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The Real Truth About ROI

When I was in the military it seems we never really worried about Return on Investment (ROI). Yet, ROI is the Holy Grail of business. Run this calculation and the business manager will know what to do.

Let’s review the calculation in its simplest form:

ROI = (Total Benefits – Total Cost) x 100.

For example. If the cost to do something is 10 units and the benefit we receive from it is 20 unites than ROI = (20-10) x 100. So, in this case the ROI would be 200%. Not bad, in fact, if business were this easy anybody could do it. But they can’t. They cant because business isn’t that easy and because the calculation is flawed. The calculation of ROI is as elusive as the Holy Grail.

Managers the world over want to know the ROI on the money they are spending and investing. They are even focused on this in the hiring process. When they sit around the table and discuss whether to extend a job offer they are really asking if the candidate will be worth the investment. This is a noble and worthwhile goal. The formula is fairly straight-forward as we have seen. Measure what you spend, measure what you gain, presto, you know you ROI. Sometimes you can figure it out. Often you can’t. Why not?

Benefits are hard to calculate, costs aren’t. In an attempt to measure ROI we attempt to quantify everything but we can’t. In fact, what really happens is because we are able to identify all the costs of something we are readily able to calculate that part of the equation. We are confident of that number. However, the calculation of benefit can be much tougher. If I invest in safety training I can calculate the cost of that but how will I calculate the benefits of that? If my safety does not get better than does that mean benefits were zero? Or perhaps the training prevented a major mishap but we don’t measure a mishap that didn’t happen so what is the benefit? Zero? I don’t think so. We get so focused on cost that it seems to grow. The font gets bigger and bolder. Unfortunately since we can’t truly quantify benefit we perceive benefit as being less and we minimize it, the font becomes smaller and more difficult to read. Don’t fall into this trap. I am not saying we shouldn’t be aware of what are spending and investing and what we get for it. I am saying to reduce everything to an ROI calculation means you are going to miss out on some big opportunities because you walk away based on a faulty ROI calculation.

As a professional speaker I face this challenge often. The meeting planner wants to know my fee (cost). I tell them and they compare me to the next person on the list and then choose. Actually they often come back and say they really want me but I am outside their budget (cost). I ask why they really want me and they tell me what a great fit I am for the group, they love my energy, they like my style and really think I can impact the audience (these are benefits to some extent). The conversation continues with me asking about other things they haven’t considered and me pointing out other things I do to support the presentation or in conjunction with the presentation (more benefits). I have now shifted the perceptions in their minds from a cost focus to a benefits focus. The font on cost got smaller while the font on benefits got bigger. The challenge for me in this case is how do I truly quantify what the audience will learn? I guarantee they will be entertained and they will learn something but how do I put a dollar amount on that? There are ways to do it but at the end of the day the calculation of cost is pretty solid and one of benefits is less certain.

Yet, many firms will fall back on ROI to make a decision and it is a bad decision. Let’s continue with my scenario. Despite my best efforts I can’t them to shift focus away from cost. They pick the lesser priced speaker who then comes to their event and has less energy, is less of a fit, and presents dated and boring material. Sure, they saved money and the ROI calculation was looking good but now the actual benefit of this lower price provider is clear but it is too late. The audience is wondering why they wasted their time attending such a bad presentation. It happens all the time in every industry. My next door neighbor sells medical equipment and it just happened to him as he was beat on price by a firm that sells a product with proven lower quality. But the purchasing manager isn’t looking at lifetime cost of ownership, just the initial cost. My neighbor has a product with a boatload of benefits but he sometimes he can’t get the buyer to see past cost. In the words of Emeril, BAM, bad decision. ROI has failed again.

The challenge is to understand and be able to communicate the benefits of any given decision or course of action. That action may apply directly to us or to a business decision but the fact remains, we usually look at cost more than benefit. How do you get the boss to understand the benefits you bring to work every day? This is not a conversation we normally have but it is critical if you are to succeed in corporate America. We naturally don’t do this because it sounds like bragging. Nobody likes a braggart. However, if you don’t brag on your self a bit, nobody else will. Go ahead, tell them what you can do for them.

Wally Adamchik is President of FireStarter Speaking and Consulting. Visit the website at www.beaFireStarter.com. He can be reached at 919-673-9499 or wally@beaFireStarter.com.