Determining the ROI of Enterprise 2.0

Despite recent statistics showing that Enterprise 2.0 tools have spread to about a third of businesses globally, there remain ongoing questions being asked in the enterprise software community about the real returns that they provide to businesses that deploy them.Many IT solutions create value only after traveling through an indirect chain of cause and effect. Certainly blogs, wikis, and social networks are popular on public networks, but does that translate to meaningful bottom line value to organizations? In other words, is Enterprise 2.0 truly strategic in the unique way that information technology can so often be?

This is a key question since actual penetration of these tools is almost certainly lower than the one third figure I mention above. Most organizations today, even the ones where the applications are available to employees currently, are not yet exhorting workers to adopt these tools en masse despite a suite of compelling arguments and a growing set of case studies. Even impressive citations such as the recent TransUnion Enterprise 2.0 case study that claims an eye-opening 50x return on investment (using the most basic ROI formula for calculating returns) are not yet initiating widespread inquiry.

Instead, while we're seeing widespread interest and acceptance of Enterprise 2.0 in the workplace, there is still mostly a wait-and-see attitude amongst IT managers and business leaders at the moment. The reasons for this seem to fall into three general categories:

One is an broad wariness of a new horizontal information technology approach that purports to solve so many problems and will overlap extensively with existing solutions from e-mail and instant messaging to content/document management and knowledge management systems, to name just a few. Other related concerns are feelings that workers already have a lot of software to use today, that the tools already exist in the organization (see my Enterprise 2.0 and SharePoint discussion a few weeks ago), or that the available tools aren't fully enterprise-ready yet.

A second set of issues is related to corporate culture and its fundamentally hierarchical nature, which seems anathema to the flattened, highly social nature of Web 2.0 in the enterprise. At this point, it's becoming increasingly clear that in some tightly controlled, top-down organizations, culture is indeed an impediment to the use of emergent, social computing. Fortunately, there is now enough evidence visible in current case studies that many industries can indeed benefit from Enterprise 2.0.

The last issue is one that has bedeviled software and its strategic application to business since the very beginning, namely the accurate predicting of the return on investment of an IT solution. Andrew McAfee, who originally coined Enterprise 2.0, summarized the challenges succinctly a while back in The Case Against the Business Case. The central problem? Assets that are intangible, such as knowledge, social capital, and situated technology -- which Enterprise 2.0 is primarily focused on -- rarely have direct impact to financial outcomes such as revenues and profits. Its their downstream effects that generate the most value to the business.

There have been a number of good discussions on this topic lately including a detailed exploration of the issue by Hutch Carpenter, where he concludes that "software ROI is only as predictable as the activity for which it is used" and Martin Koser's discussion on the challenges of coming up with the concepts and measures for "collaborative performance". Susan Scrupski has also been exploring the ROI of Enterprise 2.0 and in her call for case studies recently highlighted that while we have a good number of them, there is still not enough ROI coverage in a wide set of industries.

However, a key aspect of the ROI issue is that the strategic capabilities represented by Enterprise 2.0 are primarily emergent in nature, instead of carefully aimed at and unleashed at specific problems. Classical technology investments such as assembly lines and industrial automation could be quantified because their most significant effect was direct and measurable. Many IT solutions (think e-mail or service-oriented architecture) are general purpose and tend to be indirect and create value only after traveling through an indirect chain of cause and effect to enable a positive business outcome. The problem with this is that it's very hard to either measure or predict accurately, especially since IT solutions tend to have longer chains of cause and effect than other technologies. While this often builds up accumulated value by its ability to cascade across a business, it's very unsatisfying from the traditional perspective of investment in X by spending Y to achieve a predicted return Z.

The net result of this lack of clarity is a hold up on the explicit use of Enterprise 2.0 for strategic benefit by businesses, even as the tools are proliferating, often virally, in many organizations. For now, the tools are often used in a localized or ad hoc fashion, or at very least, without a concerted business-wide effort to systematically capture the perceived business value. This question is important since an accumulating body of knowledge is pointing to potentially dramatic business returns with Enterprise 2.0. If these continue to be borne out, it will affect the competitive and financial positions of the companies that are proactive and therefore their long-term marketplace success. As I outlined recently in my Economics 2.0 session at Web 2.0 Expo last week, Enterprise 2.0 and other new modes of business seem to herald new, much more efficient -- and just as significantly, fundamentally different -- ways of running our businesses.

What will change the current status quo? A preponderance of case studies in the affirmative? Sustained, first-hand experience of the early benefits convincing senior management? Lack of reports of negative outcomes like data theft and excessive socializing? Yes, it will be all of these, but like the well-known examples of successful emergent systems such as termite colonies, bird flocks, animal herds, business organizations, and now online communities, there are real limits on the ability to direct emergent systems towards focused outcomes. In the end, all one can actually do predictably is enable the possibilities and not prevent them.

Innovation often comes from where you least expect it and harnessing collective intelligence, the core principle of Web 2.0 as well as Enterprise 2.0, is the very art of eliciting value from emergent systems such as the Web and our intranets. That this value is forming the bulk of the networked economy (open source software, social networks, social media sharing, etc.) is one of the signature lessons of the era of open business models and 2.0.

Update: Based on some feedback to this post over the last day, I would like to make it clear that there is little doubt that Enterprise 2.0 delivers ROI today, at least on the collaborative side (the jury still seems to be out on the social networking side). Recently, researchers have even been able to put a real numerical value on social connections. My point is just that it's difficult to determine where the returns (often the most important ones) will appear when the tools have so many downstream effects. That's not to say either that Enterprise 2.0 ecosystems can't be directed to some degree to achieve business objectives. In fact, I believe the the next generation of workers will be experts at achieving their goals by eliciting and then harvesting the knowledge and capabilities they need over the network.

Update 2: Dennis Howlett responds with Enterprise 2.0 promise is years off...if it materializes.

Are concerns about ROI holding up your investments in Enterprise 2.0?