Over the years, return on investment has been the economic litmus test for most business spending — and IT in particular: For CIOs, a purchase either can show hard-dollar payback or it can’t. ROI was also the bottom line that brought IT under scrutiny of finance departments and auditors.

Certainly, the “go, no-go” rules loosened up a bit when productivity, competitive advantage and other “soft-dollar” results were considered. These intangibles were always difficult to measure with standard calculations such as net present value (NPV) or total cost of ownership (TCO), but they remained the exceptions — one-off purchases or solutions for individual departments or users.

Today, many old metrics and processes seem to be fading, and exceptions are now the rule. Many believe that with the proliferation of social media, consumer devices and cloud computing, for example, new ways to determine ROI — if such approaches even exist — are needed. And some are even claiming that ROI is not only the wrong metric to use, but that it doesn’t exist in reference to social media. Can this be true? If so, how can sound purchasing decisions be made?

We have discussed the economics of cloud and virtualization on Smart Enterprise Exchange in the past. As I wrote previously, “Most conclude that there is no one-size-fits-all ROI calculator that tells you when to go to a cloud model and how much you will save or pay. The most definitive answer about lower costs seems to be that you probably will see savings; but as with warning labels on medicine bottles, results will vary with the situation.”

My advice at the time was: “Conduct your typical due diligence by analyzing contracts, negotiating with providers and starting small.” But I am starting to realize that this type of traditional approach just may not work in the more amorphous world of social media.

Marcio Salles, who blogs about social media with a Brazilian perspective, recently included a great infographic in his blog on Smart Enterprise Exchange. Provided by MDG Advertising, the graphic addressed the ROI of social media for marketing purposes. In sum, it acknowledges that this is a “contentious” topic and offers several ways to measure effectiveness. Among these: going beyond click counts to include revenue generated, reduced returns, conversion rates, and positive brand mentions or feedback, among others.

Still, the company says that many factors such as closing business deals, encouraging new partnerships, quicker information retrieval (which translates to lower costs) and particularly, recruiting new talent, are “intangibles.” Among specific platforms mentioned, Facebook and Twitter were rated highly, and YouTube holds out the most promise. But how can their use be monetized?

Dozens of other recent blogs and consultants have raised the issue of social media ROI, too, and lots of discussion has ensued. Sean Jackson, Chief Financial Officer of Copyblogger Media, and Sonia Simone, Chief Marketing Officer, treat the subject in a lighthearted blog here but also raise some good points. Specifically, they conclude that revenue should not be a success factor for social marketing efforts. “The real measurement of return lies in the profits created from your culture of marketing.” Another social media executive offered some alternative metrics here, while a marketing strategist says not to worry about ROI — just move ahead with your plans.

But I suspect that marketing has different requirements than IT does. Would CIOs get buy-in for large-scale projects based on this advice? Typically, large global enterprises — especially those in regulated industries or with strict guidelines from their boards — need strong business cases for new investments. Has that mindset changed with social media? Must it change?

I believe that the landscape is evolving, but slowly. Uncertain financial returns are still inhibiting social media rollouts, according to many sources, including a recent InSites Consulting research report from the U.K. And even those who last year created social media ROI calculators are going back to the drawing board to make revisions.

CIOs can’t afford to stall and haggle over every purchase and every departmental request, and I agree that “calculating the ROI of social networks is not rocket science,” as this blog states. Nevertheless, sound decisions are key to good leadership and investment decisions should be based on more than popular trends or gut feelings. That’s the point of view Peter DeLisi takes in an upcoming new blog on Smart Enterprise Exchange next month.

Let’s keep this conversation going. What are your experiences in this rapidly changing market sector? Are your corporate purchasing requirements keeping pace with new media? Are RFPs and ROI finally a thing of the past?

Paula Klein

Editor and Community Manager

Smart Enterprise Exchange

Additional resources/ related blogs:

• A Framework for Social Analytics, Altimeter Group http://www.altimetergroup.com/2011/08/research-report-a-framework-for-social-analytics.html
• Social Media ROI http://mashable.com/2011/11/15/social-media-roi-measure/
• Social Media and B-to-B Marketing http://directmarketing.thomsonlocal.com/Win/News-Archive/Marketing-News/?storyId=84622
• Social Media Marketing Use Growing http://www.brafton.com/news/even-with-social-media-marketing-use-growing-implementations-just-beginning

Will your business lower costs by using cloud services? That seems to be a key bottom-line question that CIOs — and their bosses — want to know. Why then is it so hard to get a simple answer?

Writer Doug Bartholomew reports in his article, Costing out the Cloud, that, “understanding cloud economics is sort of like going for a swim in a hidden lake” — you never know the depth before you take the plunge.

While that sounded true, I was left wondering why. How can a model designed to ease complexity be so complicated to price out — especially when nearly every department from HR to sales is jumping into the cloud computing pool?

When I investigated further, I found lots of research, analyses and case studies that I will share with you here. Most concluded that there is no one-size-fits-all ROI calculator that tells you when to go to a cloud model and how much you will save or pay; the most definitive answer about lower costs seems to be you probably will see savings; but as with warning labels on medicine bottles, results will vary with the situation.

Cost savings may be one of the prime reasons companies are flocking to the cloud, but as Steve Phillips, VP and CIO at Avnet, told us: It is “only part of the story. At Avnet, it’s more about adding new functionality more quickly and affordably than we could do it on our own,” he says.

Some analysts are comparing cloud economics to the outsourcing of a decade ago. In an Accenture report, “Cloud and the Future of Business: From Costs to Innovation,” issued earlier this year, the consultancy — which also provides IT outsourcing services — says that shifting computing and storage capabilities into the cloud offers economies of scale in terms of IT support, energy consumption and speed.

However, it also says that cloud computing is unlikely to result in huge transformational shifts “if it is understood solely in terms of cost savings arising from data centre consolidation and virtualization.” Indeed, just as business found that “the most effective forms of long-term outsourcing tend to have a perspective that is diametrically opposed to concerns about cost-minimization,” cloud computing has to be considered from a broad perspective as well.

Accenture’s conclusion? “Long-term cost benefit modeling for cloud computing is immature and demands much further attention.” So that puts you back where you started from.

James Staten, VP and Principal Analyst at Forrester, has also studied cloud economics, and asks in a recent blog: “Is your cloud strategy centered on saving money or fueling revenue growth?” Where you land on this question, he says, “could determine a lot about your experience level with cloud services and what guidance you should be giving to your application developers and infrastructure and operations teams.”

According to Staten, “the majority of CIOs would vote for the savings, seeing cloud computing as an evolution of outsourcing and hosting that can drive down capital and operations expenses. In some cases this is correct, but in many the opposite will result. Using the cloud wrong may raise your costs.”

Staten offers other insights in another blog about which applications to move to the cloud. He advises that: “For enterprises to make the most of a public cloud platform, they need to ensure that their applications match the economic model presented by public clouds. Otherwise, the cloud may actually cost you more.”

I also recommend reading a comprehensive white paper, “The Economics of the Cloud,” issued late last year by Microsoft. It offers models and criteria to use as a framework when making decisions about cloud economics. It is a very in-depth analysis of cloud cost considerations and includes discussion of infrastructure, data center and utilization; multi-tenancy options; support and maintenance costs; capital versus operational budget expenditures; private versus public cloud costs, and new application development costs.

It also notes that the emergence of cloud services is different from previous outsourcing and virtualization efforts and is “fundamentally shifting the economics of IT … cloud architectures facilitate elastic consumption, self-service, and pay-as-you-go pricing.”

The report cites four areas that may yield economies of scale and cost savings:

• Cost of electrical power

• Infrastructure labor cost

• Buying power

• Elimination of capital expenditure

So, what are the takeaways for budget-conscious CIOs and their business-unit partners from these experts? In my view, it’s to jump in and test the waters, but carefully. Conduct your typical due diligence by analyzing contracts, negotiating with providers and starting small. Know what type of cloud is optimal for each applications before you sign on. Are you looking at pay-as-you-go public clouds to offload peak capacity from your servers, or for a small, dedicated application hosted in a private cloud for one business group? The total cost of ownership (TCO) will be very different for each.

I’d like to know more about how you approach cloud economics at your enterprise. Does the pace of business allow for thorough cost analysis for each application? Are you saving money? Please share your experience and tactics by commenting on this blog and also take our poll here to compare your strategies with your peers.

Paula Klein

Editor and Community Manager

Smart Enterprise Exchange