Ten Myths About ROI

The term ROI is probably used more in business these days than ever before, particularly in areas where it has not been discussed previously.

Originally, the concept of return on investment was used in the context of showing value from investing in capital expenditures, such as buildings, equipment, and companies. In the past two decades, it has been used in the context of showing return on investing in a variety of non-capital expenditures like human resources, technology, quality, and marketing. But the term ROI is entered into the business lexicon on a routine basis. What's the ROI on that? is a common question. Can you show me the ROI? Can you show me the money? are often requests from executives. This will deliver a very high ROI or You can expect a very high ROI with our particular product or service are commonly heard from sales professionals. Most of these requests are brought into play without understanding the true meaning of ROI.

In reality, the return on investment is a financial term. It shows, in a single metric, the ultimate contribution of different projects, services, programs, and events. Since those of us concerned with the contribution of non-capital expenditures borrowed this formula from the financial and accounting community, we should use it appropriately. In doing so, however, a variety of myths and misunderstanding have surfaced, causing vast amounts of confusion. Here are 10 important misunderstandings about ROI as it is used to evaluate non-capital investments.

Myth #1: Why should my project come down to one financial number?
Reality: It should not come down to one number. The original developers of the concept of return on investment for capital expenditures argued that it is an imprecise measure and should never be used in isolation of other performance measures. The financial community considers a vast array of measures in making major funding decisions. We should follow their cue. The ROI Methodology advocated in these columns generates six types of data about a project:

• Reaction to the project


• Learning to make the project successful


• Application and implementation of the project


• The business impact connected to the project


• The financial return on investment


• Intangible measures

A balanced profile of performance results is needed and is always developed when ROI Methodology is used properly.

Myth # 2: ROI is too complex for us to use.
Reality: Not necessarily. The ROI Methodology is broken down in a simple step-by-step process for collecting, analyzing, and reporting data. It applies a discipline approach to show the value of the project as it collects the six types of data described above. It also includes a step to isolate the effects of the project, making results more credible. The key is planning carefully, sharing the responsibilities, and building capabilities so that it can be done quickly. Using technology is also important to reduce the complexity and time involved.

Myth # 3: ROI costs too much.
Reality: Not necessarily. The key is building internal capability to show the value of projects, not always depending on a consultant to do it for you. ROI studies on projects can be conducted internally for as little as $1,000-$2,000. As a percentage of the project itself, the cost of the ROI study, if done internally, is often 1%-2% of the total project. Expensive projects may require greater investment, sometimes 5%-10% of project costs. A variety of cost-saving tips can be utilized to make it an affordable, usable process.

Myth #4: I don't have a finance, accounting, statistics or mathematics background; therefore, this tool is not for me.
Reality: Mastery of finance, accounting, statistics, and mathematics is not necessary to make ROI work. It is void of complicated statistical processes, although it is based on very sound practices. The only finance and accounting needed is an understanding of cost, profits, and the actual ROI calculation.

Myth #5: ROI is too subjective, involving only estimates.
Reality: Not true. Estimates are used only in small segments or parts of the process. When used, they are collected from the most credible source and adjusted for error to ensure the most conservative estimate is reported. The philosophy is simple; estimates are never preferred but only used when other methods for obtaining the data or converting the data to money are not feasible. Even then, we make the process as credible as possible in order to defend them. In short, we do not prefer them, but we are prepared to defend them.

Myth 6: My top executives aren't asking for ROI; therefore, I shouldn't be interested in this process.
Reality: Unfortunately, this is a serious misunderstanding. Waiting for a top executive to ask for ROI puts us in a very vulnerable position. To build capability and expertise with ROI and change the practices that are necessary to make our projects even more successful takes time, often much more time than an executive is willing to tolerate. Essentially, if executives request it, we are on their timeline and their agenda. If we take a proactive stance, we manage the agenda and the time. Unfortunately, we have seen disastrous results when evaluators wait for the ROI request because they struggle to do it, cannot do it credibly, and often suffer the consequences.

Myth #7: I don't have time for this.
Reality: Unfortunately, the use of ROI does take additional time, but the time could be managed if the process is planned from the outset of project implementation. Also, by building data collection into the project and sharing responsibilities with others, additional time can be saved. The use of ROI may ultimately save time as certain projects are radically altered and changed when they are not adding value. Some projects are prevented in the beginning due to their lack of potential, freeing up time to spend on more productive, value-adding projects. Imagine if you implemented or managed 10 new projects or programs per year. How much would you benefit from knowing which of the 10 were the most valuable and which were of less value, thereby giving you the information you need to make necessary choices? The ROI methodology can show you. The additional time could be used to work on the more effective ones. There is an old saying that fits this situation squarely: "We take time for things that are very important." If it is important to know the contribution of your projects and programs; how to use data in ways to improve those projects; build support for those projects, and maintain your budget, then time must be allocated to make it work.

Myth #8: ROI is not appropriate for my type of projects.
Reality: ROI is being used with all types of projects and programs in areas where it was unthinkable a few years ago. ROI is being calculated for internal communications projects, public relations initiatives, conferences, diversity, sponsorships, and even language training. The reality is, when the expenditures are significant and there are limited funds available, someone, the ultimate client, is concerned about the ROI of the project. This person or group of people wants to know if the project is a good investment of funds. This information helps them make decisions as to where they should place the funds in the future.

Mythi#9: ROI examines what has already happened and does not look forward.
Reality: Not true. The ROI methodology can be used to measure the success of a project before it is implemented, even in the conceptual stage. A follow-up evaluation can show if it is actually successful. Use of forecasting and follow-up ROI is recommended.

Myth #10: It's hard to find ROI resources that can fit my situation.
Reality: Not anymore. Through the ROI Institute and the ROI Resource Center, all types of tools, templates, and documents are available. Books ranging from simple introductions to extensive How-to Manuals are available. Case studies and software guides are all available, all aimed at making it easier to understand and easier to use. Contact us at the ROI Institute (www.roiinstitute.net) for more details.

We hope this column has been helpful to you over the past months. While this is our last contribution, we hope to continue hearing from you as you pursue the use of ROI in your organization.

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The Mystery of Business Alignment

Whenever a project or program is implemented, there is often mystery about the issue of business alignment. Everyone talks about it, management requires it, and we know that alignment must be accomplished with new projects and programs. But how is it achieved? This article describes a simple approach to achieve alignment.

Figure 1 shows the connection between the initial need for a particular project, the objectives of those projects, and the evaluation of those projects. The process starts at the left side at the top of the figure, the beginning point for the project. It moves through the different levels of needs assessment and analysis until the project is identified. Along the way, the objectives are developed at each level. Finally the project is evaluated at those same levels. These levels of evaluation connect to levels of objectives and to levels of needs assessment. With this backdrop, let's explore the process of business alignment in three specific steps.

In the Beginning

The first question is simple: Is there a payoff opportunity with this project? In this step we are examining the payoff needs. Is this a project worth pursuing? Will it generate enough monetary benefits to overcome the costs? Sometimes this is obvious and other times it is not so obvious. Figure 2 list some rather obvious payoff opportunities.

Figure 3 lists a few not-so-obvious opportunities. In those situations, we need to dig a little deeper, moving to the business needs. What is the actual business measure being addressed? This is the first connection to business alignment.

Specific business measures are identified such as productivity, cycle time, customer complaints, sales growth, absenteeism, and employee turnover. Next, we must ensure that a solution is selected that connects to the business need. Therefore, we ask questions about job performance. What are employees doing (or not doing) that is influencing the business need? The answer identifies what must change in the workplace to satisfy the business need. This begins the development of the solution. After we have identified these performance needs, we must determine what learning is needed to support the performance. (i.e., what do employees need to know that they do not know now to achieve this redefined job performance?) After the learning is defined, determining preference needs is next. What is the best way to deliver this project? How should the employees react to it? When is the best time to implement it? This level is about preferences for the different stakeholders.

Collectively, the five simple levels provide thorough needs assessment and connect the business need to a specific solution and that is the first step in the business alignment.

During the Project

The next business alignment phase occurs during the program, using impact objectives. As the business need is identified, one or more impact objectives are defined. These objectives define specifically how much the business measures should change (i.e., which ones must improve and by how much.) They are conditions that should be met after the completion of a program.

Examples of Impact Objectives are:

• In three months, waste should be reduced from $5,000 per month to no more than $1,000 per month in the warehouse.


• The average number of new accounts opened at Great Western Bank should increase from 300 to 350 per month after six months.


• There should be an across-the-board reduction in overtime for front-of-house managers at Tasty Time restaurants in the third quarter of this year.


• Employee complaints should be reduced from an average of three per month to an average of one per month at Guarantee Insurance headquarters.


• The average number of product defects should decrease from 214 per month to 153 per month at all Amalgamated Rubber extruding plants in the Midwest region.


• The company-wide job satisfaction index should rise by 2 percentage points during the next calendar year.


• Sales expenses for all titles at Proof Publishing Company should decrease by 10 percent in the fourth quarter.

Impact objectives provide the focus needed by all individuals so that they are concentrating on the business alignment throughout the process. Objectives provide business focus for participants (i.e. employees), their immediate managers, various coordinators (if they are involved), the organizers, and the sponsors. Essentially, everyone involved clearly has the business focus needed throughout the project and that is the second phase of business alignment. Now, for the third phase.

After the Project

Data are collected along the same five levels to see how well the project has succeeded: reaction, learning, application, impact and ROI. Business impact is measured from the records, pinpointing the change in the measures. This is the same business measure identified in the business need and highlighted in the impact objectives. In this step we are monitoring a fact -- a measure has changed. To achieve the ultimate validation of business alignment, this fact must be connected to the project. This is where the issue of isolating the effects of the project comes into focus.

In reality, there are many processes that often drive a business measure. While a variety of techniques are available, a simple process often used is estimation. The most credible person involved (sometimes the employee or the manager of the employees), sorts out the various factors that could have driven the measure. The most credible person(s) discusses the impact of the various factors, and allocates a percent of the improvement to each of the factors, including the project in question. Although this is a guess, it is coming from the person who knows it best. However, because it is a guess, the error must be removed by asking one more question: What is the confidence in your allocation on a scale of 0 to 100%? If a person is 80% confident in the allocation, in essence, there is 20% error in their guess. The 20% of the change in the business impact measure is factored out of the analysis by multiplying 80% times the allocation. While there are other methods to isolate the effects of the project, this is always possible. This step should always be tackled to validate the business alignment.

Summary

In summary, business alignment is achieved in three phases of a particular project. First, in the beginning, the project is connected directly to the business measure. Second, alignment through the project is maintained and is achieved with a constant focus driven by the impact objectives. The objectives ensure that business alignment is there. And finally, to validate that business alignment has been accomplished, the effects of the program must be isolated on the change in the business measure. There it is, in simple terms, how business alignment is achieved for a specific project or program.

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Using Metrics to Manage Recession

Economic down turns affect us all. Small businesses often take the greatest hit. Increases in costs, reductions in revenue, and stagnant inventory often result from a slow-down in the economy. Lay-offs, mergers and consolidations, and bankruptcies dominate the news. With all of this, along with a government administration in flux, it is no wonder small business owners and their teams are concerned about the future. In the coming years, small businesses will face many challenges -- challenges which can be addressed with the use of metrics.

FACING CHALLENGES WITH METRICS

As small business owners we understand the concerns the current economic climate bring to the table. Based on our experience as well as observations of others through our work, we've identified four specific challenges that all small businesses will face over the next two years. Each of these challenges can be met by implementing a solid approach to using metrics.

Budget Issues

Most small businesses are budget sensitive. While many small businesses are very successful, much of their success is due to their knowing the inflows and the outflows. They plan for their spending based on expected revenue and expected costs. They budget according to plan. But during economic down turns, concerns about reducing budgets, justifying requested budgets, or maintaining budgets when other budgets are being reduced increase.

While it may be reasonable to expect all budget line-items to be proportionally adjusted, in reality, they are not. Managers reduce budgets in areas that are considered to be unnecessary or not absolutely essential. This situation sometimes positions support functions such as marketing, human resources, or information technology as targets for reduced funding. Questions are asked such as: How much budget is needed? Can the essentials be achieved for much less? Can others do it for less? These issues are on the minds of business owners and their management team. Without an effective metrics program the value of these functions are misunderstood if understood at all.

Studies showing the connection between projects and initiatives and staff satisfaction can be helpful in understanding how some activities impact employee engagement and ultimately the success of the business. Statistical relationships between job satisfaction and turnover; employee engagement and productivity (measured by revenue divided by the number of employees); and job satisfaction and customer satisfaction are classic measures used to make decisions about the direction of a project, process, or initiative.

ROI studies can be valuable to show the impact of specific projects and initiatives. For example, recent studies that have helped defend or justify budgets include:

• The financial payoff of a marketing campaign.
• The impact and ROI for a new leadership program.
• The ROI of a business coaching.
• The payoff of a new compensation strategy.
• The ROI of a new technology system implementation.

These and other studies provide convincing data that these projects make a difference and can often spare them from the chopping block. ROI studies not only protect the investments, but sometimes help make the case to increase investments during lean economic times.

Outsourcing

A typical reaction in slow economic times is to reduce costs. This often leads to discussions about outsourcing certain elements of the business. Most outsourcing is initially pursued with the hope of reducing costs and in fact, most seem to do that in the early stages. An effective metrics system can enable this decision in several ways. If the function should be outsourced, the metrics should confirm it. If the function should not be outsourced, the metrics will confirm this as well. Metrics on costs and efficiencies are critical, such as cost per hire, the time to fill the job, gross profit/marketing expense ratio, turn-earn ratio, and the cost of administering payroll and benefits. If we clearly understand costs and efficiencies then we can compare them to potential outsourcing opportunities. If the activity or process can be outsourced with much less costs, then maybe it is a good decision. If it cannot be outsourced with less costs maybe it should be left alone. If you do not have the metrics to show these costs and efficiencies, your ability to make a wise business decision is limited.

Too often, an outsourcing decision produces cost savings in the short-term and customer dissatisfaction in the long-term. If the stakeholders/customers of the outsourcing decision are dissatisfied, this can create serious problems for the organization. If we have excellent levels of satisfaction now then potential outsourcing may not be pursued because we have great levels of satisfaction. With no clear vision of the accurate costs, efficiencies, and effectiveness, including the levels of satisfaction, a function becomes a candidate for outsourcing, even when it should not.

In terms of reviewing outsourcing decisions, an effective metrics system can also help. A solid system not only tracks the costs, efficiencies, and effectiveness of the outsource process, but also captures the levels of satisfaction. This may also include the flexibility of using this system, the integration with other processes, and the level of support needed from all stakeholders. Sometimes what appears to be an economic decision in the short-term, turns into less flexibility, more cost, and less customer satisfaction in the long-term.

Employee Layoffs

Unfortunately, when revenues are down and costs are up, employees are often sacrificed. When layoffs occur, the question is raised: Who should go and who should stay? Here, a great metrics program can pinpoint who the talent is, where the key talent is located, areas where turnover will occur, and jobs where retirement packages may be successful. An effective performance metrics system identifies high performers, tracks the performance improvements of average performers, and shows the talent movement in the organization. Even the issue of offering buy-out packages to employees often goes astray because of the incorrect assumptions made. These incorrect assumptions are sometimes traced back to the ineffective metrics.

Image and Influence

The image and reputation of a small business is critical. When faced with lean times image and reputation can pay off. An effective metric system reporting measures such as linkages between customer perception and commitment to continue doing business; image within the community; supplier satisfaction; and customer willingness to recommend products and services to others can be critical measures in predicting the future ahead. Contribution and value translate into commitment, support, and respect. A metrics program reveals the contribution and value a small business brings to its customers, employees, and the community: three stakeholders that can influence the future of the business.

THE GOOD NEWS AND THE BAD NEWS

An effective metrics program can be one of the most helpful processes within a business during tough economic times. It can enable an organization to maintain budgets, build support, prevent unnecessary outsourcing, and trim the workforce in a rational, logical way. The bad news is that the time to implement an effective metrics program is before these issues are on the table. Now is the time to start working on this process quickly and deliberately, allocating time to put metrics in place. This often involves building capability and understanding of the team so that they will not only develop the metrics, but use them effectively. An effective metrics system will show how well the functions within a small business are operating and contributing.

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ROI and the Small Business Owner

When we discuss metrics and ROI with the managers, executives, and specialists, we are often asked this question: How does this apply to small business? True, large businesses routinely focus on measurements, metrics, and ROI. There are departments, functions, and people with titles of analytics, metrics, evaluation, research, organizational effectiveness, and other labels that just do not exist in a small business. So how should a small business address ROI beyond calculating the ROI for capital investments, which they often know quite well?

The ROI Perspective

Let's put ROI in perspective. The concept of the use of the ROI Methodology, as discussed in these columns, focuses on capturing up to six types of data that defines a success of a project, program, initiative or event:

• Reaction
• Learning
• Application
• Impact
• ROI
• Intangibles

When business owners are considering a new program for human resources, a technology purchase, a new quality initiative, or a new marketing plan, the key question is how to ensure that the project is adding value and perhaps even a positive ROI. Here are a few tips for the small business owner to ensure that there is an adequate return on these types of investment.

Tips for Ensuring a Return

1. Make sure the new project is connected to the business. While this seems obvious, too many projects or programs are implemented for the wrong reasons. They are implemented because others have tried it, it seems like a great idea, logically it makes sense, our top executives want it, etc. So the first question to ask is: Will this add value? The answer should include an explanation of how it is connected to the business. New projects, programs, or tools are implemented because some business measure is not doing so well. Maybe there are too many customer complaints, there are too many shipment errors, it's taking too long to process an order, we have excessive absenteeism, or we have low productivity in a particular area. These are business issues and they are all defined by business measures.

2. Make sure the supplier can produce results. Many projects or programs are often implemented by an outside vendor, supplier, or consultant. Someone has an idea so they hire a consultant or vendor to improve the situation. Ask the supplier for previous successes. What evidence do they have for added value in similar organizations? If there are no data and there is a reluctance to discuss results, then be careful. It may be waste of time and money.

3. Set clear objectives at different levels. While this appears obvious, too many times objectives are not set very clearly. Objectives should be set for:

• Reaction - defining the desired reaction from stakeholders of a new project or program.


• Learning - defining what everyone involved must know to do what you want them to do.


• Application - defining what everyone involved should be doing precisely in order to improve the business measure.


• Impact — defining the specific impact measures that will improve as a result of the project or program.


• ROI - defining the desired return on the investment.

Objectives at the different levels can have a powerful influence on the actual outcomes of project or program. They give all stakeholders clear direction of where you are going and why.

4. Make sure everyone supports the program. Often, programs fail because they are not supported properly by the people who must make them work or the managers of those people. An idea from the boss or an outside consultant or another manager may not have the endorsement and the buy-in from the team necessary for it to be successful. So ensure that others are on board and that they are clear about their role in the process.

5. Ask the vendor or project sponsor to evaluate it. If someone has suggested it, encouraged it, created it, or developed it, maybe they should evaluate it. If there is a vendor involved, try to get them to evaluate the project, ideally, at no cost. After all, why shouldn't they prove to the customer that their product is working? If this is asking too much, pay a little more for the project to cover the evaluation costs. Ensuring accountability is built into a program gives you some peace of mind and keeps the vendor focused on the desired results.

6. Follow up - Informally or formally. Follow up is often missing from project implementation. Just checking to see how things are going is necessary. Following up ensures a connection with objectives is taking place. Are objectives being met? Are people using the new system or new process? Are they following the new procedure? How do we know? What evidence do we have? Is it driving a business measure? And if so, how much of the improvement is actually connected to the project? Asking those who are involved can be very revealing. They usually have the answers because it is their performance that you are concerned about. Asking questions related to success with objectives helps drive accountability and it also helps you understand what is working and what is not. It is not necessary to calculate the ROI to know that there is value. However, if it is a major project or major expenditure, maybe the ROI should be completed with help of the initiator or the supplier. Knowing how the monetary benefits compare to the project costs is often very important to the small business owner and his or her team.

Summary

These simple steps can be followed in any size or type of business. ROI studies have been conducted in companies with as few as thirteen employees. Two published ROI case studies represent firms with less than twenty-five employees. Non-traditional use of ROI is becoming an important practice in small business. A business doesn't have to be big to be accountable. In fact, it is often easier to collect and analyze data in a small business than a large business. There is less bureaucracy, the measures are straight-forward and those who own or record the measures are nearby. The question is time and priority. Will you have time to do this and is it a priority? Accountability up to and including ROI should be a priority if the expenditure is significant enough to warrant your attention. The time should be devoted if there is a payoff on that time invested. For most people, who take the time to make sure the accountability is there, they clearly say it was always worth the time to do this.

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The Convergence of Design and Innovation

Both of these disciplines must be adopted for success.

In my first article for Inc last year, I wrote about "convergence." I'd like to offer another example of convergence that's taking place these days: the convergence of design and innovation. Just as most approaches to process improvement (e.g., PDCA, Six Sigma) pretty much have the same roots in the scientific method which has been around for a hundred years, so too can most methodical approaches to design be seen as pretty much covering the same bases.

Structured approaches to innovation have been popping up over the last few years as well. Innovative "buzz" started some years ago, leveraging creative techniques that have been around for decades. But it's only in the last five or so years that a new element has been added to most definitions of innovation. Some say innovation is "bringing new ideas to life," or "the act of conceiving new ideas and bringing them to market," or "commercialization of differentiating technology."

The common approaches to design have always had a flaw, though. They focus on how to "design it right the first time," but they don't address the answer to this question: design what? Design methods assume you have a design in mind. Similarly, most approaches to innovation lack an answer to the question of how to bring the creative idea to life -- or to market. So as with most things -- they start discretely and ultimately converge. Today we are seeing the convergence of innovation and design. Innovation (or creative techniques) fills the gap of "what" to design, and design methods allow us to solve the problem of "how" to bring the creative idea to life.

The most popular approach to design in business over the past ten years has become known as "designing for six sigma." There are a few different variations of design for six sigma, but they're all fundamentally the same. On the other hand, there are no widely accepted methods for innovation yet. Some have tried, but nothing has really taken hold -- until now. For the past year my firm has been applying a methodology we call, D4. The four D's in D4 are: Define, Discover, Design and Demonstrate.

We bill D4 as a new methodology, but I have to share a little secret: only the first two D's are really new. The second two are just the old Design for Six Sigma methodologies condensed into two steps instead of a more common four or five. That's because, while it seems obvious to us now, it took quite a bit of time, research and testing with clients for us to realize that we didn't need to start from scratch, but rather just needed to combine design and innovation. The result is D4, and what we've come to learn is that neither design -- nor innovation -- as others know it can really stand on their own. Convergence was inevitable . . . and now you know, too.

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Use and Abuse of ROI

Examine the many ways that the perennial business term is misunderstood.

In several of our columns, we have discussed ROI and its use as a measure to show the contribution of a particular project or program. Unfortunately, the term ROI is subject to much abuse and certainly a lot of misunderstanding. In this column we will capture some of the key culprits.

How's Your ROI?

Unfortunately, many people refer to ROI as a concept of benefit. Some who ask, "What's the ROI on that project?" are not necessarily asking about financial returns but merely the benefit. When someone claims a huge ROI or suggests that you can achieve a very high ROI with a project, they're not necessarily thinking about the financial return on investment. This line of thinking can pose a problem, because the ROI concept comes from the finance and accounting professions, to which ROI means financial ROI. Using the term improperly could undermine a relationship with that key person in the organization, the chief financial officer.

The CFO Is Your Friend

The concept of ROI is now used to measure the impact of a variety of projects and programs, having moved beyond the traditional use for return on investments in capital projects. When ROI is pursued in the traditional way, the CFO will be interested. However, we're using a term and a concept that the finance and accounting communities have used for more three hundred years and are applying to non-capital expenditures. This means we must explain our use of ROI to the finance/accounting person, or in some cases the CFO -- explaining what it is and what it is intended to do. We need to describe our methodology, including the standards and all the steps taken to make it conservative and credible. The ROI Methodology that we propose is very CFO-friendly. When the CFO or finance and accounting team takes time to understand how it works, they appreciate it. That is very important to the success of our projects.
It Is Only One Measure

A huge misunderstanding is that ROI is everything for a program or project. In reality, it is only one measure. The original developers of ROI to measure the payoff of capital expenditures (professors and economists) stated that ROI was an imprecise measure, suggesting it be used in conjunction with other measures (never alone) to make decisions about the investment. Within the ROI Methodology, ROI is only one of six measures. We measure reaction to the project, learning that is necessary to make the project work, application of what is involved in the project, the impact of the project on one or more business measures, and the actual financial return on investment of that impact. The sixth type of measure is the intangibles, those measures we cannot credibly convert to money with minimum resources.
"I Don't Believe It"

Many executives find that very high ROI values are unbelievable. Their reference point is the typical capital investment, where the hurdle rate in North America is typically in the 15 to 20 percent range. When a project delivers 200 to 300 percent or more, the common reaction is disbelief. But high values can and do happen. When people are involved, and they are in most every project, they can reap significant successes. This is particularly the case in programs that involve the entire work team.

An ROI might be a seemingly unbelievable high value, and that's when we point out that the methodology's Twelve Guiding Principles are built on a very conservative philosophy. This conservatism helps us when we try to convince key decision makers that, "Yes, it is a large value, and it is probably even higher than reflected here. Because of our conservative approach, we have understated the value. Incidentally, we also have intangibles, which are not in the ROI calculation but represent more value."
Okay, Whom Are We Going To Shoot?

At the opposite end of the spectrum -- when the ROI is negative -- executives often want to find out who is responsible, prevent the disaster from occurring again, and punish those who caused it. Unfortunately, this is not the right approach. The ROI Methodology is a process improvement tool. If the ROI is negative, we have a tremendous amount of data that tells us what we can do to make it positive. The complete data set uncovers the problems, identifies the barriers, and pinpoints the enablers to success. Thus, we have a clear understanding of what we must do to make it better. The headline on our study is not, "Who's the culprit for this terrible ROI?" Instead, we say, "Now we know this project is not delivering the value we thought it was, but we know what to do to make it work."

It Is All About Process Improvement

One of the greatest impediments to the use of ROI is this concept of process improvement. There is considerable fear about the consequences of an ROI evaluation. A negative ROI might mean a lack of funding, a lack of support, or a reduction of influence. In extreme cases, people fear the loss of their jobs. This is not (and should not) be the case. The use of ROI in a non-traditional setting must be pursued only from the perspective that it is evaluation of data. It is collected to improve projects, not necessarily prove their success.

For more information on the ROI Methodology, please contact the ROI Institute by visiting www.roiinstitute.net. And do not forget, ROI is much easier when it is automated, and some of the best automation for ROI comes from iDNA. For more information about them, visit www.idnausa.com.

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Collaboration

To COL-LAB-O-RATE. The American Heritage Dictionary defines collaboration as: "to work together, especially in a joint intellectual effort."

Through my research over the past few years, I have come to appreciate the power of collaboration in ways I never did before. I have been amazed to learn of some collaborative efforts of the past -- mostly by people that history has painted as great individual writers such as C.S. Lewis and J.R.R. Tolkien who years later were discovered to have worked together.

I've also come to learn -- or perhaps realize would be a better term -- that I accomplish nothing without collaboration. My study of how innovation really occurs, how we generate new ideas and how we make decisions, has convinced me that a deeper understanding of collaboration will help us all become better at just about anything that requires the use of our intellect. That's because the belief that we simply figure it out when called upon, or that we just come up with great ideas out of the blue, is a pure fallacy.

Few if any really meaningful thoughts are not the byproduct of considerable collaborative effort, often spanning great periods of time, and often happening in ways we don't recognize. The "epiphanies" that we have really represent the moment in time when all our collaboration comes together. We take in information from many sources, and our brains combine that information in many ways. Then often our best work happens between about 11:00 PM and 6:00 AM, when we're sleeping; ultimately when the right connections are made, the epiphany occurs. The more volume of collaboration we have, the faster the process plays out. But that doesn't mean you have to team up with a lot of people to collaborate. That's just one way of getting it done. Here are some others.

Collaboration with myself. This was perhaps one of my greatest epiphanies: I collaborate with myself. The mechanism that allows me to collaborate with myself could be called "separation in time," because I think about something, analyze it, research it and then I do something else. All the while, I'm processing information in the background, especially when I sleep. Then at some other point I come back to the problem at hand and think some more -- but now I'm combining my fresh thinking not just with my past thinking, but with all the new connections that have been made in the interim.

Collaboration with historical figures. I can collaborate with historical figures -- dead ones in fact -- by reading and understanding their thoughts. All great thinkers of history, whether we're talking about Plato, Ben Franklin or Robert F. Kennedy, collaborated with themselves and others before coming to their moments of brilliance. You can collaborate with them by picking up where they left off, by combining their wisdom with yours and by learning from them.

Asynchronous collaboration with others. It's not at all unusual for you to be working on the same problems as others -- even your competition. You can collaborate with them by studying what others do and why -- completely unknowing to them. You can also asynchronously collaborate with others by working on the same problem separately, before combining your efforts, or by handing the problem off from one to the other as some big companies are doing. Why not work on and think about a problem together continuously with different teams stretching across the globe on a 24x7 basis?

Open collaboration. This is a concept that's catching on fast, mostly due to the rise of the internet. Open-source code refers to writing computer program code that's open to developers to build and improve upon. Proctor & Gamble has a different kind of open innovation program, which entails sharing its challenges with a network of about 2 million people around the world to help it solve problems faster and cheaper than in the past.

Synchronous Collaboration. This is the type of collaboration most of us know and understand, but it actually should be a more rare form of collaboration than that which I've described above. The reason is that this type of collaboration is inherently limiting -- you only have the opportunity to tap into the thoughts and knowledge of those in your immediate circle. But sometimes this type of collaboration is beneficial if not necessary, so it should be exploited as well.

So the next time you have a problem to solve, think about the kind of collaborative efforts that will help you get to a solution the fastest. Look at the problem from all angles, and recognize that there are many collaboration pathways available. Use them all if you can, because you've got nothing to lose and everything to gain.

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Intangible Measures

If certain data cannot be converted to money, are they still important?

Many organizations are realizing the importance of intangible measures. Sometimes labeled soft data, intangibles can be powerful, elusive, and mysterious. Some believe they cannot be measured; others believe they cannot be converted to money. In most cases, both of these viewpoints are misguided. Intangibles are part of what drives organizations and their projects. What makes them important is the fact that they're often linked to more tangible measures.

Consider these intangible items:

* Adaptability
* Awards
* Brand awareness
* Career mindedness
* Caring
* Collaboration
* Communication
* Conflict
* Cooperation
* Corporate social responsibility
* Culture
* Customer complaints
* Customer response time
* Customer satisfaction
* Decisiveness
* Employee complaints
* Engagement
* Execution
* Image
* Innovation and creativity
* Job satisfaction
* Leadership
* Networking
* Organizational climate
* Organizational commitment
* Partnering
* Reputation
* Resilience
* Stress
* Talent
* Teamwork

These items drive projects such as leadership development, product development, marketing, promotion, certain external programs, technology, quality, and many others. They're also linked to tangibles. For example, customer satisfaction is often linked to sales growth; employee engagement can be linked to productivity; and job satisfaction can be linked to customer satisfaction.

So how do we measure intangibles and place a monetary value on them? Before we examine these two questions in detail, let's define "intangible." An intangible measure is a measure that cannot be converted to monetary value credibly with limited resources. If a measure can be converted to money, then it becomes tangible, but the conversion must meet two important criteria. It must first be credible, or believable -- particularly from the viewpoint of executives who will need to make decisions about it. Second, the value of the measure must be reached within a reasonable amount of time and without excessive use of resources. When we accept that the measure cannot be converted with the resources we are willing to commit, we must leave it as an intangible.

With that definition, the task becomes easier. We need to identify the measures that we can convert in a reasonable amount of time -- with a credible value. Beyond that, it is a matter of providing extra resources to make it happen, which small to medium-size organizations are generally not willing to do.

Our philosophy is that anything can be measured. Think about it: If there is no way to measure it, then why be concerned about it? Measurement might not involve simply counting. Some intangibles, such as complaints, can be counted, while most fall in the perception category, including most of the intangibles listed above. Almost every one of these could be measured on a perception basis, taking data from the most credible sources. Customer satisfaction, a concern in any organization, is based purely on the perception of customers. The degree of networking is best reported by those involved in the networking. The reputation of the organization is taken from the people you want to influence -- where your reputation makes a difference. Measurement systems vary, but typically they are point scales ranging from three to ten levels, sometimes even more. The 5-point scale is the most common.

The problem with these types of measurements is that there are often no standards, making it difficult to benchmark with others. This might not be a problem, because what is important is to determine where you want a measure to be. So comparing this figure to someone else's might be irrelevant. For example, on a 5-point scale where 5 is outstanding and 3 is average or moderate, a 4 might be your goal, even though the rest of the world is at 3. Our premise is simple: If it is important, it can be measured. If it is a phenomenon that can be witnessed or observed, it is measurable. Yes, it might be perception, and that's okay. After all, customer perception drives businesses, employee perception drives major human resources investment, and the perception of a brand drives value.

Can we convert intangibles to money? For example, is there value in a brand? Large companies, such as Coca-Cola, place a huge value on their brands. This can be accomplished in a variety of ways, including calculating sales generated by brand awareness and then assigning value based on what it costs to achieve that brand awareness.

In order to place value on an intangible (or at least a measure that is perceived to be an intangible), first find out what others in your industry have done. Try searching industry reports, available benchmarking, and research databases. (One of our favorites is eric.ed.gov, or ERIC. This database contains studies, articles, and reports published in trade magazines, research reports, scholarly journals, and other professional publications.) Many professors and other researchers spend a tremendous amount of time studying and researching the value of intangibles, publishing their findings in journals. The Internet has made this previously hard-to-find material easily accessible.

Another valuable technique is to ask those who are most experienced with the intangible. Contact individuals within the organization who work with the issue on a regular basis. Their expert input certainly provides a good starting point. Of course, the credibility has to be there. Do they have a significant amount of experience with the issue? Do they understand the full scope of its impact? Are they biased? Sometimes experts want the number to be large or small, depending on their perspectives. Do they have a track record of accuracy? Have their values been checked by others? Have they published their findings? Do they have proper credentials, education, and certification? It pays to address these questions before soliciting expert input.

Finally, calculating the monetary value can prove helpful. This is not preferred, as it is often the most time-consuming method. For example, a few years ago, Sears wanted to place a monetary value on employee job satisfaction measured in feedback surveys. Using store-level data, the Sears team linked job satisfaction to customer satisfaction and then linked customer satisfaction to store revenue. Then they calculated the profits from the additional revenue. In essence, Sears could show the monetary value of increasing job satisfaction. This linkage took about six Ph.D.s nine months to develop (or perhaps it was nine Ph.D.s six months) -- obviously a large expenditure of resources. The project required serious analysis involving extensive data. However, because of the size and scope of the company and the importance of understanding what makes the stores profitable, Sears needed to know this value and was willing to allocate the resources.

Some organizations place a monetary value on customer satisfaction. To do this, they track what happens when customers are dissatisfied. They record the actions taken by customers after the complaint is resolved (if it is resolved). For instance, does the customer return? This thought process creates a decision tree analysis, a technique used to measure the value of customer satisfaction. The analysis takes considerable expertise and resources, far beyond the limitations of many organizations.

The above example takes us back to the original definition of intangibles. If it takes too many resources to convert them to monetary value, or if the conversion is not credible, then leave them as intangibles. After all, everyone knows intangibles have inherent value, even those that cannot be converted to money.

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