McKinsey Is (Kind Of) Wrong About Social Media ROI

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Social media proponents are making hay over a recent McKinsey report which claims that companies that use Web 2.0 technologies are achieving higher profits. According to the report:

“A new class of company is emerging—one that uses collaborative Web 2.0 technologies intensively to connect the internal efforts of employees and to extend the organization’s reach to customers, partners, and suppliers. We call this new kind of company the networked enterprise. Results from our analysis of proprietary survey data show that the Web 2.0 use of these companies is significantly improving their reported performance.”

The  causal implication there is that Web 2.0 use drives higher performance. But it could be that firms that do better have the funds to invest in technology, and, therefore, more likely to use Web 2.0 technologies, no?

Either causal direction is too limited, in my view, though.

Back in 2009, I published a report called Bank Performance: Why IT Management Matters. It was based on concepts I had picked up working at Nolan, Norton & Co. years ago, and was never able to write about after becoming an analyst — until 2009.

The idea advanced in the report is that it doesn’t matter which technologies a firm uses, what matters is how a firm manages IT. The “how” of IT management is comprised of three dimensions: 1) Tolerance of IT risk; 2) Senior management support of IT;  and 3) Coordination between IT and business functions.

What the report shows is that firms (in this case, banks) that show a high tolerance for IT risk, have strong senior management for the use of technology as a business enabler and differentiator, and demonstrate tight coordination between the IT department(s) and lines of business are more profitable than other banks.

Going back to the McKinsey findings, I’m willing to bet that if they had applied the framework I described above to their research sample, they’d find that the Web 2.0-using, high performing companies would score highly on the three dimensions of the framework.

The implications of this — if I’m right — is important.

It means that simply throwing Web 2.0 technologies at business processes and problems may not produce the desired results if the company isn’t somewhat tolerant of IT risk, doesn’t have strong executive support for IT, and if IT and the lines of business aren’t tightly integrated.

This isn’t to say that McKinsey’s findings aren’t important or useful.

If you work for a company that scores low on the three dimensions of IT management, what do you do to change things?

It’s not easy. You’re basically trying to change a culture that’s embedded in your firm, and trying to change the thinking of executives with 30 to 40 years of experience that tells them what you’re trying to do is wrong.

But executives in lower-performing companies do want to improve performance. And if a study like McKinsey’s can help convince them to take a chance on new technologies, then that’s good.

But the lesson for you — the Social Media Proponent — is to recognize that one pilot project, one foray into social media, isn’t necessarily going to make a permanent change in the IT-investing habits of your firm unless you work on changing the three dimensions of IT management is a more systemic manner.

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