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.

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12 responses to “A New Proxy for ROI in Collaboration and KM?

  1. I think it’s an interesting approach, but not feasible. Surely, you can outsource the infrastructure and technology, but knowledge is inherently attached to people. That means people still need to communicate, collaborate, and connect with each other. And there again, you come back to the question of the ROI. You simply can’t outsource these activities nor should you. Having said that, you may be able to outsource certain activities like the aggregation of information (e.g online resources). But then again, who can decide better what they need to know than the employees themselves?

    Also, we are moving away from a centralised KM to a more decentralised, self-service, personal KM. Employees decide what information they want to subscribe to. They decide who they would like to follow in their network, which interest groups they would like to subscribe to.

    Thus, I think outsourcing KM is not feasible, as it does not take into account what knowledge really is and how it is produced and consumed.

  2. I think in the dynamic world we live in, outsourcing the knowledge/collaboration planning and management is a serious mistake. These are best handled by people who understand a number of factors that are very hard for even the most dedicated outsider to keep up with (subtle shifts in organizational priorities and needs, culture of the organization and evolution of it, what is the current employee base capability and drive to self-direct knowledge sharing activities, etc.). I think this requires a good understanding of the dynamics of the org.

    More importantly, I do believe that focusing on the cost of operating a knowledge and collaboration environment is self-defeating. While I understand very much the challenges of quantifying an ROI in this area, some benefits should be quantifiable with some work and others will have to remain stated in soft terms (e.g., employees’ sense of connectedness with each other and the organization as an entity). To just estimate ROI on cost of operations will understate the value and lead to decisions founded of a partial set of information.

  3. Christoph: Thanks for your comment. I certainly agree with what you’ve said.

    I may not have been clear enough in the post, but no one (including me and the colleague with which I had this discussion) is suggesting that KM could or should be outsourced. This is merely an attempt by my colleague to find a proxy for the value of KM and collaboration within his organization that he can sell to the partners he supports. My purpose for sharing his thought was to see if others react the same way I did. That appears to be the case, judging by your comment and others.

    Thanks again for weighing in!

    Larry

  4. rapav: Thanks for leaving your thoughts here. I absolutely agree with what you say in your first paragraph. Again, I’m not suggesting that KM and collaboration management and activities should be outsourced, nor is my colleague. His intent is to explore alternative means of valuing the KM function to a skeptical and bottom-line oriented audience.

    I appreciate your validation of my assessment of the approach in the second paragraph of your comment and noted your point that “To just estimate ROI on cost of operations will understate the value and lead to decisions founded of a partial set of information.” Bad decision making is very likely to be an outcome of this approach!

    I have a question based on your remark that “While I understand very much the challenges of quantifying an ROI in this area, some benefits should be quantifiable with some work…”. Which benefits do you believe practitioners should be able to quantify and how should the do so? Everyone is struggling with this and would love to hear what metrics you’ve developed and used successfully. Thanks!

    Larry

  5. richarddennison

    How does knowing how much something ‘costs’, tell you anything about the ‘value’ of it?? Saying KM/collaboration costs your organisation £x will surely just increase the pressure on you to cut those costs rather than give you any clues to value??

    Or have I missed the point somehow??

    Richard

  6. Raul (rap584 in Twitter)

    Hi, Larry. The idea of outsourcing KM was so thought provoking that I wanted to comment on why not to outsource, though I realize your colleague wasn’t advocating that (sorry if my wording made it sound like I thought that!).

    A couple of examples from my world where I think with some good baseline data, hard work, and maybe some courage, we could quantify some of the benefits of collaboration and KM (though maybe not all). For instance, if access to past successful proposals are easily accessible and searchable, a proposal writer could have a better starting point for writing future proposals. I would assume we could look at some time measurement of the research they have to do by type of info sought, how long it takes from search to receipt of the needed info, and make some assumptions that could lead to determining how much faster a proposal could be written. (Or, perhaps it is not fast to write one but more time could be spent on ensuring higher quality).

    We are the start of the journey on this so I can’t say we have a metrics system that can help us measure it but I will be trying to figure out how best to articulate value. In some cases, they will be very hard to articulate such as the value of “awareness” of other work going on when it does not feed something as concrete as a proposal. I would like to hear others’ ideas too.

    Thanks
    Raul

  7. Richard: No, I don’t think you’ve missed the point. Cost does not equal Value, at least not in my mind. I think the attempt by someone to use Cost as a proxy for Value is damning evidence of just how hard it is to show ROI in collaboration and KM.

  8. richarddennison

    Thank goodness for that – thought I was going mad! 😉

  9. Raul: Glad you came back and left some thoughts regarding metrics. Thanks!

    Many organizations measure information asset reuse and know precisely how many times a document (i.e. a specific proposal) has been accessed and/or modified. This is a great step in making KM more tangible, but doesn’t translate directly into currency value. Efforts to measure time savings have been used extensively in attempting to justify KM, but are usually viewed as suspect by financial types in the organization. They apparently don’t understand that time is money and any reduction in process cycle time lowers cost and, potentially, leads to quicker revenue recognition!

    Quality of decisions, documents, products/services, etc. is even more difficult to access objectively and assign a value. I haven’t seen this tack used successfully as a major point in a business case; quality is generally presented as a ‘soft” benefit.

    I hope this response doesn’t strike you as excessively negative. However, what you are suggesting has been tried before and never really satisfied those seeking currency-based measurements of KM and collaboration activities. That’s why I am beginning to think of contribution of these activities in terms of a multiplier effect, rather than a primary value add (see my post “The Multiplier Effect of 3C Technologies on this blog.)

    Larry

  10. I’ve enjoyed this discussion and particularly appreciated Christopher Schmalz’s idea of personalized /decentralized KM.

    I agree that “monetizing” KM can be very challenging. There can be exceptions, as noted, where for instance KM directly impacts and underlies acquisition of new business. KM can argue for a significant impact even where it “merely” reduces the time needed to respond to an opportunity.

    The article and commenters have addressed measuring “replacement cost,” document access and time savings. Another soft measurement can be from the perspective of people. How many people are using KM-branded systems? how often? Doesn’t adoption of KM tools or sytems (presumably at some “cost” to employees in terms of time and energy directed through the tools) prove that they have value to them?

  11. David: I’m glad you’re enjoying the discussion and thank you for contributing to it. Response time to an opportunity is indeed a useful metric. One old (late ’90s) example of that is the calculation that ever additional day it takes a pharmaceutical company to bring a new drug to market costs it $1 million, on average. Anything that KM or collaboration software can do to reduce time-to-market clearly reduces cost and speeds up revenue recognition!
    Adoption metrics have been among the most popular and useful in proving a business case for social software, but, alas, they are soft metrics, as you correctly state. Strong adoption results may be compelling enough evidence to move an enterprise social software project from pilot stage to a fuller deployment, but at some point, financially-oriented individuals within the company will demand to see hard dollar benefits associated with the project. It’s still very difficult to translate adoption into currency-based value measurements.

  12. Greetings! Very helpful advice within this article!

    It is the little changes that make the largest changes. Many
    thanks for sharing!

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