Talking Numbers: The ROI of Enterprise 2.0 Projects

In my last posts so far, I've already outlined quite extensively how companies create value through the use of Enterprise 2.0 tools and what benefits social technology can deliver to an organisation. Just by looking at this, it appears to be somewhat obvious that every company should invest in it if the necessary resources are available. In reality, however, a manager generally faces an entire set of investment opportunities rather than just only one. Therefore he or she needs to base the decision of which project to pursue on a comparable and measureable value. One widely used value/ratio is the Return on Investment (ROI) of a project. In other words: How much value is created through a particular project in comparison to the initial investment in it (see the graph below for a more detailed overview). In today's blog post I'm going to show one example ROI calculation based on an Enterprise 2.0 project at Intuit and further I'd like discuss the applicability and limitations of the use of such a measurement.

A good explanation of the idea behind ROI (of course, projects with a negative ROI should NOT be pursued at all):

 

Source: Hinchcliffe, D. (2009) Determining the ROI of Enterprise 2.0. Retrieved from: http://www.zdnet.com/blog/hinchcliffe/determining-the-roi-of-enterprise-2-0/334

 

Brainstorm at Intuit

Intuit Inc. is a U.S.-based software company founded in 1983 in Palo Alto, California. With products such as QuickBooks and TurboTax, the company mainly focuses on financial and accounting programs for small businesses and indivuals. In the early to mid 2000s, Intuit, similar to many other companies, struggled to turn new ideas into reality. To address that problem, the company came up with the internally-developed Brainstorm platform in early 2007 followed by a full-scale rollout in 2008. According to Andrew Nusca and also other sources (I wasn't able to track down the original numbers from Intuit itself), Intuit was able to increase the number of created ideas by 1,000% while effectively decreasing the time to market time by 60%. In other words, they launched 6 times more new products in the market in one year. Let's have a closer look what this means in terms of ROI.

Crunching the Numbers

 

The ROI-formula is quite simply to understand. Following from what was explained already earlier, it is just the Net Benefit from a particular project  (Added value - initial cost) over its initial cost.

 

Usually, investment cost would consist of buying/leasing a software solution, installing the tool as well as the training of employees. 

• Buying/Leasing Cost: Because of the fact that Intuit developed the Brainstorm platform in-house, they of course didn't have to pay for it in the sense of buying/leasing a product but rather accounted for it as research and development cost. In 2007, Intuit spent $472.516 million for research and development (Annual Report 2007). So if we assume they spent only 5% of that amount on the development of the Brainstorm platform we end up with $23.503 million. On the other hand, if we assume a license cost of $2 / user / month and a company with the need of 4,000 users (half of Intuit's 8,000 employees use it) we end up with a yearly cost of $96.000. As you can see there is a huge difference between the two amounts but as the buying/leasing is the more natural cost, I'll use this one in the rest of the calculations.
• Implementation Cost: Again, Intuit probably didn't have a classical implementation as every other company that would buy their software. For simplicity reasons, however, let's just assume they used a normal implementation team consisting of 10 members who worked 8 hours a day for 30 days to implement the system. If we multiply the total of 2,400 hours with an hourly wage of $35 we end up with $84,000. As the team could have used the time to perform their usual tasks we double that amount to account for forgone revenue.
• Training: Besides the very technical aspects, employees also need to be trained for using the new tool. To calculate the cost of training I adapted and slightly modified a formula used by Newman, Thomas and Ebrary (2009). So if we assume that the 4,000 users need to be trained 1 working day of the year and these workers would usually produce an average annual output of $55,000 we would lose 4,000 x $55,000 x (1/230) = $957,000 revenue. It is likely that employees will also spend one additional day experimenting with the program and thus, we double that amount, too.
• Total Cost: 2 x $957,000 + 2 x $84,000 + $96.000 = $2,178,000

As already mentioned earlier there were 2 main benefits from introducing Brainstorm at Intuit: more generated ideas in general and decreased time to market. We can assume that the first point is closely related to the latter as more good ideas in general ultimately mean more products in the market. Naturally, not every launched product will have the same success but let's say a new idea that is released to the market, on average, is worth $900,000 (look, there will be some star products but most of them probably serve a niche market). With Intuit decreasing its time to market by 60% and hence launching 6 times more products this results in a total value gained of $5.4 million.

So if we plug the numbers in the formula we get a final ROI of:

 (($5,400,000 - $2,178,000) / $2,178,000) x 100% = 147.93%

A positive ROI of roughly 150% proofs that Brainstorm was indeed a very successful project for Intuit. Of course, a ROI calculation usually would be performed prior to the actual execution of a project in order to compare the expected value of the project to other investment opportunities.

What does this all mean?

 

To wrap it up one final time again, all we've essentially done above is compare benefits with costs. In general, benefits can be broken down into hard and soft benefits (Newman, Thomas & Ebrary, 2009). Most ROI calculation, including my calculation for Intuit, solely focus on the hard benefits, that is, benefits that can be easily identified and expressed in "hard" numbers (e.g. more revenue, less costs etc.). This is the point where one critical drawback of the ROI becomes visible. Many managers might be too focused on numbers and pure facts instead of thinking about what other "soft" benefits might be possible to achieve. For example, a more vivid corporate culture or increased employee satisfaction are more difficult to quantify but certainly add a lot of value to the company. So instead of heavily relying on the numbers, I believe more managers need to take the risk of aiming also for the intangible benefits when choosing new investment projects - especially because social technology heavily focuses on those intangible benefits. 

As a balance, worried managers could use what Aaron Kim refers to as 'lagging ROI'. So they would still need to take the risk to start some projects without 100% factual support but metrics will be provided after some time into the project and one can then decide whether to terminate or continue the investment. Still, the overall message will remain the same for today: ROI offers a relatively quick and easy way of comparing different projects but only those who dare to also aim for the intangible benefits will be able to reap the benefits of social technology. 

How do you think can providers of social technology convince some of the number-obsessed managers that exist out there?

References

• Newman, A., Thomas, J., & Ebrary. (2009). Enterprise 2.0 implementation. New York: McGraw-Hill.