From all the attention it gets, ROI (return on investment) appears to be the “holy grail” of business performance measures for projects, activities and processes, and investments requiring the investment of resources (including time, people, and hard cash). But calculating ROI can be challenging at times. Since ROI is, at its core, a measure of value, are there other ways of looking at the value question? I believe that there are.
Most of us who have been around the ROI block a few times know how hard it can be to calculate the ROI of certain activities. This is particularly true for people investments and process activities that have an indirect impact on the bottom line. In these cases, there are alternate approaches you can take to assess the value of a particular activity, project, or investment. While these approaches won’t truly satisfy the needs of the CFO in us, the operational manager in each of us knows that having a method that can help us see which activities give us the biggest business pay off has huge value in terms of managing critical business resources more intelligently.
The first approach includes “assessing” all business activities in terms of their strategic value. To be able to do this, you first need to have a solid strategic plan in place with recognizable and clearly defined strategic objectives. In addition, each strategic objective must have a relative priority attached to it. Prioritization tells us that one strategic objective has a higher level of importance than another in executing the business strategy at this point in time (since business priorities will change over time, the strategic value attached to various business activities will naturally change over time as well). All business activities (i.e. business processes and key projects, initiatives, programs, and services) can be lined up or linked with the strategic objectives in your strategic plan and the relative value of each business activity can be determined based on the priority given to the strategic objectives each supports.
Companies taking this approach usually use some type of point or rating scale, that is based on a combination of number of strategic objectives supported and the relative priority of those strategic objectives, to value key business activities. You can come up with a methodology that works for you. The goal is less about the math and more about finding a way to create a hierarchy of business activities that lists them in descending order beginning with those of highest strategic value. Having a guide such as this can help employees and managers make more strategic decisions about where to focus finite resources for highest business impact (or return).
A second approach is to relate investments in intangibles to more tangible outcomes that are “closer” to the point of investment. For example, when we invest in building the skills of our employees, we usually expect that there will be an improvement in the execution of the processes the skills are used in. This expected relationship can be used to create a measure that allows us to “see” the impact or value of our investment in skills development. When we take this approach to assessing value, we are measuring at a point where a direct relationship exists between our action (investing in developing the skills of our people) and the outcome (better process performance or enhanced process output). An example of such a measure could be average number of widgets produced per trained employee. If the actual performance of the skilled workers was compared against the performance before training and it was found to be better, we might feel more confident in saying that our training investment had value because it produced an improved business result (more available product for sale).
This relationship-based approach begins tapping into the concept of cause and effect. In a third approach to assessing value, organizations go farther by leveraging the causal relationships that exist between all business processes and strategic objectives to help them assess and determine the business value of activities that have an indirect impact on financial results. Organizations that are successful with this approach take the time to: develop organizational consensus on these key cause and effect relationships, collect data to validate that they exist and assess the strength of these causal relationships, and leverage the existence of these relationships to achieve desired, high value results in a more efficient and cost-effective way.
The most well known case of an organization leveraging the cause and effect relationships in their business is Sears. In their 1998 article in the Harvard Business Review, The Employee-Customer-Profit Chain at Sears, authors Rucci, Kirn, and Quinn presented the cause and effect information shown in the diagram below.
Essentially, Sears was able to validate that significant cause and effect relationships existed between employee attitude, customer impression, and revenue growth. That is, they were able to determine that by evaluating the level of improvement in employees’ attitudes about the job/the company, they could reliably predict the resulting improvement in revenue growth. In fact, such a high level of precision has been created regarding the causal nature of these relationships that Sears knows that a 5% improvement in employee attitudes will result in a 1.3% increase in customer impressions and satisfaction and a 0.5% improvement in revenue growth. With this knowledge, Sears can then make targeted investments in the drivers of enhanced employee attitude knowing that it will translate into an improvement in revenue growth. As a result, Sears has confidence in the ROI (in the form of increased revenue dollars) of specific interventions and targeted investments in their employees.
While this last approach gets us to a type of ROI assessment, it takes time and a lot of data points to validate that a causal relationship exists – most organizations could spend years collecting enough data to do this. While it’s a good idea to establish the groundwork to eventually leverage this third approach, most businesses want a quick win in assessing the value of their investments – particularly the intangible ones. In my experience, a combination of the first two approaches offers companies a good way to prioritize and assess the relative value of their various business investments in a quick way that has real, more meaningful implications (than perhaps ROI has) for successful business performance management.
What methods have you used in your organization to measure the value/impact of financial and non-financial investments on your business strategy and results?
