No Guts, no Glory

Once in a while, we experience major technology shifts that challenge our view on our business. The bullish advocates argue that we are experiencing a new economy where we should disregard the old rules that applied prior to this technology shift. The Internet boom is a good example. When the number of Internet users skyrocketed to 50 million in three years, investors were so eager to participate in this Dotcom economy that they totally ignored the importance of profitability, cash flow and experienced management. As an Internet consultant at the time, I remember an analyst at a stock broker asking us for advice on how to revise their valuation methodology so that the fair value they calculated would explain the market values of the listed dotcom-companies. Alfred Berg, the most respected stock broker at the time tried to do some similar “reverse engineering” in a notorious sector report titled “No guts, no glory” where hype phrases like “first mover advantage” were more important than discounted cash flow (DCF).

McKinsey has recently published an extensive report on the most hyped technology shift right now – social media. There are similarities between the two reports. McKinsey uses the same logic as Alfred Berg and point out that it took merely 9 months for twitter to get 50 million users and their estimate of the business value in social media is as mind boggling ($ 900 billion to 1.3 trillion) as in the “No guts, no glory” report. But, I will argue in this blog post that there is a solid business case for social media in companies in the consumer financial services sector.

The vague business case

For a long time, proponents of social media have been using results from surveys as evidence for the potential in leveraging social media in the enterprise. The problem with this approach is that it doesn’t help companies that are trying to establish a ROI for an investment in social technologies. To them, benefits like “increased speed to access knowledge” and “reduced time to market” are just as vague as “first mover advantage”.

The good news is that McKinsey has developed a high level framework for quantifying the value of the social economy.

The value of increased productivity

McKinsey estimate that the majority of the business value in social media for the financial services sector will be reaped through improved productivity among knowledge workers. Improved collaboration constitutes 70% of the value potential in retail banking and roughly 50% in insurance (both P&C and Life). They estimate the full potential to free up 20-25% of a workweek for an information worker as presented below:

I would say that the magnitude of potential is reasonable. But, just like McKinsey, I want to stress that it takes a cultural change to reap the full potential. Based on our experience at Avanade, I would say that it takes 3-4 years with dedicated champions, management attention and training & support to get the full return on investments in social technology.

Margin improvements through the value chain

The chart below presents how McKinsey has derived the $256 – 423 billion in total annual value that they see in leveraging social technologies in consumer financial services.

It is evident that the value potential is the largest within customer facing areas, i.e. marketing & sales and customer service. Though, the majority of the estimated value is in improved collaboration internally (as depicted with blue value bars). But establish companies like American Express, SEB, Danske Bank and new actors like Movenbank, Friendsurance and Wonga have proven that there are external values in social media too (presented with white value bars).

Conclusion and recommendation

To summarize, there is a solid business case in social technology through increased white collar productivity assuming you can change the attitudes to virtual collaboration. In addition to the productivity gains, early adopters have shown that social media can be used to engage with customers in new ways for increased customer insight, faster product innovation, lower customer acquisition costs and lower churn. These external benefits may add 60-100% to the productivity potential.

Let me conclude this post with three recommendations to everyone considering making investments in social technology:

  • Align the investment with strategic initiatives. The reason is not to piggyback on the assigned budget as much as ensuring management attention. Your ROI will never become more than pipedreams if you do not have a change agent with the necessary power.
  • Build a business case on quantifiable values that can be broken down into measurable metrics that can be used as evidence to the success of the project.
  • Re-use best practices and experiences from early adopters. Do not hesitate to consult other companies on their experiences with social media solutions. I have been impressed myself on the frankness on client reference visits where the early adopter eagerly has shared his/her best practices and mistakes with other clients. These early adopters are really collaborative by nature.

Good luck! And do not hesitate to share your questions and experiences by commenting this blog post.

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