Post #6 - ROI

In the lecture a Return on Investment (ROI) case study was analysed showing how it is possible to calculate the monetary value from a project. This weeks blog will focus on taking an Enterprise 2.0 case study and determining if the method used to calculate the ROI is effective. I've chosen to analyse a case study on IBM's social collaboration tools which is one of the earliest cases of analysing the monetary value of an Enterprise 2.0 project.

Since businesses have been increasing their interest in social technologies the ability to calculate the ROI of a project is exceedingly important. However it is often difficult to associate a figure to many of the benefits that these Enterprise 2.0 projects bring to the workplace. Being able to calculate the monetary value of a project has immense benefits for the company that wishes to implement social technologies.

The majority of the data from this case study was done by interviewing the IBM marketing and sales personnel and analysing the financial framework of the company. The purpose of the IBM Social Collaboration project was essentially to increase idea generation within the employees. The image below shows the new product development process where the Idea Generation segment determines the quantity of commercialized products. The amount of ideas generated would then be one method of measuring the success of the project.

To calculate the ROI of the project the case study had come up with four benefits and attempted to attach a monetary value to them.

The first benefit was the revenues of incremental new products which is calculated from tracking revenue from new products. The case study determined that 7% of the total revenue is from new products which would equate to $1.4 billion for the $20 billion company. which equates to $2.8 million per product line when taking into the account the 150 products per year. After assuming that only 2% of ideas are commercialized they determined that 7,500 ideas were generated each year. They determined that project had a 'likely' value of $2.1 million based on this benefit alone.

The second benefit was based on the time it takes for a product to reach market and they gave it a 'likely estimate' of $336,000.

Another benefit was based on the fact that the Social Collaboration tool would allow the sales communities to share their practices and product expertise to increase their ability to make sales. The 'likely estimate' the case study had given this benefit was $150,000.

The final benefit discussed in the case study was the savings from increased staff productivity. Essentially the benefits from employees being able to find information faster was given a 'likely estimate' of $455,800.

Typically a ROI analyses the tangible and intangible benefits as they both have importance in a business. The four benefits above would all be considered tangible benefits however there may be many other intangible benefits of the project such as employee satisfaction due to increased communication between employees.

The above formula allows us to calculate the ROI for the project based on the investment gain (value from benefits) and investment cost. The case study states the following costs for the project based worker hours required and hiring rates.

• License fees (20,000 seats at $75 per seat) = $1.5 million
• License maintenance = 20% (recurring $300,000)
• Server hardware (1 per 20,000 seats) = $13,000
• Server maintenance = 10% (recurring $1,300)
• Implementation/planning (700 hours at $60/hour) = $42,000
• Professional service fees (100 hours at $150/hour) = $15,000
• Communication plan (120 hours at $80/hour) = $9,600
• IT administration (200 hours at $60/hour) = $12,000

Using these to calculate the ROI gives the following results.

Investment Gain = 2100000+336000+150000+455800 = 3,041,800

Investment Cost = $1500000+13,000+42,000+15,000+9,600+12,000 =1,591,600

Substituting these values into the ROI formula gives a value of 91.12% which is a significant investment considering the majority of costs will only apply initially.

The methods used by Forrester Consulting to calculate ROI have various strengths and weaknesses. Although the costs are relatively definitive there is a considerable amount of ambiguity in the benefits discussed in the case study. Associating the increase in new products to directly correlate with the value of  the project can be a problem as there may be many other factors that have caused the increase in products especially in a large company. New technologies being released and pressure from competition are factors which have not been taken into account in the case study.

If you take into account that the case study produces a very rough estimate for the ROI of the Enterprise 2.0 project then the information can be very useful. I feel it is important to consider what outside factors may cause inaccuracies in the data which may skew the results.