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ROI and the Small Business Owner

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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.

Last updated: Jun 11, 2008




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