Where social networking is headed next

March 5, 2012, 4:36 PM UTC

By Kevin Kelleher, contributor

FORTUNE — What do you get when you cross a buzzword like “social networking” with an eye-glazing term like “enterprise software”? A buzzkill — in this case, one called “enterprise social networking.”

As long as the web has been around, the consumer side of things has been sexier. Enterprise software may be a $285 billion market, according to Gartner, but it receives a fraction of the coverage that the consumer web does, and it tends to adapt slowly to major changes, such as the adoption of iPhones, tablets and web-based apps.

Social networking is another major trend. But until recently, many companies outside of the web industry have been slow to adopt them as workplace tools. There may be 845 million people users connecting with their friends on Facebook, and 150 million LinkedIn (LNKD) members networking with colleagues in their industry at large, but relatively few people frequent an in-house social network to collaborate with their co-workers.

That may be changing. Yammer, a popular enterprise social network with 4 million users, raised $85 million in funding in a round including DFJ Growth, Khosla Ventures, Charles River Ventures and Founders Fund. Yammer has raised $142 million in venture financing so far.

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It’s not alone. Jive Software (JIVE), which went public in December, claims to have 17 million users. Jive’s stock is up 82% from its $12-a-share offering price. Others, such as Socialtext and Socialcast, are growing. Meanwhile, bigger companies are moving in. Google (GOOG) is making noise about adding in-house social networks to Google+. And Salesforce.com (CRM) is betting that its Chatter collaboration software will fuel its growth.

Last Friday, Salesforce.com’s stock rose 9% to a six-month high of $143.64 in after-hours trading after reporting revenue and earnings that exceeded analyst expectations and forecast that revenue would exceed forecasts again this quarter. On reason, CEO Marc Benioff told analysts in a call, was that the company’s social enterprise offerings, including Chatter, was luring in new customers, such as Hewlett-Packard (HPQ) and Activision (ATVI). “Our outstanding financial success this quarter was powered by the momentum of our social enterprise strategy,” Benioff said. “With the social enterprise, we are now closing our largest most exciting strategic deals.”

The rise of social networks in companies is coming as corporations slowly figure out their value. A report by Altimeter Research last week said services like Yammer are growing popular in some companies, but that many don’t yet realize the potential to strengthen communication in existing workplace relationships but also build new relationships that can increase efficiency. “Many business leaders are at a loss to understand what value can be created from Facebook-like status updates within the enterprise,” Charline Li, founder of research firm Altimeter Group, wrote in a recent report. “Some organizations have deployed social-networking features with an initial enthusiastic reception, only to see these early efforts wither to just a few stalwart participants.”

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Li interviewed software vendors such as Jive, Salesforce and IBM (IBM) as well as companies like Best Buy (BBY) and Sprint (S). She found that while social networks have a significant potential to improve communications inside a company, they are often implemented in ways that discourage rather than encourage their use. Part of the problem may lie in the low investments in enterprise social networks to date: Two-thirds of companies surveyed spent less than $100,000 on social technology last year. Others integrated social networking clumsily, with some departments taking to them and others not so much.

But the potential could be much greater. Just as email changed how workers communicate in a company, social networks – which, Li argues, by their very nature encourage sharing – have the potential to make office communications more fluid and efficient by forming ad-hoc collaboration, avoiding duplication in projects, streamlining processes and increasing the flow of information among hierarchical levels.

As an example, when Stephen Elop became Nokia’s (NOK) CEO, he used Socialcast to ask employees what needed to change. “The dialog not only helped him learn from the organization, but also signaled that a new type of relationship was dawning between the leadership and employees,” the Altimeter report said.

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And social networks don’t have much of a learning curve, since many people are familiar with Facebook, Twitter and specialized sites like LinkedIn and Pinterest. But there hasn’t yet been yet a platform that causes workers to take to it intuitively, the way so many people have to those consumer social networks. And that leaves a huge opportunity for a enterprise social networking company. What Facebook did for friendships and LinkedIn did for industry connections, enterprise social networks can do for a company’s workforce. It’s a big market waiting for someone to conquer it.