Pimp My Numerator! Three Steps To A Better ROI Calculation
With ever increasing pressure for companies—particularly publicly traded organizations—to demonstrate return on investment (ROI), it has become evident that the measurements are deeply flawed. That’s not to say there’s one silver bullet for calculating, but with a strategic approach, organizations can maximize the accuracy of their innovation efforts.
Are You Smarter Than A Fifth Grader?
Traditionally, ROI is measured as a simple mathematical equation, taking what you earned from an investment, divided by the original amount of the investment. Sounds elementary, right? Well, as long as your numerator and denominator are accurate, yes, you need be no smarter than a fifth grader.
However, there are large departments of educated, well-paid adults inside companies trying to calculate the returns on investments made in product development, new services and/or business model and infrastructure design. Often, they will spend a great deal of time figuring out what the denominator is: looking for all the obvious and “hidden” costs. But the hidden value? Not so much.
For the most part, the numerator is relegated to the number associated with the sales, profits and/or cost savings associated with the particular initiative or innovation and what it produced in the intended context. So for example, if an insurance company develops a new “whiz bang” delivery model online, they will calculate the costs of the employees involved, outside consultants, research, materials, travel and so forth associated with developing the model and make that the denominator. Then they will calculate how much revenue/profit came from the sales associated with that model, and the costs saved from the traditional model, and factor that into the numerator.
What is often overlooked is the additional value that should somehow be part of that numerator, as well. These are items that are not seen as easily, but are very important. Consider these:
- What did you learn from the research that was useful in other successful projects? Did it earn anything or save you money? Did it prevent you from wasting time and effort down a wrong road? Could it have prevented a lawsuit?
- Were any insights used in marketing communications for current products and services? Did it help you to write more effective copy, or eliminate the need to solicit more research to validate a campaign or media choice? Did it make a great industry meeting speech or create visibility for your competitive position?
- How often were the insights used in communications internally? Were they used with other departments? Did employees feel a sense of “I get why we are doing this?” Did it lend confidence to the board meetings or analyst meetings?
While quantifying these items is more complicated, it is important to recognize the value of learning from any innovation project. The smartest organizations have learned to maximize results by evaluating ROI in this manner.
Even innovations that “fail” in the traditional ROI sense have value that is not always being measured. After all, Post-it Notes would never have been invented had it not been for a failed attempt at creating a strong adhesive! What do you suppose the ROI was on that innovation?