Developing an ROI for Collaboration Projects or Programs By David Coleman, Managing Director, Collaborative Strategies LLC “Collaboration” seems to be the buzzword this year, just like “knowledge management” was last year. But collaboration is easier to say than it is to do. Electronic collaboration is the ability of people to interact with each other through the computer on an on-going basis for a specific reason or goal. The emphasis is on the interpersonal or social interaction. Collaborative Strategies believes the social aspects of collaboration are 80% of the value of electronic collaboration. The infrastructure, tools, and enabling technologies that now make this type of interaction possible and less expensive are responsible for the other 20%. The makes determining the value of collaboration a challenge. In a budget meeting it is usually the CFO, or another responsible person with financial „signature authority,‟ who asks the question, “What is the financial return from an investment in collaboration?” The CFO wants the value of collaboration to fit a formula for return on investment (ROI) that looks something like: Invest $W at time X, Get $Y at future time Z, where $Y > $W This question must be asked. It presents some daunting problems for strategic thinkers. The fact is, it is the CEO, CIO, or CKO, or whoever is responsible for the strategic infrastructure and knowledge capital, e.g. intangible assets, of the organization should be the first to ask the question. Failure to have a reasonable understanding and response to this fundamental ROI question can indicate that top management is not clear on the impact of the collaboration, the Internet and the strategic initiatives that must be implemented if the organization is to adjust to the quickening pace of change and stay ahead of competition. Intuitively we know that collaboration is useful and often necessary; it is just hard to prove. As senior analyst, Dan Rasmus at Giga Information Group, puts it, “Collaboration is the fundamental starting point for eBusiness transformation. Without collaboration, organizations will be unable to evolve their employees or processes. Unfortunately, many organizations fail in their collaborative efforts by getting caught up in infrastructure and ignoring process.” The Question The question is how do we quantify the strategic value of collaboration? At a recent meeting at a top technology company attended by many of the strategic and tactical thinkers with real pain around this issue, the following remark was made with considerable emphasis, “given the added impact of extensive travel schedules, the difficulties around communications for geographically and time zone disbursed project team members was becoming such that there was now recognition that collaborative issues may be central to the competitive future of the organization.”
They still can‟t explain it to their CFO, but they „get it.‟
What they are talking about is the fact that the untimely communication and response that is unclear, un-prioritized, and unacknowledged is a natural consequence of the organization’s size and structure, and effectively offsets the huge financial and resource advantages of the firm. While this organization is a thought leader, younger smaller companies that do not have the same organizational constraints often eclipse it in the market, stealing early mover advantage. New communications and collaboration structures are required if the organization is to remain a market leader.
How can such an organization measure collaborative interactions with the goal to improve them? By measuring reduction in cycle time and attributed man-hour costs? Or by the elimination of hours on the road to accomplish a face-to-face meeting, and the associated travel costs? These simple metrics do not begin to cover the value of collaboration. The attendees of a recent Silicon Valley meeting said, “Improved collaboration means that projects are brought in on time, on budget, with richer features, and enhanced functionality -- failure to consistently accomplish this results in a huge opportunity cost.” This is acknowledgement of the tangible and intangible value of collaboration, and that the value of the intangible is not easily measured. In looking for the value of collaboration within an organization, you have to look at measurable artifacts (time and money) that are affected by changes in behavior due to collaboration. Collaboration itself is a human behavior, so what we are trying to measure is the direct effects of this behavior, as well as its cumulative effects, across the organization or within a value network. Another option is to measure its potential or estimated effects. This sounds simple, but there are a few other intangible concepts tied up with collaboration, such as trust and relationships that can complicate the calculation. In the world of sales, the measurable value of a relationship is based on the amount you can sell through, or because of, the relationship. However, many business relationships can have great value and yet not result in any direct or indirect sales. Another way to value relationships is through access to content or expertise. Someone you know has a critical piece of information; if they collaborate with you and share it, and you have the ability to apply that information, thus turning the information into knowledge, you have increased the value of that information by making it actionable. How much was the increase in value due to that collaboration or interaction? If the information that was shared results in a sale, then the value (whole or partial) of that sale can be assigned to the value for that collaboration. If no sale occurs, how else can that information and the collaboration that occurred be valued? To answer this, we need to take a step back and put the value of collaboration into context. The Context, Content, and Process of Collaboration Collaboration for collaboration‟s sake is just extra work! While humans are social beings, not all social interactions have positive value. Most of us already have too many things to do; adding another that does not have clear value will meet with resistance on
both a personal and organizational level. Collaboration will not occur on a continuing basis unless the WIIFM (What‟s In It For Me?) question is answered clearly for all those involved in any collaboration. Collaborative behaviors only start to have value when they are combined with three other concepts: Context, Content and Process. Without a common context or conceptual framework and language, it is very difficult to transfer information through collaborative, communicative, interactive and other behaviors. There also has to be a compelling reason for all parties to collaborate. Also, collaboration is most effective about or around specific content. In the history of computing, computers have been used mostly for computing and for accessing information or data. Although this is still true, due to the current complexity of business, as well as time compression brought on by the Internet, no longer is a single person accessing static content adequate to get the task done. Today, collaboration on or around content also has to happen in a certain way, in a flow or process. If this process is not there, often there is lack of trust and the content does not get transferred or the wrong type of interaction occurs. What we have learned is that for collaboration to be effective, it has to occur around specific content that is of value to all the parties collaborating, through a process that is agreed upon by the collaborating parties, and with tools and infrastructure that enable common context and the ability to transfer information in a highly secure and personal manner, at a low cost over time and physical distance. Once all three of these criteria are met, how, do you measure the value of collaboration? In general terms, it is best to measure the activities surrounding the collaboration. Thus, metrics that are easily measurable (time and money) as well as the results of this measurement process have to translate into something that can answer the CFO‟s initial question on ROI. Below is a collaborative case metric for collaboration value within a Health Maintenance Organization (HMO), which illustrates the development of indirect metrics for collaborative value. Accurate count of daily hospital census received before 9am can assist the attending physician in determining the number of patients to be discharged. The information is conveyed to the physician through a collaborative tool that allows the physician to aggregate this and other information in a timely manner and also to get advice, opinions, and expertise from his peers within this collaborative environment to facilitate the decision. Collaboration surrounding this information will enable a quicker (and better) decision about patient discharge, which can result in patient dismissal in a timely manner and a lower number of bed days. This can also save the HMO money spent for charges incurred due to delays in discharge. The information from the daily census also flows into overall numbers and affects reimbursement funds to those providing services to the HMO (medical practices, labs, and hospitals). Since the patient information (census) is entered daily by nurses at the hospital, the HMO physician has a direct link to hospital medical and accounting records and can
collaborate with the nurses who enter the data, or other specialists assigned to the case, enabling them to make accurate and timely discharge decisions. A sample calculation for ROI follows: a) 100 patients average hospital stay for the same diagnosis in a given quarter (e.g., winter months) in a given geographic region is compared to average hospital stay metrics for the same quarter the following year, after a program of automatic reporting is established and fed into the collaborative system, enabling the deciding physician to have quicker consults with other physicians and specialists resulting in more appropriate and rapid discharge of patients. b) If this information allows the HMO to save 1 bed-day per patient, and each patient bed day costs $500, then c) 100 patients x 1 bed day saved 100 x $500 per day average daily hospital charge = $ 50,000 savings x 20 regions through out the HMO operating area = $1M savings. From this calculation we can see that the collaborative system (tools, infrastructure, software), if used properly (with the right content, within the right process, and with people that have a common context), allows more rapid and better decisions. Let‟s say the system used in this pilot study cost $250,000. Then we could say the ROI on the system is the $1M saved, giving us a 400% return; however, that is only for the ability of the physician to make one decision more quickly. The same collaborative system can actually used for business planning and will enable the HMO to be much more proactive rather than reactive, eventually saving them many more millions of dollars. The Mathematics of Collaborative Value The thing to understand is that collaboration for any organization needs to be addressed at a strategic level yet does not have value unless it is in a specific tactical circumstance. This makes it particularly hard to answer the CFO‟s question, “What is the value of collaboration?” First establish the change (delta) that can be attributable to collaboration. One client used the metric of employee morale improving. But is that attributable to collaboration, or the daily stock price of the organization, or 100 other factors? Research done over the last few years by Dr. Nick Bontis of McMaster University in Canada on a large number of financial institutions, shows that there is not a direct correlation between knowledge sharing and employee morale. What this research was able to show is that there is a direct correlation between employee retention and knowledge sharing (collaboration).
In order to establish change, there must be “before” and “after” measurements... but what to measure? Collaborative Strategies assess an organization for its “collaborative fitness.” This diagnostic provides a snapshot of where their current perceptions of collaboration in their organization today. Four factors are measured: Technology, Culture, Economics And Politics (TCEP). More critically, we measure on a 1-10 scale a person‟s perception of how these four factors impact collaboration. Each factor is weighted; total scores range from 10-100. If we assume that for every point on the weighted total score scale, there can be some dollar value assigned, we would have a rapid metric for measuring the economic impact of perceptions of collaboration on the organization. Because Collaborative Strategies conducts before and after assessments using this metric, a return is calculable. One way to do this is to look at employee turnover rates in the context of the industry in question. Dr. Bontis‟ research has shown a –0.233 gamma path (statistics that look at causality, a 1.0 would equal perfect causality) for the financial services industry. This means that because of collaboration the turnover would be about 25% less. In this study, $36,514 of profit is attributed to each employee in this organization. With a company turnover rate (voluntary) of 13.1% in an organization of 16,353 employees, that means that 2142 employees turnover voluntarily in this organization each year. At a value of $36,514 per employee, this means the company is loosing $78,212,988 per year of profit on turnover (not even counting expenses for those employees). If collaboration can cut that by 23.3% the loss would be $18,223,626 less or $59,989,362. The savings of $18M from decreased turnover can be weighed against an estimated cost of $5M for development and deployment of the collaborative system providing a ROI is 3.6. Another way to calculate the value of collaboration looks at organizational size. Lets assume that for every 100 people in an organization each point on the TCEP scale is worth $100k. For example if we look at the same financial services company of 16,353 people which has a very average “before” TCEP score of 50, and that company decides to do a collaborative pilot project with a group of 100 people (Group A). We measure the “before” for Group A and find it is 65, significantly higher than the average for the company. After we complete the collaborative pilot project we again measure Group A‟s TCEP and find the score has risen to 75. Since there are 100 people in this group that are directly benefiting from collaboration, we could say the value or direct benefit is $1M (10 x $100k). Conclusions It is often difficult to measure the direct and tangible effects of collaboration. Many of the highest values are indirect and intangible. Two possible methods have been recommended for calculating the value and ROI of collaboration and knowledge sharing. First measure the value of collaboration through the decrease in turnover and ultimately profitability. Second, use a weighted collaborative metric to look at perceptions of collaboration (and ultimately perceived value) before and after a pilot project and from that data extrapolate probable value of collaboration for the group directly benefiting from the pilot and also extrapolate this benefit (conservatively) across the organization.
By subtracting estimated costs for implementing a moderately successful (50%) collaborative program for the enterprise, and looking at the estimated value, we can derive the estimated ROI. Any discussion of the metrics for collaboration will be controversial. The Collaborative Strategies methodologies are a possible way to answer this pressing question on the economic value of collaboration. Collaborative Strategies welcomes and encourages discussion and dialogue on this issue
The author of this article, David Coleman is the Founder and Managing Director of Collaborative Strategies LLC and the editor of the “Inside Collaboration” newsletter and a contributing editor to Collaborate! Magazine. He is the author of two books on groupware, and many of the monthly Hot Tips on the collaborate.com web site. When he is not consulting for vendors or users of collaboration technologies, David is often engaged in both in-person and Web-based presentations to educate all types of organizations about the benefits, best practices and successful techniques for collaboration. He is also working on a new book on e-collaboration. He welcomes your comments, questions, and requests, and can be reached by e-mail at davidc@collaborate.com, on AOL Instant Messenger at davidc121, or by telephone at 415/2829197.