Why McKinsey Values Social Economy At Up To $1.3 Trillion - InformationWeek

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David F Carr
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Why McKinsey Values Social Economy At Up To $1.3 Trillion

Impact of public social media is important, but McKinsey study sees two-thirds of the value coming from social business collaboration within and between businesses.

5 Social Networks Hot On Facebook's Heels
5 Social Networks Hot On Facebook's Heels
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Maybe it's time for collaboration technologies to step out from the shadows of their sexier social media cousins.

A just-published McKinsey study, "The social economy: Unlocking value and productivity through social technologies," estimates that social technologies could pump $900 billion to $1.3 trillion per year in new value into the economy, based on an analysis of four key industries. Two-thirds of that value will come from improved social collaboration within or between companies, which will translate into a 20% to 25% improvement in the productivity of knowledge workers, according to McKinsey.

Those are enormous numbers to be throwing around, but I should point out some caveats up front. For one, McKinsey is talking total economic impact, meaning that some of that trillion dollars of value will end up in consumers' pockets rather than as corporate profits. The study also doesn't say how quickly this value will materialize, only that it will come eventually. "This is not a matter of, I install the technology, and the next day my people are 20% to 25% more productive--the gap between the technology investment and the capture of value usually lags by several years," said Michael Chui, one of the lead authors of the report.

McKinsey is a global management consulting firm, and its McKinsey Global Research research arm produced the 184-page report as an independent research project, not sponsored by any technology vendor. Chui said the report is intended purely to provide "thought leadership and understanding" on a topic that will be important to businesses, governments, and non-profits. It covers a few familiar case studies (TD Bank, Farmers Insurance) and many others that were new to me.

McKinsey takes an extremely broad approach to examining all the ways the phenomenon of "social" could have an economic benefit, from sales, marketing, and customer service on public social networks to improving product development through crowdsourcing and better appreciation of customer desires. However, what jumped out at me was the emphasis on enterprise collaboration as the greatest untapped potential for social technology and the area where the greatest value will materialize in the long run.

That would seem to be good news for enterprise social networking software (and cloud services) providers, as well as organizations that have bet on social software for the workplace. To date, most businesses have shown more interest in the potential of marketing through social media and the importance of monitoring and responding to customer communications through social channels. The McKinsey analysts agree that's important, but they suggest the impact on business operations could be even more significant.

Chui said one reason the study frames the issue so broadly is that the lines between categories in social software are often blurred. "Between internal versus external, you're often talking about the same technology, albeit with a different flavor," he said. What start out as "internal" applications of social software often morph as businesses see the need to invite partners or customers to collaborate, he said. "This has been an ongoing research project for us, and one of the findings from that research is that the companies that learn to use these technologies internally and externally actually see higher benefits from both."

The full report provides a detailed analysis of the impact of social technologies on four industries: consumer packaged goods, consumer financial services, professional services, and advanced manufacturing. It's the sum total of the impacts on those industries McKinsey used to come up with the estimated total annual value creation potential of $900 billion to $1.3 trillion. That breaks down as about $345 billion from product development and operations; $500 billion from marketing, sales and after-sales support activities; and $230 billion from improvements in business support activities. These may be rubber numbers, but they do add up to about $1 trillion, and the detailed breakdown in the report shows how they came up with these estimates.

Social technologies could create anywhere from $212 billion to $308 billion of value in the consumer packaged goods industry alone, according to McKinsey. The CPG industry stands out partly because it gets some of the greatest value from the marketing and market research value of social technologies, in addition to any impact on business operations. "In addition to heavy spending on advertising and promotion to build and sustain brand loyalty, CPG companies depend on a continuous stream of product enhancements and brand extensions to drive sales and brand loyalty. A CPG company often generates one-third of annual revenue from products that have been on the market for one year or less, so setting product requirements and successfully launching new iterations are critically important. Social technologies can help in both of these areas," the report notes.

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