I was chatting to someone today about return on investment and how you’d try to calculate it for social software in the enterprise. My advice was just don’t bother but they weren’t having that as an answer.
They were banging on about this and that and trying to get across to me how important it was etc etc. Well working for a large pharma company I felt confident in challenging them to get an accurate ROI figure for anything. Of course they’d never manage it. People are so detached from the finances in a company like ours. They may have a decent idea of how much they pay for it but they have no idea how to measure the profit they make following the investment that they make.
Let’s break it down to the simplest level which is about how complicated this kind of thing should get.
%ROI = (Amount of profit / Amount invested) *100
So the two values you need to figure out is the amount invested and the amount of money you make. The amount invested seems simple because you know how much you spend on particular software. Or so you would think. Most people forget about the time taken to install the software or complete the documentation, they forget about the infrastructure costs, they forget about support costs and training costs. So they never really get that simple figure right.
As for the amount of money made you can just forget it in pharma, especially in the discovery stage. The research side of things is so dissociated from the sales side of things that you haven’t got a hope. The best you can hope for is, “we spend $Xbillion on research and make $Xbillion in profit.”
But that doesn’t mean you need to chuck out the ROI calculation. It actually comes in very handy when you want to prove a point. By now most of you have probably figured out what I’m going to say.
Looking back at the equation you can see you divide whatever profit you make by whatever you invest. For those of you who have done any simple maths you’ll realise that your profit is your numerator and your investment is your denominator. In any fraction the bigger the numerator and the smaller the denominator the bigger the resulting fraction i.e. in this case, the more money you make and the less money you spend the bigger your %ROI. This trend will always be correct until you get your investment down to zero and then your ROI is infinity.
So, what I’m trying to say in a very convoluted way is forget about the profit that you might make from investing in social computing, it’s just to hard to put figures on knowledge and happiness and quality. Start trying to figure out how you can get this stuff into the workplace as cheaply as you possibly can. If you manage to get something in for free it doesn’t matter if you only make a penny, your ROI is still massive.
4 Comments
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Allen Taylor
So my argument on this would be that nothing can come into any organisation for free.
As you said yourself a piece of software has to sit on something (a server, a local PC, even if its hosted externally there will be a cost). It will need some level of support even if this is done by the users of the system there is still a cost, etc, etc.
Nothing in life is free !
I look at ROI in this space in a slightly different way.
I agree that it is very hard to get a clear handle on the return/profit aspect but at the same time you can often work out the impact of not doing something, ie. lost opportunity – this is often a great way to focus a decision in this space.
The other thing that having this conversation does is make people think about what metrics would be useful in proving value.
So Social Networking is a good one, what is the value of knowing that someone in Sydney, Australia has an interest in say MobileComputing. Well I may contact them and find out that there is overlap in our work, or I might find out that we can work together and deliver quicker – these have real costs which can be quantified.
Hey Nic,
I guess we agree that nothing can be done for free, even talking to a vendor will cost something! I also think that we’ll both agree that the cheaper you can get something done, assuming that it meets the quality standard you’re expecting, the better.
Don’t get me wrong, I don’t think ROI is a bad thing, I just think it needs to be put into context, especially when you’re dealing with something as vague as the returns you get from social software. How do you accurately measure the $ value of connecting people in the organisation or of making that new business contact? Do you need to calculate ROI if the investment is something you could afford to lose or if it only represented a small percentage of your budget?
When it comes to social software though ROI is always going to be stacked in it’s favour isn’t it? Lightweight, low infrastructure costs, open source software, not many support overheads etc etc.
I just always get the impression that when people start calculating ROI in great detail it’s retrospective and it’s because they’ve spanked a lot more money than they should’ve done.
I recently thought about this same issue. I didn’t look at it in terms of revenue gained so much as expenses avoided (http://blog.groupswim.com/2008/02/07/quantifying-an-online-community/). Attributing money earned to Enterprise 2.0 is going to be tough given most of the benefits are focused on making people more efficient, sharing knowledge more effectively, allowing people to have some fun while they are working, etc.. It is tough question with no easy answer, but I know in my gut it is the right thing to do; it just may never be easy to tie into a nice financial equation.