Tuesday, July 9, 2013
Three Challenges of Return on Investment
Three years ago, I was invited to speak at an HR conference in Dubai, and had a number of exchanges with the organizers. The conference was set for January 2011, but a few months before, I sent them the working title and points for my talk. In turn, they sent me a draft of the conference brochure. The title to my talk was off, so I corrected it. A second draft and a third draft came, and it was as if they never received any of my corrections. So I called them, as clearly something was wrong with this picture.
At issue, apparently, was their difficulty understanding the import of my title and accepting the fact that it was exactly what I intended it to be.
In time, I will have advanced my thinking far enough, and in particular developed my algorithms sufficiently enough, to assure a Return on Investment. But back then I wasn't ready to state that as a declaration, so I framed my title as a question. Even then, the question must've been too bold of a proposition for the organizers, and the notion of a guarantee must've been out of their day-to-day realm.
Thankfully, our phone conversation clarified and settled the matter easily, and we pressed forward.
Soup du Jour
Like a few corporate terms, ROI seemed to be top-of-the-menu for a lot of people. So much so that the term gets bandied around by just about anyone, it seems, when it comes to social media, for example. This very phenomenon ought to be a flag for those of us, who are tasked with formal responsibilities around ROI, to take note, investigate further, and proceed cautiously.
Before we delve into challenges, let's clarify that (a) ROI is actually an equation and (b) there are two sides to that equation. Some may speak to the benefits of their efforts, for instance, 1000 new Likes for their Facebook page. This is only one side of the ROI equation. What did they have to put into their website - that is, money and resources - to get more Likes? In ROI, we must account for benefits (return) against (on) costs (investment).
In any optimal scenario, benefits are greater than costs. In other words, we gain more good things than we put into the effort. With zero representing the break-even point, the ROI must be greater than zero (i.e., positive). If, at the end of the day, the figure were negative, then the project cost more than it was worth.
Challenge of Realization
Top leaders make decisions on which projects to invest in, and therefore engage in, by comparing their ROI. If the importance, urgency and feasibility of the projects are all accounted for, that is, controlled statistically to ensure a level playing field for such a comparison, then the greater the ROI, the more reason top leaders have to choose the project expected to give the biggest payback.
In previous articles, such as Social Media, Marketers and ROI, I have emphasized beginning with the end in mind. There may be an issue, opportunity or challenge facing the organization, and the CEO, along with his or her team, must first grasp the nature of this and determine what they need to do. The team can then identify the project that will resolve, capture or overcome what they're facing.
If ROI is truly a priority for the organization, then it must be part of beginning with the end in mind. Moreover, unlike how many issues are addressed, note that the CEO must not begin with the project. Consultants, whether in-house or contracted, are keen on their proven methodology, and may work aggressively to sell you on their project, before they've fully grasped what it is you want the project to take care of. Instead, the project always follows the end in mind. In one scenario, the consultant may already have the requisite capabilities and experience in their repertoire. But in another scenario, the organization may have to go with someone different altogether.
What ROI does the CEO and leadership team expect, that is, from investing in the right project that will address what they're facing: 10%, 25% or 100%, what is it? Investors may ask something similar, What are the earnings for this fund or that fund? Then, like top leaders, they decide on where to put their money, based on the answer to their question.
My advice is a departure from conventional wisdom and common practice: that is, to respond by asking, What ROI do you want?
The CEO may be tempted to return my volley with some ungodly figure, perhaps in a half-mocking tone. But my question is a serious one, and it does take analysis and thought to answer. Given the specific nature and difficulty of the issue, and the innate challenge of realizing an ROI in general, What ROI does he or she expect at the end of the day (i.e., at the finish of a project)?
From my standpoint, it's not anything that would faze me, if the CEO wants to shoot for the moon, or something close to the moon, when setting that ROI. A colleague informally sought my advice with a client, which aimed to increase their revenues tenfold in three years. He asked, Is it possible? I replied, I'd have to know much more about what his client is trying to accomplish, then added, Sure, it's possible. But then the questions are, What will it take for the organization to hit that target? How badly do they want to get such significant increase? Are they willing to commit time, resources and energy to this effort? What is their time horizon for hitting that target?
By necessity, the right answers will be the ones that give the CEO and organization the most realistic chances for making their expected ROI happen. Of course, this may mean adjusting the ROI they expect. For example, 10% may be doable, in a highly competitive, commoditized market, while 25% may mean setting aside other priorities or shelving other projects. Upon further consideration, then, the CEO and leadership team may re-set the target ROI to figure between 10% and 25%.
Challenge of Efficiency
During an economic downturn, companies make quick decisions of what and whom to cut out. Perhaps training and development programs, certain advertising campaigns, or research and development initiatives. The workforce is often downsized as well, with mainly just the quantity or percent of layoffs being reported in the media. Quick, tough decisions are necessary, but I often wonder how sound they really are.
I argue that these decisions are essentially a question of ROI, and must be thought-through as such by top leaders across unit and functions in the organization. More specifically, those programs, campaigns and initiatives - and staff - that offer the biggest payback must be kept onboard. Further, there don't need to be wholesale decisions. Instead, certain training that moves the needle best, not just in skills development but also in performance results, for example, can be kept going.
The foregoing lays the groundwork for grasping and overcoming the challenge of efficiency. Now that the end in mind is clear, the expected ROI is set, and the required project is outlined, then the question becomes: How does the leadership team maximize results, while managing costs and ensuring the outcomes they expect? In modern parlance, how do they get the biggest bang for the fewest bucks, and still get what they want?
Again, it is important to keep in mind that there are two sides to the question of ROI. Some amount of investment is crucial to getting a return, so the CEO must determine that optimal level, below which he or she ends up with diminishing returns. If organizational finances and resources are limited, then the CEO must determine how best to optimize results with what they have. This may mean adjusting the expected ROI based on the current reality of the organization.
Another factor to account for is project timeline. All things considered, the organization may need to lengthen the project duration to a more realistic timeline. So my colleague's client, who aimed to hit a tough target in three years may need to re-set it to four years. It depends on the balance among factors, which the CEO and leadership team must account for, analyze completely, and render sound decisions on. There is no way for any consultant, such as myself, to script this. The specific advice I may give depends on their particular considerations.
Nevertheless, the above slide maps one possible scenario. The negative peak may occur early on in the project, as investments have to pour in, long before there are any results to speak of. The break-even point is when results match the costs of the project, beyond which returns increase to a positive peak. Perhaps at the end of the project, or sometime after it's been closed.
I suggest taking the project timeline in increments, say, two to four weeks, and running the numbers on the ROI equation: that is, costs and results, to date. This regular, critical review must also weigh overall progress toward addressing the issue, opportunity or challenge, which we began with. Depending on the results of the calculation and review, the CEO may decide to keep the ship on course or make necessary adjustments.
Challenge of Attribution
Suppose you ran competency training programs that your sales force was very happy about. A few months later you find an uptick in their sales figures, and if you were the trainer or Project Lead, you may be quick to attribute that uptick to the programs you ran. Just as you're looking forward to top level congratulations, and perhaps some bonus, however, the compensation and benefits manager takes credit for it. She may have revamped the incentive package for the sales force, and she is certain that this had had direct benefit on their performance. In the meantime, the CEO recognizes a notable improvement in market economics, say, on the demand side, and implicitly attributes the uptick figures to these favorable conditions.
Who is right?
A few years ago, I set about determining "learning effectiveness" for the learning and development (L&D) programs we ran in a company I worked for. On this slide, I represented L&D as a tree with books sprouting from its branches (left). I defined effectiveness as an improvement not just in competency but also in performance.
As you see, the picture gets complicated very quickly, because so many factors can, and do, impact performance. No one in the organization is going to scoff at positive results, as that's something to celebrate above all. But the challenge for L&D was how to forge that line-of-sight from programs to performance. The L&D manager may take the high road, and acknowledge that multiple constituents in the organization have a play in those positive results. But then the question is, What part or what portion of the results can be attributed to each constituent? Which is a challenge in itself to answer.
I drew up different options for answering the question, but if you're not at all a statistician, or data scientist, then you're likely to abandon the whole ROI effort for its maze-like process and calculations, right?
This complexity or this confusion is no hypothetical case: An organization and its processes are complex phenomena, and the CEO in particular is tasked with speaking to that complexity as if it were the clearest, simplest thing in the world. The irony is that there are clear and simple things to circumvent the morass I've just walked you through.
We must begin with the end in mind, that is: issue resolved issue, opportunity captured, challenge overcome or ROI realized. That line-of-sight is more effectively and easily forged at the outset of a project, than in mid-stream when the project is well underway. That line-of-sight is forged as part of a process I've been describing in this article. To reiterate, once the end in mind is clarified, and once the right project is set, then we can anticipate, and therefore account for, its impact on that end in mind. We also account for individual, organizational and external factors that can, and may, impact that end in mind, too.
Years ago, it became clear to my colleagues and me that ROI attribution isn't just a quantitative or analytic endeavor. It is a qualitative, subjective process as well. In other words, it was also a matter of managing people's expectations and perceptions. There is no way to forge a line-of-sight with 100% clarity, and even the best solution doesn't have 100% effectiveness. But these two things - analytic and human - make up the challenge of attribution for ROI. Building relationships, keeping communications open, addressing questions timely, and resolving concerns are among the crucial ways for ensuring that the right ROI process leads to proper attributions.
No doubt, the most important thing for the CEO and his or her leadership team is keeping the organization on a good growth trajectory and making sure everyone feels a sense of engagement and meaningfulness. In truth, returns help the CEO re-invest back into making a better organization and a more satisfied staff group. Grasping, then overcoming, the challenges of realization, efficiency and attribution help ensure actual returns.
Thank you for reading, and let me know what you think! Also, if you'd like a PDF of this article, please e-mail me at Ron.Villejo@ronvillejoconsulting.com.
Ron Villejo, PhD