By Frank J. Rich
The pneumonic—ROI—is generally understood for its universal application to investment analysis. Return On Investment is so common a term that most know it without thinking, or by association with idiomatic synonyms such as: the bottom line, the net return, the results, etc. A few, however, have written to ask what it means, thus; this brief discussion of what it means to me.
ROI has a traditional character; it measures the value of an investment, usually in a comparative analysis. That is, it is most often used to compare the value of one investment to another. The simple methodology reveals a number that aids a binary decision—shall I choose investment A or investment B?
The formula in its typical application is as follows:
ROI = (Gain from Investment – Cost of Investment
Cost of Investment
Despite its obvious use in judging the worthiness of comparative investments, my interest in a focus on the term means to take a detour to another aspect of the term in the organizational vernacular. Perhaps, more than any other communication in the meeting rooms and hallways of organizations worldwide is the groaning over the lack of “necessary” resources to accomplish stated goals. In reviewing the usual rhetoric we find two fundamental forms of this complaint:
- We’re not able to achieve the goal because “those in ______”, or the “technology in place” are not capable of getting the job done.
- I need “__________, but it’s not in the budget.”
At the root of achievement is the desire to accomplish something in spite of the circumstances. We have all seen athletes, who when stripped of key players rise to a level of play that compensates for the loss of them. It is amazing to see how many goals a hockey team scores when down a man because of penalties. How is it possible for four players to outplay five? The first emotion when a team goes down a man is: “Oh no, we’re in trouble now, at least for the next four to five minutes.” Yet, those that do score under these circumstances, and regularly, do so for one underlying reason—they have recalculated the gain and not the loss.
Similarly, we hear from basketball players when confronted with a tough opponent, that individuals must “step up” their game if the team is to win the game. The postgame interviews usually hear the same statements: “Our guys just stepped up and gave us the boost we needed.” It is no less the model of achievement necessary to all organizations. Why then, do we continue to hear the grumblings listed above?
In our efforts to secure the market advantage we hope for, indeed, we have planned for, organizations suffer from a fundamental flaw; they do not consider the power in the ROI. Not only do people refuse to “step up,” they consider that doing so is at greater risk to them than the alternative—hiding. Consequently, a significant percentage of workers are hiding their talent and skill from others for fear of failure on some level. It is easier, and more common, to complain over the lack of resources.
Let’s consider a revolutionary statement: “The resources you seek are not only available to you, but free for the asking.” Do you believe it? I can guess that most do not; after all, it’s not in the budget, right? But an even greater force than the dreaded budget is the “will to win.” Organizations are formed to win, or succeed at achieving their goals. Why would they conspire against themselves by not applying the resources necessary to that end? The simple answer is that they wouldn’t, not if the path to achieving them is clear. Is the fog clearing a bit now?
In truth, no organization but those absent good sense would deny the resources necessary to achievement. If they are short the necessary capital one could conclude that this is a battle for another day. Or, alternatively, think creatively about how to get it. Perhaps, it requires more of all stakeholders, a partnership of sorts not unlike a hockey team that rises to meet the challenge of diminished resources.
The opportunity in the revolutionary statement above is the simple truth in it. All that you desire is available to you; it is hidden in plain sight. All that is required is that you present the ROI. If the gain from the investment in resources is greater than the cost, and not in violation of minimum revenue standards (most pharmaceutical companies will not pursue products of less than 500 million in revenues), then the door to those resources usually swings wide.
Imagine for a moment that you were to petition your technology manufacturing company to build a new cell phone, even though the company had no experience in the field. One can only imagine the guffaws that return to you. But after you tell them that the functionality and user friendliness of the new phone would far outstrip any on the market, that it will outperform all others in internet access speed and resolution, that it’s design would enable quick and easy use of it, that it would benefit from more applications from third party vendors than any other, and that its cool design would make it a fashion must. And finally, you outlined an ROI that demonstrated the new phone would outsell all others 10:1.
I wonder, just how did Apple decide to build the iPhone? They calculated the gain, I suspect.