The rise of the networked enterprise

There's still people who believe the internet and social media are flash-in-the-pan technologies - or simply aren't relevant to their role.

This group doesn't include most senior executives at organisations around the world, as this McKinsey report indicates.

The rise of the networked enterprise: Web 2.0 finds its payday (PDF) provides insights from 3,200 executives, finding that companies using the Web intensively gain greater market share and higher margins.

In government terms these gains could be expressed as lower costs, improved reputation, better community engagement and more reliable policy outcomes.

To quote 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. In fact, our data show that fully networked enterprises are not only more likely to be market leaders or to be gaining market share but also use management practices that lead to margins higher than those of companies using the Web in more limited ways.

Social media channels are becoming mission critical corporate tools,

Our research, for instance, shows significant increases in the percentage of companies using social networking (40 percent) and blogs (38 percent). Furthermore, our surveys show that the number of employees using the dozen Web 2.0 technologies continues to increase.4 Respondents at nearly half of the companies that use social networking say, for example, that at least 51 percent of their employees use it. And in 2010, nearly two-thirds of respondents at companies using Web 2.0 say they will increase future investments in these technologies, compared with just over half in 2009. The healthy spending plans during both of these difficult years underscore the value companies expect to gain.

Among respondents at companies using Web 2.0, a large majority continue to report that they are receiving measurable business benefits—with nearly nine out of ten reporting at least one. These benefits ranged from more effective marketing to faster access to knowledge (Exhibit 1).

Organisations using less social media channels, or using them less frequently reported less - or no - productivity improvements from social media. However the greater the use of social media, the greater the perceived and measured benefits.

Fully networked enterprises. Finally, some companies use Web 2.0 in revolutionary ways. This elite group of organizations—3 percent of those in our survey—derives very high levels of benefits from Web 2.0’s widespread use, involving employees, customers, and business partners, according to the survey. Respondents at these organizations reported higher levels of employee benefits than internally networked organizations did and higher levels of customer and partner benefits than did externally networked organizations. In applying Web 2.0 technologies, fully networked enterprises seem to have moved much further along the learning curve than other organizations have. The integration of Web 2.0 into day-to-day activities is high, executives say, and they report that these technologies are promoting higher levels of collaboration by helping to break down organizational barriers that impede information flows.

The research closely matches the same type of research in the 1980s for desktop computer use or in the 1950s regarding telephone access as these were rolled out throughout organisations. The more staff that had access to these technologies, the greater the benefits to the organisation.

Of course there are also challenges that need to be addressed. We have codes of conduct for phones and computers, monitor their use and have management processes to rectify any inappropriate use. Precisely the same approaches are needed for internet and specifically social media usage inside organisations.

However we've done this all before, several times, so it isn't really a big leap to address.

So are these benefits really measurable? McKinsey believes they are...

We performed a series of statistical analyses to better understand the relationship between our categories of networked organizations and three core self-reported performance metrics: market share gains, operating profits, and market leadership. Exhibit 3 shows the results.

Market share gains reported by respondents were significantly correlated with fully networked and externally networked organizations. This, we believe, is statistically significant evidence that technology-enabled collaboration with external stakeholders helps organizations gain market share from the competition. They do this, in our experience, by forging closer marketing relationships with customers and by involving them in customer support and product-development efforts. Respondents at companies that used Web 2.0 to collaborate across organizational silos and to share information more broadly also reported improved market shares.

The attainment of higher operating margins (again, self-reported) than competitors correlated with a different set of factors: the ability to make decisions lower in the corporate hierarchy and a willingness to allow the formation of working teams comprising both in-house employees and individuals outside the organization. These findings suggest that Web technologies can underwrite a more agile organization where frontline staff members make local decisions and companies are better at leveraging outside resources to raise productivity and to create more valuable products and services. The result, the survey suggests, is higher profits.

Market leadership, which we ascribed to those organizations where respondents reported a top ranking in industry market share, correlated positively with internally networked organizations that have high levels of organizational collaboration.

McKinsey finishes with a very strong conclusion:

The imperative for business leaders is clear: falling behind in creating internal and external networks could be a critical mistake. Executives need to push their organizations toward becoming fully networked enterprises.

And details some specific steps to get there...

• Integrate the use of Web 2.0 into employees’ day-to-day work activities. This practice is the key success factor in all of our analyses, as well as other research we have done. What’s in the work flow is what gets used by employees and what leads to benefits.
  
• Continue to drive adoption and usage. Benefits appear to be limited without a base level of adoption and usage. Respondents who reported the lowest levels of both also reported the lowest levels of benefits.
  
• Break down the barriers to organizational change. Fully networked organizations appear to have more fluid information flows, deploy talent more flexibly to deal with problems, and allow employees lower in the corporate hierarchy to make decisions. Organizational collaboration is correlated with self-reported market share gains; distributed decision making and work, with increased self-reported profitability.
  
• Apply Web 2.0 technologies to interactions with customers, business partners, and employees. External interactions are correlated with self-reported market share gains. So are internal organizational collaboration and flexibility, and the benefits appear to be multiplicative. Fully networked organizations can achieve the highest levels of self-reported benefits in all types of interactions.

Food for thought for all public service and private sector leaders.