Return on investment

This page is about ROI. It’s about the fact that determining the expected or actual ROI for any investment in intangible assets isn’t easy.

Whether it’s return on investment for an intangible asset or your entire business strategy, ROI is all too often poorly assessed and poorly understood – not a great basis for deciding how to spend money.

There are no shortcuts. The web is littered with “X steps to social media ROI” content for example as if a few prescriptive steps can be applied universally and meaningfully. They cannot.

We believe this page will be worth your time. You should get return on the investment of your attention, if only so you have more confidence challenging the “5 easy steps” crowd. It’s based on sections of Chapters 6 and 7 of The Business of Influence.

Farcical ROI

Here are some quick examples of when the pursuits of ROI or decisions made in the name of ROI become farcical. I’m sure many readers will have come across such situations.

When the boss rules

‘Look, I’m told we’re investing in this. Now we just need to work up the numbers to get it through finance.’

When efficiency rules

‘This investment will speed the process up.’ ‘Er, but it’s not actually a bottleneck.’

When the guru rules

‘Well the book’s at number 1.’

When last year rules

‘Well we did it this way last year . . .’

When the competition rules

‘They’ve gone for it, so. . . .’

When vanity rules

‘We can afford it and it’ll be a testament to our time.’

When experience rules

‘Do you think the CMO’s background in advertising sways the budgeting process?’

When rules rule

‘Let’s treat it as three separate projects so each comes under the limit demanding cost justification.’

When paralysis rules

‘I just don’t know.’

And when all else fails…

When cost rules

‘Just make a decision on a least-cost basis because this sort of thing never has a tangible ROI.’

When strategy rules

Arguably the most significant advantage of strategy maps and dedication to the task of business performance management is a clearer understanding of return on investment… when strategy rules.

The strategy mapping and Balanced Scorecarding work establishes a cause and effect:

  • We need to improve our ability to operate in the way we’ve identified in order to delight the customer and subsequently the shareholders; and
  • We need to build our human, information and organizational capital this particular way in order to excel at those processes.

We’ll return to this later, but let’s first explore one example of a C-title struggling with the ROI of an intangible asset.

The CMO’s dilemma

John Bell heads up Ogilvy PR’s global digital practice. In a paper titled Socialize the Enterprise, July 2010, John calls for a ‘comprehensive social media strategy’ and identifies what he refers to in a corresponding blog post as the CMO’s dilemma. It goes like this:

After a year of experimentation in social media, the CMO of a global Fast Moving Consumer Goods (FMCG) company realized that, once again, his team’s latest effort was not working. He was frustrated. This time, he thought, they had cracked it. From the outset, the team looked to existing agency partners and new social media gurus to help them to tack the social media programs to their product campaigns. The media companies offered paid placements in social networks. The advertising creatives designed a clever Facebook application, and the public relations team suggested reaching out to some bloggers to spread word of mouth. The brand team felt they had the tactics to transform their traditional marketing campaign into a social media campaign. But, with no real way to measure the impact of blog posts, Tweets or the limited use of the Facebook application, it just seemed like a lot of work to generate modest word of mouth online. Where was the ROI in that? When the three-month campaign came to a close, the CMO was disappointed. He wanted something bigger, something that reminded him of mass media.

This will be a familiar dilemma to many readers. When faced with such pressures it’s perhaps not surprising that a certain creativity enters the process of determining ROI. There are two common outcomes. Fudges are dressed up as models with “known limitations” or, worse, without such caveat. Or the individual attempts to redefine ROI for the specific intangible asset in question.

Accountants know what ROI means

I dislike any attempt to hijack the term ROI. Accountants know what ROI means, and they can only view any softening or redirection or substitution of its meaning by marketers trying to validate their investment plans as smoke and mirrors. You won’t find anything in this book about a ‘return on influence’ for example – oh, except just there of course.

For one rather entertaining perspective on ROI, in the domain of social media, take a few minutes to listen to David Meerman Scott ‘rant’. At first you might think David is advocating the abandonment of any calculation of the worth of social media, but he’s not. He’s just saying that MBA courses are preaching the wrong approach: an approach more akin to the attitude to ROI that is integral to integrated marketing communications [as addressed later in the book]. David believes that business leaders have been hiding behind the ROI argument out of fear of social media. From conversations with him, I know he considers social media to be a strategic imperative, an imperative that is given complete validity by the Influence Scorecard as and when demanded by each organization’s influence strategy.

Clear, simple and wrong

I thank my colleague Gabbi Cahane for alerting me to this apt H.L. Mencken quote:

For every complex problem there is an answer that is clear, simple, and wrong.

And as much as I’d dearly love to present a simple answer to ROI for social media efforts and social business more deeply, I’m afraid the Influence Scorecard is as close as we’re going to get. The temptation to develop a simpler framework is teasing, but the omission of any step, nuance or reliance only serves to break rather than simplify the model.

John Bell’s sentiment in the ‘CMO’s dilemma’ is echoed in Twitter, Twitter, Little Stars, a Business Week article, July 2010. Describing the role of the social media officer as possibly the ‘zaniest human resources innovation in memory’, the article plants tongue firmly in cheek in outlining the two-step process that companies go through in this regard:

First, they scramble to hire social media officers. Second, they figure out what it is, exactly, that social media officers do.

And then this damning indictment:

Much of the justification for the corporate spending [in social media], however, is anecdotal. As company chiefs find themselves chasing another new, new thing in the digital world, they are doing so as much on faith and emotion as on metrics and case history.

Social media, it seems, has well and truly joined the role call of marketing and PR-related activities for which ROI calculation remains stubbornly illusive.

X-step stairway to heaven

Pat LaPointe, Managing Partner of MarketingNPV, maintains a blog titled Marketing Measurement Today. It’s a worthwhile read – so take a look around if you haven’t yet come across it. LaPointe and I have never met or spoken, so it’s entirely coincidental that as I’m writing this section, he has posted: ‘Measurement problems? Check your credibility chain.’ In this post he reminds readers that metrics must be aligned to the needs of the business, comprehensive and objective, and lead to accountability. Our viewpoints have much in common but I feel that LaPointe’s approach to ROI, while endeavouring to be more thorough than you’ll find in most organizations that feign such attempts, errs in being too simplistic.

His July 2009 post, ‘Twittering away time and money’, opens with:

One of the most common questions I’m getting these days is ‘How should I measure the value of all the social marketing things we’re doing like Twitter, Linked-in, Facebook, etc.?’ My answer: WHY are you doing them in the first place? If you can’t answer that, you’re wasting your time and the company’s money.

LaPointe then lays out a six-step framework for thinking about social measurement, starting with:

Fill in the blanks: ‘Adding or swapping-in social media initiatives will impact ________ by ________ extent over ________ time-frame. And when that happens, the added value for the business will be $________, which will give me an ROI of ________.’ This forms your hypotheses about what you might achieve, and why the rest of the business should care.

The ensuing five steps involve sensitivity analysis, flexing the assumptions to find the most sensitive variables, conducting small-scale experiments to learn more about these variables, and reiterating until you have a model that seems to work. He asserts that the drivers of success become apparent, and these form your key metrics.

If LaPointe can achieve in six-steps, and in one blog post, what has taken me the best part of a book, then I’m in trouble. I don’t think polarizing the situation with a closed question like ‘Does it work?’ helps. I have no doubt that the process LaPointe proposes has value, if not just prompting organizations to think about what they’re doing in a wider organizational context, but here’s my beef.

The primary problem is once again the one that David Meerman Scott rants about. Not every aspect of social marketing can be quantified as having a return in hard cash, and the fact that one aspect might lend itself to this analysis doesn’t mean that it’s more suited to helping the organization to achieve its ends than other aspects that can’t. Try to fill in those blanks above for the idea of starting a CEO blog, or a Facebook campaign, or an investment in social Web analytics, or a store redesign, or executing a new call centre strategy. And if you can’t answer these points singly, how might an answer be derived from considering a social media campaign in its entirety? I mean, really, where do you start?

LaPointe is on the money, if you’ll forgive the pun, in asking: ‘WHY are you doing them in the first place?’, but his ‘fill in the blanks’ step assumes that only answers for which you have any chance of estimating a number after the dollar sign can be proffered. Having stressed organizational alignment, it seems that it can only be alignment in the financial perspective of the Balanced Scorecard, not the intangibles in the learning and growth perspective that have strategic linkage to the operations, and then customer perspectives.

I’m also uncomfortable effectively coming up with something constituting a social media initiative and then testing it. I’d rather the ‘something’ emerged from diligent left- and right-brained deliberations following the cascade of mission > values > vision > strategy > strategy mapping > scorecard.

There is another problem, one relating to the small-scale experiments. Having been involved in my fair share of operations modelling and simulation over the years, I’d advise caution in linearly extrapolating any results from small-scale experiments in situations where scale may be a non-linear factor. Doing so may well significantly overestimate the outcome and lead to returns that are considerably lower than expected, or significantly underestimate the potential and thereby kill ideas that may otherwise have proved productive.

But social commerce is trackable!

Yes, increasingly so, with innovations from the likes of Google, Adobe, SAS, Salesforce, etc.

You can witness what Google refers to as “social assisted” sales. You can follow the customer journey over many weeks (persistent cookies and do-not-track opt-in accepted – and perhaps increasingly not to be expected) attributing sales value to your investment in specific digital tactics.

Now, I ask you to make a fruit cake. And you can have the most accurate set of weighing scales, but you’re only allowed to use the scales to measure out the sultanas.

Bear with me…

All to often, ‘digital types’ in e-commerce situations demonstrate a correlation between digital paid media and sales uplift, or with another perceived valuable digital goal if it’s not e-commerce. They assume that correlation is entirely cause-and-effect, and divide the gross profit of the sales uplift by the cost of the tactics to calculate the ROI.

But sales are also built-on years of R&D, product and brand development, reputation building, customer service and independent endorsements and sponsorships and community involvement and environmental management and hiring the right people and sourcing the right suppliers … etc. Without such assets, many intangible, the ‘digital types’ will have considerably less to work with I’m sure you’ll agree.

The fabulous tools and services dedicated to tracking social commerce help you measure none of these. Your business aspires to make the perfect fruit cake, but you literally are measuring just the sultanas. Useful in its own microcosm, but not what we’re talking about here. In fact, a distinct problem here is one best described as measuring what you can not what you should.

Does the focus on those sultanas risk detracting appropriate focus on the flour, sugar, eggs and all the other ingredients? Is it possible for example that a marketing chief comes in and effectively optimizes the hell out of the stuff that’s measurable, directing investment into the stuff that’s measurable to the neglect of the other important but harder-to-measure activities? Is it possible that he or she will get a short-term fillip to the bottom line, get promoted, and leave his or her successor to pick up the legacy of this underinvestment just as that underinvestment starts to hurt?

Business performance management

This discussion on ROI started with a list of farcical approaches to ROI that would be funny if it wasn’t actually funny at all. At Euler Partners, we believe only one approach rules – strategy rules. And that has led us to strategy maps and the Balanced Scorecard, the dominant business performance management framework amongst the Global 2000, and our augmentation of it for social business, the Influence Scorecard.

With cause and effect built in, here, then, are the aspects of the business to invest in, and, by disassociation, the aspects not to invest in. Or, in other words, executing against the strategy map and Balanced Scorecard has ROI built in by design. Here’s how Kaplan and Norton, the pioneers of the Balanced Scorecard, put it in their book Strategy Maps in relation to traditionally the most difficult investments to justify, intangibles:

Economic justification of these strategic investments can be performed, but not in traditional ways. The common approach is on a stand-alone basis: ‘Show the ROI of the new IT application’, or ‘Demonstrate the payback from the HR training program.’ . . . But each investment or initiative is only one ingredient in the bigger recipe. Each is necessary, but not sufficient. Economic justification is determined by evaluating the return from the entire portfolio of investments in intangible assets that will deliver the ROI from [the strategic imperative].

We recognise that this conclusion won’t please everyone. Some people just want to know what return $X is if they sign off a budget of $Y. Unfortunately, the world just isn’t that simple.

We recognise complexity and chose to navigate that complexity rather than pretend it doesn’t exist. The thousands of organizations that have adopted the Balanced Scorecard and similar business performance management approaches recognize complexity and chose to navigate it, so why should it be any different for the newer social media aspects in general or social business more deeply?


Postscript, 9th October 2012

Some of the conversation around this webpage has referenced Google’s ZMOT, so we’ve addressed this in a blog post: ROI and ZMOT – depends on the question you’re asking.