI for our customers. It might not be the exact same financial measures that vendors have been using for 20+ years, but good CFOs can track anything measurable.

    BTW, I think you may have inadvertantly dropped a word in the sentence that mentions my blog.

    -- Jonathan
    becher
    • In which case

      We need to talk. You can find my contact details via: http://www.accmanpro.com
      dahowlett@...
  • RE: ROI is so Business 1.0: not

    I would say that the question would be .. is ROI 1.0 applicable in the 2.0 world? Or are we looking at a new set of measures that then map to these costs or benefits.
    Darayush
    • Versions

      For Pete's sake! v1.0 or v2.0, the whole world can't seem to decide, can they?
      Justin Carmichael
  • TCO Defunct?

    How can TCO be defunct? You can't calculate ROI without knowing TCO.
    ParrotHeadFL
    • ROI needs TCO

      I totally agree with you. Which should be defunct is the need to focus blindly on acronyms instead of concepts...TCO should include everything something costs us (the limit being the cost of that measure should not pass the benefit of measuring it) and is in fact evolving as companies such as Intel includes TCC (total cost of communication). ROI is what you expect you'll get back for your investment (TCO)...and that's also "inmortal", whether you measure as it with IRR, NPV, Discounted Payback Period or all of the above. The article has 'good links', but books don't bite...try at least scanning one by Martin Curley for example.
      cybedu@...
    • TCO is a requirement

      Exactly.. No ROI without TCO. Still, both do not take risk into account, and here is where the real analysis has to be done.

      Also, bear in mind that the benefits are only estimated for the project justification, but very seldom during the course of the project to identify if indeed the benefits promissed are the benefits to be attained.
      jocada@...
  • RE: ROI is so Business 1.0: not

    There is growing attention to broader versions of what ROI can mean, especially in terms of public or social value. See for example, www.ctg.albany.edu/publications/reports/advancing_roi
    tcresswell@...
  • Few IT Organizations Can Effectively Quantify ROI

    As a consultant I come across many IT organizations that tell me the only acceptable ROI factor their company recognizes is headcount reduction. This is so 19th century it is sad. It brings all talk about ROI to a screeching halt. These are the kinds of companies that are doomed in the long run.
    steven.g.kahn@...
  • Looking for Learning

    A common thread appears to be looking to Learn, searching for that which we do not know, to develop an answer that is actually useful. Whether by getting outside the financial 'Box' view (for the CFO), or walking around the enterprise to actually talk to people expecting to find out something new - some of which can be useful - or Googling (and knowing how) to get new information. So - success in the 'information age' can be enhanced by 'seeking information'.
    marvink@...
  • RE: ROI is so Business 1.0: not

    Gibberish, gibberish and more gibberish!!!
    cne@...
  • RE: ROI is so Business 1.0: not

    OK Dennis Howlett, you've criticized those who say it would be difficult to measure and declare a reasonable ROI.

    So, as a 're-constructed' CFO, how would you logically come up with metrics that can be tracked, dissected and reported in a summary, of any kind?
    canon_man
    • Research the problems you're trying to solve

      You need to know what problems you're trying to solve. You can't just implement any technology because it "looks" cool or other people say it's cool. You have to have a problem you're trying to solve, or a situation you are trying to improve.

      Then, once you know what you're after, you can research how bad the problem is, research what the various "solutions" will do to fix it, what the decreased cost (or increased efficiency) is worth, and the cost of implementing the "solution".

      For example, if you are looking at an expert management system, you are probably finding that your employees are having a difficult time finding the expertise they need to do their jobs. How much time do they waste trying to find their experts? What is their time worth? How much time will they recover if they have this new solution? Does the solution cost more than its worth?

      Yes, you have to dig deeper into your organization, but if you weren't already asking those kinds of questions when implementing new "solutions", you're running the risk of implementing something that will either be ignored, or will decrease productivity and create additional pain and suffering.
      bmadsen@...
      • ROI blinders

        I have seen people blindly calculating ROI for a given project and completely ignore the obvious side benefits. If I mention the benefits, the usual reply is "that doesn't apply to this project, so it can't be included." Ummm, aren't these aide benefits also a return on the investment?

        I agree that CFO's need some sort of measurement for projects. How else can they make informed decisions about the desirablility of a given project? Sometimes the side benefits can be much, much larger then the benefits of the original project.
        dmhunter@...
  • RE: ROI is so Business 1.0: not

    I think terms like ROI and TCO are part of the "cult of business" crap that consume an enormous amount of time, keep relatively useless middle managers employed, and offer little to the bottom line. They are a way of doing work without doing real work and are part of the infection that is making IT not only boring and needlessly tedious, but also ineffective. Conveniently it's way to get lost in how it looks rather than how it is - real technical merits etc.

    Most of all they offer cover for the ultimately arbitrary decisions that managers would have made anyway, all the while allowing them to bandy about acronyms that make them seem more intelligent than they really are.

    Did I say that? I didn't really say that did I?
    Matt Fahrner
    • Cults are everywhere

      I believe there is a cult of business, as well as a cult of IT, a cult of social computing...Cults can be cool, despite their modern association with brainwashing. If you want to do social computing, go do it, on your own dime and your own time. If you want the "cult of business" people to subsidize your social computing, you have to give them a reason to part with their money. Acronyms like TCO and ROI come and go, the underlying economic realities remain.
      MadSciGuy
  • The ROI is so great.. its not worth mentioning

    thats my take
    pcguy777
  • Business 3.0 is so Business 2.12342423

    We all need to get over this "version" love thing. It's really getting annoying.
    Narg