R.I.P. the decades of R.O.I., and welcome R.O.R.

For literally decades, the notion of return on investment, or even more specifically return on invested capital (R.O.I. either way) was the gold standard for justifying a business decision.  If the return exceeded the investment enough (also weighing risk, disruption, and many other factors) then it would get the green light for funding.

This was, and is, especially common in investments in enterprise software. But I predict we will see a (long overdue) rapid decline in the use of R.O.I. as the gold standard for project justification for these four reasons:

1) Smart organizations have figured out that you can justify almost anything with R.O.I. math.  Someone recently said “if you do project X at a cost of $2 million and it saves you $5 million per year, then you should do it, right?” Many people would say yes, I would say there’s nowhere near enough information.  For large companies, a $5 million savings could be a distraction to more important activities, just to name one reason, but too often I see these sorts of projects approved.

2) The metrics are often very squishy.  Organizations don’t generally have great metrics to begin with, but especially when anchored to the process view (which is often very volatile, with a short half-life), and when the process changes, organizations end up comparing apples to oranges.  The simple solution there is to use the business capabilities lens described in the pages of Rethink, starting with the “what” outcome you are measuring, and then looking to the “how” of process.

3) There needs to be larger context setting.  What overall goals is the department, division, or enterprise setting?  It isn’t enough just to cover costs for a lot of projects.  These days, it’s about staying ahead of competition, differentiating, and knowing who your most valued customer is (see #4 below).  If the $5 million in savings in #1 above doesn’t connect to a key performance indicator, you need to be certain that it’s not  going to be too distracting or disruptive in an area in need of much more attention someplace else and the “shiny object” project selected out of context from the rest of the organization always has that risk.

4) Many organizations need to look at their R.O.R., return on relationship.  How much do you spend on each customer and how much do you get in return.  Someplace in almost every industry, their is a vital set of relationships, sometimes it’s partners, sometimes it’s customers or sales channels, and sometimes it’s employees and you have to know what is most valuable to your most valued relationships so that when the least valued relationships whither, you don’t worry, but when you see blinking red or yellow lights in the most valuable relationships, nothing can get in your way of fixing that.

So as we enter this new decade, and hopefully start to get further out of a recession, start to measure your R.O.R., do better context setting in terms of the value of a project to the overall, be sure you have concrete metrics, and be leery of the R.O.I. math of the one-off “shiny object” projects.

-Ric