Monday, April 4

ROI and Productivity: Industrial Age Metrics

We have two holy grails in this industry, ROI and Productivity.

ROI and Productivity (ROIP) are great for talking about manufacturing widgets. They are even great for talking about call centers. But value creation? Leadership? Relationship management? Innovation?

Would you use such metrics for an acquisition? How about a hire of a key corporate officer? Would you make a career switch to improve your personal ROI or productivity? Would you use ROIP to make the case to develop a web portal for your enterprise? How about ROIP for picking out what to have for lunch?

With these as goals, we are rushing headlong into the 1950's. I distrust generic metrics anyway. But these seem to especially trap us in the wrong decade.

6 comments:

Dub Dubs said...

Clark: I'm not sure I totally disagree, but here's a different view. Admittedly I'm biased because this is what I do.

Trying to use ROI to hire a CXO would seem incredibly OCD. However, using ROI for business decisions involving larger capital expenditures seems reasonable. While I'm not so afraid of the 1950's, I am concerned that we learn our lesson from the 1990's. Back then, IT was considered a source of economic value add. They promised efficiency, but didn't always execute, often at a huge cost. For many of these companies that ignored basics of business finance, they disappeared in 2000.

As you say, great for widgets and call centers. Does ROI create value? Perhaps not, but the absence of ROI can certainly destroy a financially undisciplined company.

Clark Aldrich said...

I believe ROI is one factor, but seldom THE factor for any management and above issue.

I agree completely no company can survive without fiscal discipline. But nor can they survive with just focusing on lowering costs.

May I ask you, what is the best tip or tool you have come across recently to help measure ROI?

Dub Dubs said...

Clark: Let the CFO run the company and you are doomed to failure and boredom.

In my experience, ROI tools are always "tweaked" for every engagement. Unfortunately (or fortunately) I work for an organization which created its own tool and is proprietary.

My best tip for CFO buyoff: make sure that your NPV caclulation uses their interest rate assumptions and is valid. Then run the ROI by the controller (if they support you) and identify weaknesses in your ROI prior to presentation to the CFO. NPV is often the first thing a CFO looks at and when try to calculate if I'm wrong in their head, I'm regurgitating the advice I got from the Controller.

Dubs

Clark Aldrich said...

This might be my final thought on the area, a pretend compromise: don't assume a budget holder will get excited about ROIP. If you can get a budget holder to agree in writing (if I can achieve an ROI of x using y methodology, then I will get z dollars to roll out the program), fantastic. But find out before if, don't assume, they care.

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