When ROI Isn't So Cut & Dry
Measuring return on investment for your business seems straightforward enough, but in reality it's not always so simple
For financial executives, return on investment is a core financial metric. Years of experience have made clear the importance of quantifying the financial returns from investments, and evaluating potential investments accordingly.
But can all investments be measured with a simple ROI equation? Hint: probably not.
Not all benefits can easily be measured in dollars and cents. A strict ROI approach risks missing the full business value of acquiring tools and services. This is why one executive told us, “we’ve learned to also think of ROI as ‘return on initiative.’”
To get at the full return on initiative requires identifying and measuring harder-to-quantify-gains for things like time savings, reduced employee turnover, and efficiency gains. The impact of tools and initiatives designed to improve these areas may be harder to quantify, but an accurate understanding of their impact is essential for good decision making, as well as a business’ long-term success.
How can you make sure you measure and understand the returns for initiatives like these? It starts with understanding the metrics you’re actually trying to improve.
What types of gains are most important to your business?
These areas won’t matter equally to all businesses. When evaluating the impact of a new solution, or deciding how to best measure difficult-to-quantify factors of ROI, focus on the areas of your business that are of immediate importance for you. And this might not always be about direct contributions to revenue.
A good way to start is by asking what a gain looks like in the context of the problem you’re trying to solve? This may require taking another step back to ask questions like:
- What’s on my agenda?
- What are my top initiatives this year?
- Where do I want to focus my resources?
Bob Creeden, Managing Director of the University of Virginia LVG Seed Fund, suggests “looking at the measurement of people against their goals because those goals roll up into the company’s larger initiatives. If middle level management is able to meet their goals, then executives can hit their objectives that generate revenue.”
Whether you define return as time savings, improving employee retention rate, or efficiency gains, the motivation for change (and measurement of improvement) must be connected to your larger vision. Failing to define gain, and a way to measure it, creates a narrow view of the broader outcomes of an investment. And could lead to poor investment decisions.
Defining return, beyond the bottom line?
Maybe return is providing time savings and freeing up people to do work more directly aligned with their strengths. PWC says 40% of mundane finance functions like billing, reporting and general accounting could be automated, freeing up employees to work on value-driven activities. This is rarely accounted for in traditional ROI calculations. It can be accounted for by considering what your people could be doing with 1,000 extra hours per week.
Maybe return is reducing your employee turnover. Some of the main reasons employees leave their jobs include lack of advancement opportunities, compensation and benefits, and poor managers. Conversely, employees that are engaged in their work are five times less likely to voluntarily leave the company.
Why should I care about employee retention as long as the work is getting the work done?
Low turnover rate saves money in hiring expenses, training, and productivity. It also boosts employee morale and productivity. Gallup’s “State of the American Workplace” report shows that only 30 percent of employees in the US are engaged and inspired at work. The vast majority that are disengaged? They’re costing companies about $450-550 billion annually.
Maybe return is helping your employees work more efficiently by providing high-quality training for new tools and processes. To maximize productivity, businesses need to make sure they’re setting up their employees for success. And, more often than not, this means arming with the tools and training they need to reach their potential. Most companies have onboarding programs, but a smaller number provided continuous on-the-job training. This could be having a serious impact on how productive your employees are.
Less visible factors do impact ROI
Why is paying attention to the non-quantifiable components of ROI important?
Consider how the flip side of each factor we’ve discussed can negatively impact ROI. Ask yourself:
- How much money are we losing from employees wasting time on mundane tasks?
- How much time, money and effort are dedicated to recruiting new employees each quarter?
- What is the time-to-benefit for a new hire?
Luckily, there are techniques that address these factors and offer increased visibility into the less obvious components of ROI. Encourage your team to identify all aspects of your business that influence ROI, beyond the quantifiable factors. Label each contribution as positive or negative. You might be surprised at what you find.
Measuring non-traditional ROI
So how can you measure this impact if it doesn’t have a direct, quantifiable outcome?
If time savings is an important objective, you might consider tools that offer automation. A third party management option can handle tasks that would normally take hours out of your employee’s day.
For example, a company called Blackline offers cloud software that automates and controls financial processes. Their software handles mundane tasks, like month-end reconciliation, that many companies still do manually. Vincent Messina, a Strategic Account Manager at Blackline, says he learns this by asking customers, “What can employees accomplish now, that they weren’t able to before you bought the solution?” If the answer you hear from vendor customers aligns with your critical success outcomes, this should be part of your return on investment calculations. (Here at Lola, we also pride ourselves on saving customers time so they can focus on value-based tasks)
For employee retention, a tool like TINYpulse offers feedback on your company’s culture. This can allow you to proactively observe trends and focus your attention on the most important information in order to make changes before problems arise. Employee engagement and feedback tools like TINYpulse might not lend themselves to a straightforward ROI calculation, but there is no denying that they can have a big impact on your company’s performance and stability.
If training is an important factor for you, software from Articulate360 helps businesses create and scale training through a cloud-based suite of eLearning development tools. Kristin Finnegan, a Talent Manager at Midaxo, used Articulate360 to improve her learning and development program. Kristin said this type of training offered “a blend of classroom training, group work, and self-paced eLearning”. This combination “allow[ed] for new hires to learn the more straightforward content at their own pace, and at a time that is convenient for them” which meant that Kristin was able to optimize the time she and the new hires had together in the classroom to dive into deeper discussion and hands-on activities.
The bottom line
It is natural to prioritize explicit financial returns on investment. But when investment decisions move beyond strict sales and marketing software, and into areas that involve people, the harder-to-quantify factors of ROI may actually provide the biggest business impact.
Speaking of ROI, Lola can help you save time, money and headaches on corporate travel. Schedule a demo to learn how: https://www.lola.com/schedule
How does your corporate travel policy stack up?
Posted byRebecca Morrison