By Peter Ward and Vanessa DiMauro

There’s a cringe-worthy trend emerging around how online community ROI is being articulated which has captured my colleague, Peter Ward and my attention.  So, we pulled together this blog based on our on-going research agenda and feedback from numerous customer engagements.  We see many online communities using cost reduction as the primary measure for assessing return on investment (ROI).  In some cases, communities can reduce call center costs by offering customers a self-serve option using the online forums and interactive FAQs. This is a good thing; it enables customers to resolve low-complexity questions independently and frees up customer support to focus on more complex issues.  When online customer communities are first launched, cost reduction is often a short term focus.  But over time, if the community becomes adept at solving customer problems and engaging with customers about new products, services and enhancements, customers will start turning to the community for customer support due to the company’s demonstrated attention to customer care.  This success will actually raise costs – but in a good way – because additional benefits will come from increased customer loyalty, time-to-market and quicker recognition of customer needs and wants.

Pinning an online community’s business case solely on cost reduction is a two-part problem.  First, it’s difficult to substantiate the actual cost reductions.  Yes, we know there are no shortages of sophisticated calculators which help you build a cost reduction model to free up budget.  The reality is: calculating cost reductions from an online community is tricky.  Can you really tell how many calls were deflected thanks to an online forum?  For consumer products in particular, would the customer have called customer service to begin with?  In the case of B2B, perhaps the customer decided to call the distributor from whom they recently purchased an incremental product.

In addition, what if the community is a success?  Vibrant online social business initiatives often increase engagement with customers and partners, potentially increasing overall customer support costs.  Of course, successful communities also offer a heightened awareness of looming product or service issues, insights into new products or new applications for existing products, fewer defects and a host of other benefits.

The second issue is structural: cost reduction is not a sustainable long-term metric for business success. There are bigger and better approaches to valuing social business and online community initiatives than just dollars saved.  Now before you get alarmed that your business case is invalid, let us explain…

Let’s start by defining what it means to be a social business.  While there’s no single definition, we offer three that share a number of commonalities:

Our definition is: A social business is one that actively engages online with one or more stakeholders to help them solve problems, share best practices and surface insights that are used to compliment or enhance those business processes that deliver value to their clients.

With this working definition of a social business, let’s review the definition of Return on Investment (ROI).  In their groundbreaking book, Competing for the Future, Gary Hamel & C.K. Prahalad (Harvard Business School Press, 1994) defines ROI as having two components – the numerator or net income and the denominator or investments.

ROI = N/D

N= Numerator or Net Income.  Examples include identifying where new opportunities lie, anticipating changing customer needs, Investing preemptively in building new competencies.

D= Denominator. Examples include investments, net assets, capital employed and people.

This formula places the emphasis in ROI on the numerator which can be enhanced by identifying new opportunities, anticipating changing customer needs and investing in new competencies – each requiring investments in people, process and technology.  The forward-looking elements of this definition are an essential part of ascertaining the full value of ROI – and we would argue that the social business enabled by online community can play a central role for organizations that are willing to listen and respond to feedback and insights offered through peer-to-peer exchange and increased levels of member engagement.

Here is the rub: while we all know that measurements are key to developing ROI, research has shown that few organizations are measuring the return on their social business investments.  In a recent study: Social Business: What Are Companies Really Doing?  MIT Sloan Management Review examined this issue in detail and found that most organizations do not measure the success of externally facing social business initiatives.

Even when they do develop measures, our research, The Social Business Benchmark Study – 2013 Preliminary Findings, suggests that they are frequently not aligned with the organization’s strategic objectives.

In fact, through this study we learned that for many companies, social media is just another marketing channel – a digital megaphone of sorts.  Moreover, the real return on social business initiatives lies in listening to and interacting with your customers, partners and suppliers.Going back to the Return on Investment definition — ROI = numerator / denominator — there are many opportunities to establish meaningful metrics which can help determine the value of social business and online community initiatives.  Doing so means identifying what you are trying to measure, and ensuring that it offers a real business return.  Cost reductions can offer a short-term solution for an ROI assessment, but cutting costs only goes so far.  Aligning customer satisfaction, time-to-market, product improvements and innovation with the numerator has more upside and few bounds!

Here are some key steps to establishing ROI for social business: 

• The  social business initiative should align with one or more functional organizations (e.g. customer service, product management, R&D). Identify a limited but substantive set of business outcomes which can be created or accelerated due to the social initiative.
• Through discussion with the functional organization, learn how their success is measured today (e.g. problem resolution, new features, customer satisfaction).
• Establish which stakeholders (e.g. customers, field service, distribution network) provide the most reliable  feedback, and which venues (e.g. customer advisory councils, regional conferences) have traditionally offered the best opportunity for interaction?  Why?
• Explore the potential impact of gathering and acting on ongoing feedback will have on the organization.
• Come to agreement on meaningful ways the community initiative will measure success (in alignment with the functional organization) and establish an operating model for incorporating feedback or insights.
• Document baseline measures of success and establish a realistic targets which are in alignment with the strategic objectives of the organization.