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For the past year or so I’ve been dutifully following the very public discussion on ROI as it relates to social networks and the digital media. I’ve tracked discussion threads, downloaded white papers, read articles online and in print (and yes, print does still matter). I initially approached the subject with interest, then continued to follow it for amusement. The bottom line (so to speak) is that no one seems to have an idea on how to calculate ROI in this context, nor has anyone had the temerity to point out that the question is largely irrelevant.

“What,” you say, “the Emperor has no clothes?” Well, in a manner of speaking, yes. And in similar fashion the to fairy tale, I see this largely as a matter of perception and group denial. In the story it took the innocence of a child to see what others could not. I come at it from a different angle–a cynical senior citizen (card-carrying AARP) who really doesn’t care if you think I’m crazy or not. I do have a somewhat unique perspective, however, having graduated from engineering school (so I’m moderately good with math), and took my masters in communication before going to business school. This was a while ago, admittedly, and well before ROI became king (“roi” always was king in France, of course, but that’s another subject).

All right, aside from some obvious confusion concerning what I wanted to be when I grew up, I did learn (a) how to look at problems from a rational point of view, (b) the transformational impact that new modes of communication have on society, and (c) the very simple formula for calculating return on investment. The latter, of course, is;

I didn’t need a B.S. to understand that one. What you do need, however, are accurate measures of gain and cost, and that’s where things get sticky.

Once you start messing around with internal and external networks you lose the ability to measure both cost and gain. Why? Because they are pervasive. In fact, that’s the whole idea, isn’t it? Networks allow you to project your brand out into the world, and empower people to collaborate more efficiently. The degree to which networks enable free and efficient exchange of information is inversely proportional to your ability to control or measure the results. A butterfly that flits through your garden will pollinate the flowers, but you’ll never be quite sure where it is at any particular time. Catch it, pin it to a board, and you’ll always know where it is. But the garden won’t turn out nearly as well.

So, what is the cost of an investment in digital media? There are the direct costs involved in establishing a presence, of course, and maintaining it with either internal or external resources. Great, you’ve built a pipeline. These costs are minimal in comparison to the time and effort your people will spend putting things into it, now and over the years to come. And while those costs might be difficult to measure, it’s practically impossible to apply metrics to the offsetting cost savings.

Let’s say that a service rep provides a solution to a problem that a customer posted on Facebook. As a consequence, dozens of others don’t need to call customer service for the same issue. How do you measure the savings? An HR manager in your New Haven office posts a problem on an internal network and receives a solution that day from a supervisor at your factory in Duluth. How much time and money were saved? It’s only in Congress that you can get away with quoting costs without projecting offsets in savings–when it’s the other party’s bill, of course.

If quantifying cost is difficult, putting a dollar figure on return (or gain) is impossible. In general terms, of course, we can survey people, learn that those who are fans of our product on Facebook are X% more likely to purchase it, and project the anticipated impact on sales and market share. You might call that a measurement of return, but I call it market forecasting without benefit of the proverbial two hands and a flashlight. Don’t forget, they may be fans of your competitor, too.

Here’s the nub. The media we use and the way we use them have tremendous influence on both society and commerce. The advent of print, radio, and television each had a profound and well-documented effect on our culture. So will social networks, but not in the same way. The others are centralized and, for most part, controlled, outwardly directed, and one-way media. Their effects are much easier to isolate and measure. That’s not the model for social networks or digital media.

Think of another medium of communication that radically changed society and commerce–the telephone. After drums and smoke signals, it was the original model for instantaneous, networked communication (and a lot more private). I suppose executives in the late 1890s wrestled with the proposition of bringing a phone line into the company… questioning what it would cost, how it could affect operations, and the revenue it might generate. Hopefully, they didn’t wait around for someone to devise a way to accurately quantify the ROI before calling… oops… visiting the nice people at the Bell Company.

Unlike television, radio and print, the Internet isn’t a mass medium. Like the phone system, it’s a utility: a service provided for the shared use of the public. The web, with its websites, was an early application designed largely on the mass media model–we post it, you read it. Networks are a more mature evolution that is an increasingly pervasive component of modern life. Engagement is less a question of return on investment than it is the cost of non-investment (CON? Eh… maybe not).

There will be elements of your social/digital investment that you can isolate, measure, and evaluate against costs. Some companies, for example, have already started selling products and services through their Facebook pages. For the most part, however, the effects will be too diverse and spread out throughout your organization to be accurately measured. In fact, the greater its success the more complex the interrelationships and collaborations will become. Remember the butterfly?

Before you ask about the ROI of social media, go calculate out the ROI on having your telephone system and get back to me on that. But don’t bother calling me “crazy”–I believe I covered that earlier.

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A few weeks ago, along with several other agency owners from around the country, I participated in a forum at the American Association of Advertising Agencies in Manhattan. During our discussions, someone mentioned the case of an advertising agency that had recently been purchased by an investment consortium. It seems that, following the acquisition, agency management was informed that they were projected to grow the agency’s profits by 8% over the coming year.

Now, any agency that I know of would be tickled to experience that kind of growth. Ours, however, is a service business that relies on building long-term relationships. We have no control over what our clients decide to budget for marketing, nor can we predict what new business opportunities will arise and be won in the coming year. Generating an 8% increase in a moribund economy seems like a wildly optimistic proposition.

When the agency leadership asked the new owners what the source of that 8% projection might be, they were told that this was the number they needed to use to attract investors, and now the agency was expected to deliver on their promise. They had painted a picture of prosperous returns and, like Oscar Wilde’s fictional Gray, they expected reality to conform to the portrait.

For my part, this kind of thinking isn’t too far removed from the bank president who recently testified before Congress concerning the mortgage crisis. He freely admitted that he and his fellows might have overlooked the possibility that property values didn’t always have to go up.

In America we have a deeply rooted sense that things should always be growing, expanding, and getting bigger and better. There are hiccups to be expected along the way, of course, but our manifest destiny is to keep moving onward and upward. This derives in part from our history of success in rising from colonial stepchild to superpower in just two centuries. Mostly, however, it is the result of being the only robust and fully functioning economy in the years following World War II. Over the ensuing half-century we established ourselves as the world’s leading nation and primary market, consuming a disproportionate amount of the planet’s resources.

In the long term, this is positive attitude is a good thing. Sadly, we seem to be unable to sustain our expectations beyond the next quarter. People didn’t invest in building the railroads because they expected to see a return on their investment before the tracks were laid. Today we expect to see big, consistent returns regardless of the condition of the economy. How else could so many intelligent people be taken in by Bernie Madoff?

The world has changed. There is more competition for resources, and the excesses we enjoyed in the past are no longer tenable. We need to reinvent ourselves as a nation, and establish a new position in the emerging world economy. This isn’t going to happen simply because we want it too, or because assume it to be our birthright. Nor will it come from continuing to borrow against the future so that we can have what we want today but can’t afford – not as individuals, and not as a country. If we learned anything from the last two years it should be that growth cannot be assumed… that the future is best assured by living within your means today, and Investing for value rather than quick returns.

It’s time to tighten our belts; the question is whether or not we still have what it takes to do it. What do you think?

By,

Robert Mattson

Executive Vice President- Creative Director & copywriter

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