A little while back I was presenting the concepts and structure of my MBA course to a diverse  group of my HBS colleagues.  Pretty early on one of the professors in the Finance area asked me the question I was most dreading and least prepared for:  "Andy, what do you teach students about conducting a financial analysis of proposed IT investment?  How do you build a business case for IT?"

I was about to launch into a long-winded and poorly argued answer, but Bob Kaplan spoke up first.  "You can’t," he said.

Kaplan is responsible for both activity-based costing and the Balanced Scorecard, so he speaks with no small authority on matters of costs and benefits.  After the seminar he gave me a copy of Strategy Maps, which he wrote with David Norton.  The subtitle of the book is "Converting Intangible Assets into Tangible Outcomes."  Intangible assets consist of human, organizational, and information capital, which they define as "Databases, information systems, networks, and technology infrastructure."

The authors make their point forcefully and early in the book.  

This is a very crisp articulation of what I was going to try to say in the seminar.  I’ve probably seen hundreds of business cases that identify the benefits of adopting one piece of IT or another, assign a dollar value to those benefits, then ascribe that entire amount to the technology alone when calculating its ROI.  The first two steps of this process are at best estimates, and at worst pure speculation.  

The final step gives no credit and assigns no value to contemporaneous individual- and organization-level changes.  It’s a little like giving all the credit for the Boston’s 2004 World Series victory (yes, I am still basking in it) to Terry Francona, or David Ortiz, or Theo Epstein.  All three were critical and probably even necessary elements of the win, but it would be ludicrous to say that any one of them was responsible for it.

IT is vexing because its costs are so clear, and so high.  Its concrete expenses make it look on paper like a new machine tool, assembly line, or factory, and very few responsible companies go around buying any of them without first conducting financial analyses.  The difference between IT and these other fixed assets is that machine tools and factories add value directly, not through "chains of cause-and-effect relationships."  

A company invests in a new assembly line because it needs more widget capacity.  If it had that capacity, it could make and sell more widgets.  The relationship between costs and financial benefits in this case is complicated in some ways (it depends on many factors, some of which must be estimated) but the cause-and-effect chain is a short one, and one that doesn’t depend on lots of contemporaneous changes.

With IT, cause-and-effect chains are often quite long, e.g.  successful CRM adoption integrates the information about customer purchases across multiple channels – phone, web, store, etc.  This information allows stores to accept returns of good purchased online and lets customer service reps see each customer’s entire order history.  Both of these can increase customer loyalty, which in turn increases sales.  Sales can also be increased if recommendations presented to the customer on the website take into account purchases made at the store.

(There are some shorter cause-and-effect chains with IT.  eProcurement systems, for example, are popular with both CIOs and CFOs because centralizing and standardizing the purchasing process often yields savings that can be quantified, or at least benchmarked, in advance.  The cause-and-effect chain in short in this case, and benefits are in the same terms (dollars) as costs.  Such systems are the exception rather than the rule, however.)

So does this mean that companies should just stop building business cases for IT  and proceed by intuition, or by the persuasiveness of a sales pitch?  

Of course not.  One half of the ‘classic’ business case —  the costs —  can be assessed in advance with pretty high precision.  We know by now what the main elements of an ERP, BI,  Web enablement, systems integration, etc. effort are, and what their cost drivers are.  And we also know the capabilities that different types of IT deliver if they’re adopted successfully — if the human and organizational capital are well-aligned with the information capital.

The comparison of dollars spent to capabilities acquired isn’t one that yields an ROI or NPV number, but it’s one that business leaders are adept at making.  Most of the executive teams I’ve worked with would have little trouble answering questions like "Is it worth spending $1 million and tying up the following resources for the next sixth months so that we can capture all customer contacts in a consistent digital format?" or "Is it worth spending $3 million so that over the next two years we can give all of our field sales people automated heads-up alerts whenever the business intelligence system predicts one of their customers is likely to defect?"  

I don’t mean to imply that the answers to such questions are always "yes." I simply mean that most business leaders can quickly answer them because they’re posed in familiar terms —  as cost vs. capability tradeoffs.

Across the hundreds of quantitative IT business cases I’ve seen, I’d estimate that the average ROI figure was about 100%.  This brings up an obvious question, which I asked to every business case author that I could find:  "If this ROI figure is at all accurate, why are companies spending money on anything else except IT?  If there really are all these 100% ROI projects out there, doesn’t Finance 101 say that companies should immediately start lots of them, and not stop until the marginal return is less than the return from traditional investments like advertising, R&D, capacity expansion, etc.?"  

I never got a satisfactory answer to this question until I read Strategy Maps and saw Kaplan and Norton’s points about how nebulous the numerator —  the financial returns —  of this ROI figure is, and how the denominator is actually composed not only of IT capital, but also human and organizational capital (what I call the ‘organizational complements‘ of IT).

The reason companies don’t go on an IT investment binge when they see 100+% ROI business cases is that their leaders explicitly or intuitively understand these points.  In fact, I think these huge ROI figures are actually counterproductive; they lead to a response of ‘Give me a break.’  Framing IT business cases in terms of costs required to acquire capabilities might lead more often to a much better response:  ’Give me some technology.’

Yesterday’s New York Times has a fuller version of a story that I first read on Boing Boing.  It’s about Christine Axsmith, a CIA contractor who was also a blogger within at least one classified Intranet.  Earlier this month she posted on her  blog "Covert Communications" (which was hosted on the Intelink network) an opinion that waterboarding was torture, and that torture was wrong.  Shortly afterward she was fired by her employer, BAE Systems, and also lost her top-secret security clearance.  

According to the Times, "Ms. Axsmith said C.I.A. officials had confronted her and told her that the agency’s senior leadership was angry about the blog."

Axsmith’s public blog Econo-Girl contains many messages of support (and some of condemnation), and I’d encourage you to check them out.  

My purpose in writing about this incident here is not to comment on how the war on terror is being conducted or opine on how well our intelligence agencies are doing their work and protecting us and our interests.  I just want to point this out as a neat example of how not to promote Enterprise 2.0, and how to inhibit all of the positive things that can come from the use of freeform social software within organizations.

I was happy to learn that over 1,000 blogs are up and running on classified Intranets, and I hope our intelligence agencies are making use of other Enterprise 2.0 tools such as wikis and tags.  I’ve always thought that intelligence work is the perfect application for these technologies, especially if they cross organizational boundaries, like those between the FBI and CIA, that have evidently been hindering some important work.

But if employees quickly and visibly get fired for voicing opinions, especially those that aren’t obviously crazy or seditious, Enterprise 2.0 environments are going to become the opposite of what they can and should be.  They’ll become forums for banality, cheerleading, and caution.  Or they’ll become online vacant lots.  This would be a shame anywhere.  It’s something worse than a shame in areas as important to us all as intelligence and national security.

Smart organizations will accept and embrace the fact that Enterprise 2.0 tools will be used to voice dissent within the community.  And they’ll realize that this is more than just OK; it’s important.

Let’s close this post with a quote from Theodore Roosevelt, who wrote about dissent and the American President in a 1918 Kansas City Star editorial:

"… it is absolutely necessary that there should be full liberty to tell the truth about his acts, and this means that it is exactly necessary to blame him when he does wrong as to praise him when he does right. Any other attitude in an American citizen is both base and servile. To announce that there must be no criticism of the President, or that we are to stand by the President, right or wrong, is not only unpatriotic and servile, but is morally treasonable to the American public." 

As elected officials, citizens, bosses, and/or employees, are we smart enough to hear those words, and courageous enough to act on their implications?

CORRECTION (7.24.06):  The original version of this post had Axsmith working for BEA.  That was wrong –  she worked at, and was fired from, BAE Systems.  The current version of the post (above) is corrected.  My apologies to BEA.

I’m attending and speaking at three upcoming conferences, and am sure that I’ll learn a lot at each of them.  They are:

Wikimania.  August 4-6 on the Harvard Law School campus.  Wikimania is organized by the Wikimedia Foundation —  the good people who brought us Wikipedia —  and hosted by HLS’s Berkman Center for Internet and Society.  I’m participating on a panel bright and early on Sunday, August 6 at 9:30 am on "Organizational Uses of Wiki Technology"  Other panelists will include wiki vendors and corporate wiki users.

Interop 2006 New York.  September 18-22 at the Javits Convention Center.  Socialtext CEO (and blogger) Ross Mayfield and I are keynote panelists on Thursday, September 21 at 10:00 am on "Web 2.0 for the Enterprise."

The New New Internet. September 20 at the Ritz Carlton in Arlington, VA.  I’m wrapping up the day with a presentation and Q&A.

If this blog has been of interest please attend, participate in the discussion, and introduce yourself.

DrKW CIO, blogger, social software enthusiast, and true subversive JP Rangaswami just put up a great post in which he lists the most common ways in which enterprises try to discount or distance themselves from Enterprise 2.0.  One of them is the threat of dumbing down, which was the subject of my last post here.  

JP, to my great relief, agrees with most of what I had to say.  He also dissects the reasons that the ‘dumbing down’ reasoning is off base.  Here are few of his thoughts:

The whole post has much more good stuff, and is highly coherent.  Give it a read.

JP’s business-side colleague Darren Lennard, who I interviewed for my DrKW case studies, emailed to swap observations about how employees were using Enterprise 2.0 tools to collaborate.  He liked the fact that I quoted Jefferson, talked about his fondness for Hume and Smith, and wrote:

The Rangaswami + Lennard combination helped me realize that transparency/disclosure is not just a necessary precondition to collaboration; it’s a form of collaboration.  I started this blog in order to get my ideas out there.  It’s done that, but more importantly it’s also helped me learn what other ideas are out there, and who’s having them.  I’ve found things out via comments, trackbacks, referrals, introductions, and emails from out of the blue.  

Some of this, I’m sure, was jumpstarted by my article in Sloan Management Review, but it takes nothing away from that publication to say that the article alone wouldn’t have generated nearly as much interaction as article + blog has.  Making thoughts more transparent by putting them up on an online platform has led directly to further thinking.  And even though I haven’t included an anyone-can-edit technology (like a wiki) on my platform, I definitely feel like it’s been the base for a lot of  my recent collaborations.

So we shouldn’t get too upset if our companies’ first wikis don’t gain huge and immediate traction, or if the first employee blogs aren’t swamped with comments.  There are many ways for these technologies to be used, and to be valuable.  If they do nothing else they’ll contribute to the conversation, a tremendously important form of discourse that the British political philosopher Michael Oakeshott described perfectly as "an endless unrehearsed intellectual adventure in which, in imagination, we enter a variety of modes of understanding the world and ourselves and are not disconcerted by the differences or dismayed by the inconclusiveness of it all."

What could be better?

Brian Gillooly, the editor-in-chief of Optimize magazine, sent me an email after the CTC conference:

This is a good question; it’s a topic of current debate on Web, and it’s clearly relevant for the enterprise.  The last thing any company wants to do is set up an environment that contributes to dumbing down.

So which is it?  Is the IQ of an online group that of its dumbest member, the sum of all IQs, or something in between?  Do online communities aggregate knowledge or dissipate it?

Some examples are pretty clear:  markets work, in part because of the power of the price mechanism, the incentives to perform well, and the availability of clear, simple, and continuous feedback.  But what about the Web 2.0 content generation and aggregation platforms like the ones Brian mentions?  Some of them are clearly popular and big, but is their content any ‘good?’

Most of Everything is Bad…

It’s a safe bet that almost everyone you ask will say that most of it is pretty bad.  But most people, I bet, would also say that they found some great stuff on YouTube, Flickr, MySpace, etc.  Some of this ‘great stuff’ is at the level of mindless diversion or guilty pleasure, but not all of it.  I came across some fine pictures of the last solar eclipse on Flickr.

True, I find that most of what’s on these platforms is bad, uninteresting, trashy, and/or poorly done.  But I feel the same way when I go through a bookstore, walk along a magazine rack, scan movie listings, or peruse almost any sample from any publishing industry.  In other words, it’s simply not news that there’s a lot of junk out there.  Given freedom of expression, relatively low barriers to entry, and non-uniformity of tastes, how could we expect anything else?

… But So What?

The junk becomes a problem if it obscures the good stuff, or if it makes us such lousy consumers of content that we become morons or dupes.  Let’s take the first problem first.  Several earlier posts have concentrated on the mechanisms by which the cream of the online content rises to the top; they include links, tags, powerful search, RSS, and automated tools like Flickr clusters.  These are extremely powerful and precise tools.  They help each of us define the signals we’re interested in, then separate them from the noise.  

The One(?) Problem

But the fact that current search technology relies heavily on backlinks can give rise to a problem, best illustrated with an example.  I want my medical advice to come from the ‘medical establishment’ and to be based on research like double-blind clinical trials.  And like lots of people, I start any new quest for information at the Google search box.  But when I typed ‘herbal remedies’ into the box just now, the first non-paid search result Google returned was an online store, the second from a gardener’s guide, the third a guide of uncertain provenance, etc.  It seemed that only one of the first ten search results was going to be useful to me, given my preferences about sources.  This is because most people who discuss herbal remedies on the Web and link to other sites evidently don’t share my preferences.

My point here is not that most Web content about herbal remedies is wrong or bad.  That’s a judgment I’m not qualified to make.  My point is simply that there’s not a good way right now to limit my search results to sites that do have the right qualifications, however I define them.  Current search results are the result of a huge ongoing Web-wide popularity contest.  It’s a method that works surprisingly well, but it doesn’t give me what I want when I search for information about herbal remedies.

A combination of search and tagging, a la Google Co-op might be able to do better.  Google Co-op, which is still in beta, "is a platform which enables you to use your expertise to help other users find information" according to the company (if that’s not a Web 2.0-style explanation, I don’t know what is).  I’d be very grateful if the AMA someday used it or a similar tool to tag the herbal remedy sites they consider to be solid or authoritative.  I’d confine my searches to include only those sites.  People who wanted their search results to exclude information from the medical establishment would do just about the opposite.  And we’d all get what we want from the Web.  The signal would rise above the noise, even though we defined the signal very differently.  

Wikipedia and Thomas Jefferson to the Rescue

After Google didn’t give me what I was looking for within one page of results, I went to Wikipedia and typed in ‘herbal remedies.’  I found the entry somewhat scattershot and a bit of a Frankenstein —  obviously stitched together from the contributions of many individuals.  But I also found it very informative, and a good starting point.  It linked, for example, to an editorial from NEJM on the risks of alternative medicine, which was exactly the kind of information I was looking for.  It also linked to the Website of the National Herbalists Association of Australia, which is probably exactly the kind of information someone else is looking for. 

Reading the article reminded me why I’m such an admirer of Wikipedia.  Its community had managed to generate a helpful and informative entry on a controversial topic.  The community’s insistence on a neutral point of view for articles was a key ingredient for this good outcome.  Wikipedia demonstrates that people can come together and, instead of shouting at each other about how herbal remedies are either the only way forward for humanity or a huge ongoing scam, generate something that educates and helps other people.

This is the opposite of dumbing down.  And one of the main themes of this blog is that this kind of productive collaboration should be easier within Intranets than across the Internet.  Enterprise 2.0, in other words, should be at least as powerful as Web 2.0.  The informal and formal leaders of a company have an arsenal of tools at their disposal to shape both the processes of collaboration and their outcomes.  If the digital collaboration platform turns into a shouting match or a random collection of junk they really have no one to blame but themselves.  

There is ample evidence that online communities can rise above Gillooly’s ‘common denominator-ism,’ especially with the great new technologies we have to generate, refine, interlink, tag, store, filter, and search content.  If we can’t use them to rise above the lowest common denominator, shame on us.  

The second question posed above about bad content —  whether it can erode our critical faculties to the point that we become morons or dupes —  is a huge, broad, and deep one.  Many people believe that this process is in fact taking place.  In addition to everything else he did, Thomas Jefferson left these folk brilliant instructions in an 1820 letter he wrote to William Jarvis:

Cynicism, elitism, and defeatism are all easy poses, and trying to internalize and follow this advice is hard work.  But down which path do real rewards lie?