A New Proxy for ROI in Collaboration and KM?

I had an interesting conversation this morning with a leader of internal collaboration and knowledge management (KM) services inside one of the large audit/consulting firms.  We were discussing alternatives to demonstrating hard, currency-based ROI in KM and collaboration efforts.  He was experimenting with alternative valuation methods because calculating credible ROI is always extremely difficult, if not completely impossible, in the “prove it conclusively” culture of an audit firm.

His organization is experimenting with ways to assign value to KM and collaboration projects by proxy.  My conversation partner described one such proxy as follows (in my words, not a quotation of his):

What if the KM and collaboration functions could be outsourced?  How much would it cost our firm to have someone else manage those activities?

The idea is that by calculating a hypothetical, but provable, cost for how much a third party would charge to manage your organization’s KM and collaboration infrastructure, applications, and activities, you can determine a proxy, expressed as currency, for how valuable those assets are to your company.  Hosting charges for infrastructure and applications can easily be determined by floating an RFP for those services to potential providers.  Much of the cost of KM and collaboration management activities are bundled in the salaries of staff assigned to lead and support those functions.  So, yes, it is possible to come up with a hypothetical cost to outsource these support processes.

But is it desirable?  I don’t think so.

First, discussing a hypothetical outsourcing of collaboration and KM functions sends the wrong message to the organization.  It says that these things are not very important to success; they are commodities that provide relatively little value, no matter in what terms that value is expressed.  It also ignores that these functions are embedded in an organization’s culture, which is impossible to value definitively, but undeniably important to the long-term success of the company.

Additionally there are a couple of mathematical problems with the approach.  The proxy doesn’t include the cost of contributing and reusing knowledge, or of collaborating, accrued by each and every employee of the firm; only the avoided costs of staff managing those functions is recognized.  Even worse, potential bottom-line benefits (or penalties) resulting from conducting effective (or ineffective) KM and collaboration activities are not recognized.  This is the return, whereas the proxy described above only determines the (avoided) investment, and only partially does that.

So, as I see it, this proposed valuation method sends a death-wish message to the organization, understates actual incurred costs, and fails to recognize performance benefits (or penalties) to the organization.  Is that right?  Have I missed anything else?

To be fair to the individual who shared this approach with me, he’s no dummy.  In fact he has great experience and understands KM, collaboration, and ROI better than most practitioners.  I’m sure he realizes all  of the limitations that I’ve stated.  What is interesting to me is that we’ve reached a point in the ROI debate where someone of his stature  would be suggesting such an approach to proxy valuation for KM and collaboration in the first place.

Please let me know how you feel about the use of a hypothetical outsourcing cost as a proxy for value added to a company by it’s KM and collaboration programs.

Culture Trumps ROI

Talk about signs of the times!  Lately, there’s been a rapidly growing number of posts declaring the need to demonstrate return on investment (ROI) in social software, but lamenting our inability to do so.  Just today, I read three posts on the topic and noted that a fellow IBMer has launched an internal virtual event to brainstorm the issue and potential solutions.

My take on ROI of social software is pretty much along the lines of Jon Mell’s and Gia Lyons’ — don’t bother!  Trying to demonstrate business value created by the deployment and use of collaboration tools, regardless of what label we use to describe them, is a misguided effort.  Too much of the evidence is anecdotal and difficult, if not impossible, to translate into credible and compelling currency amounts.

I spent too much time around the Millennium trying to devise clever ways to show ROI on investments in software that supported knowledge management.  I learned that it is fruitless to try to sell collaboration technology to an organization that does not want to collaborate — or is not ready to do so.  Those types of organizations are very likely to demand a detailed business case demonstrating ROI on social software, or any other collaboration technology.  It’s one of the ways they can maintain status quo and kill grassroots efforts to improve collaboration.

So let’s not spend countless manhours trying to develop metrics that will help us demonstrate ROI in social software.  Better to spend the time, energy, and money qualifying and quantifying potential customers’ willingness and readiness to collaborate.  Knowledge audits, Social Network Analysis, and other consulting services are what we should be selling to organizations that don’t understand the instrinsic value that collaboration software can produce.  No business case will sell social software to a firm that doesn’t already value collaboration in its culture.