How To Calculate the ROI of Enterprise 2.0

|   Nov 30, 2010

With enterprise social software platforms still in their infancy, ROI measurements are just now becoming possible with early adopter communities. While I don’t expect that we will need to continuously re-justify these tools in the workplace, I do believe that measurements are going to be required to help bring about a more successful transition and wider adoption.

At the Enterprise 2.0 conference last month, I spoke on a panel about measuring the ROI of E2.0 from an HR perspective. After listening to questions from the audience, I realized that community mangers are looking for more detailed guide of how to measure the benefits of E2.0 software. Calculating ROI can be a daunting and overwhelming task, but given advanced analytics it is definitely possible. I would suggest starting small, selecting one area to focus on and then building upon that. Perhaps the best place to start is by picking an area that most closely resonates with your company’s current pain point. After you finish your calculations, you will quickly see that with an industry average list price of $3- $5 per user, per month, and low implementation costs, very minimal changes in key performance indicators (KPIs) are required to produce significant ROI (see infographic). Here are a few examples of important business drivers that can be improved and quantified by using enterprise social media.

CLICK ON IMAGE TO ENLARGE

Business Driver #1: Employee Engagement

Assertion: Employees using enterprise social software platforms in the workplace are more engaged than similar employees who do not use these tools. Employees are more engaged because they become part of something larger than themselves and their immediate departments. Knowledge and work become more transparent and employees are able to get real-time feedback, visibility, and gratification.

Why its important: Based on research done by Gallup, engaged workforces have an EPS that is 3.9 times higher than less-engaged organizations in the same industry1. Also, according to a recent article in Harvard Business Review titled “Competing on Talent Analytics,” companies like Starbucks, Limited Brands, and Best Buy not only greatly value employee engagement as a concept, but also can also accurately quantify an increase in employee engagement in actual dollars. For example, at Best Buy, a 0.1% increase in employee engagement at the store level is worth a $100,000 increase in annual operating income per store2.

How to Measure: Most companies already conduct annual surveys to gauge the level of workforce engagement. To measure, aggregate engagement ratings so that you have one rating per employee. Combine this data with not only data about the employee’s usage of the enterprise social software, but also other data points that can impact engagement such as compensation and promotion opportunities. Now, through the use of regression analysis (a mathematical way to model relationships), calculate what impact an employee level of activity in the network (the independent variables) has on his engagement score (the dependent variable).

Business Driver #2: Turnover

Assertion: Employees using activity streams in the workplace are less likely to turn over than those that do not use activity streams. In addition to increasing employee engagement, enterprise social software platforms help employees onboard more quickly, help them find the information they need to be successful, and help them receive real time feedback from fellow coworkers – all of which lead to better employee retention.

Why it’s Important: It is estimated that the cost of employee turnover is 100% to 150% of the employee’s base salary2. Suppose the average salary in your organization is $45,000 annually and you have 5,000 employees. If introducing collaboration software reduces your turnover by even 1%, then that equates to a saving of at least $1M annually (calculation accounts for an implementation/management cost of about $100,000).

How to Measure: Using your company’s employment records, identify the employees that have turned over since you launched your network. Again, you will need to obtain data concerning the employee usage of the your community as well as other data points that could have an impact on turnover rates like tenure, salary, market conditions and promotional opportunities. Since the dependent variable is binary (0 denoting currently with the company, 1 denoting that someone has left the company) a logistic regression will need to be used. Be careful, as coefficients in logistic regressions can be more difficult to interpret.

Business Driver #3: Sales

Assertion: Enterprise social software platforms provide employees with real time business insights, allowing them to react faster to product availability, customer issues, news about the competition, and other insights that help them go first to market with new products.

Why it’s Important: Sales is a critical KPI for many organizations, driving the bottom line and helping create company value. According to Gartner’s 2011 CEO and Business Executive survey, CEO’s are going to focus on investments that drive cash growth. Therefore, it is imperative to show the cash implications to justify any investment4.

How to Measure: One way to measure the impact enterprise social software has on sales is to just focus on the results of your sales team. Much like the other analyses, you will need to acquire the same data and make sure that you account for other factors that might impact sales. Again, use regression analysis to model the impacts that enterprise social software has on sales results.

These are just three examples of the types of analyses that you can do to measure the ROI of E2.0 in your organization. Remember that the benefit of collaboration isn’t just the knowledge and information that employees input into the network, but also the information that employees glean from the network to take back to their jobs. Other benefits of E.20 include breaking down knowledge silos, reducing the time spent in meetings, and increasing overall productivity. While some of the benefits can be challenging to quantify, successful deployments will easily demonstrate a tangible ROI in several key business drivers.

A Note About Accurate Analysis

Before you start to measure the ROI of your company’s enterprise social network, it’s important that you ensure accuracy. As with any new industry measurement, mistakes are easy to make as we look for trends and data that have little precedent to work off of.

In this case, we look to regression analysis to ensure accuracy. Regression analysis is a mathematical tool used to calculate the relationship between variables on large sets of data. Preparing the data for the analysis will be the most time consuming activity, however the time invested will help prevent mistakes. For example, one of the most common issues is to misinterpret causality based on correlation. For the non-statistical readers, this means that you assume that there is a cause and effect relationship between two variables rather than a common trend. To avoid this mistake, make sure to use data from before and after the launch of your community, thus ensuring that the change that occurred after the launch of your community. Also, ensure your model correctly controls for all factors that could impact your dependent variable – like job function, age, years of service, etc. By doing this, you ensure there isn’t another factor that is driving the true reason for the change. Regression analysis is thus a very powerful tool, but used incorrectly it can provide misleading results.

SOURCES:

  1. Gallup Engagement metrics: http://www.gallup.com/consulting/52/employee-engagement.aspx
  2. Harvard Business Review October 2010, Competing on Talent Analytics, By Thomas H. Davenport, Jeanne Harris, and Jeremy Shapiro
  3. Journal of Management and Marketing Research http://www.aabri.com/manuscripts/09272.pdf
  4. Gartner’s 2011 CEO and Business Executive Survey http://www.gartner.com/it/page.jsp?id=1454917

Comments

  • Fantastic job with this guys. Kudos.

    Commented on December 1, 2010 at 6:46 am
  • Interesting read. There are tools out there that do the rigorous stats for you and allow you to visualize trends and predict impact by your employees themselves towards meeting those business objectives. It may be something to consider.

    Commented on January 12, 2011 at 4:40 pm
  • Breaking down knowledge silos is definitely one of the major reasons I’ve began to use microblogging in my company. It’s amazing how many times I’ve got help from colleagues I’ve never met before (from another side of the globe), just by writing a simple question to Socialcast.

    Commented on January 30, 2011 at 9:36 pm
  • This post was very helpful for my latest post about ROI. I never realised how difficult it could be in regards to online. You’ve helped me realise a few different skills in ROI.

    Commented on October 16, 2011 at 6:11 pm

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Author Spotlight

Cameran Evans
Cameran Evans Chief Data Scientist View full bio

What is Socialcast?

Socialcast by VMware (NYSE: VMW) is a social network for business uniting people, information, and applications with its real-time enterprise activity stream engine. Behind the firewall or in the cloud, Socialcast enables instant collaboration in a secure environment. Socialcast is headquartered in San Francisco, California. www.socialcast.com