Return on Outcome Versus Return on Investmentby Stacey Barr
ROI is a financial metric that demonstrates something was worth doing. But not all things worth doing lead to financial results.
Return on investment, or ROI, measures the net return or gain from an investment. But it does that in financial terms only. Not all investments are made for financial return. The return that a spinal injuries association wants from donations is not financial gain, but better quality of life (such as greater autonomy and more employment options) for people with spinal damage.
On the CMO blog, Dr Chris Baumann and Iggy Pintado argue for a new kind of measure, Return on Outcome. In their words:
In reality, we argue KPIs are about a desired outcome. For example, a mid-level manager is tasked to design a marketing plan for a new product, or a plan to rebrand a dusty label, or conduct marketing research on electric cars. Yet they are seldomly ‘attached’ to a specific ROI. No, the overall theme is Return on Outcome (ROO) – there is an expectation to deliver a certain outcome, so that marketing plan, for example. So why not name it as such, ROO?
ROO, or Return on Outcome, is aimed at compensating for the limitations of ROI.
Is ROO an alternative to ROI?
There are different ways to calculate ROI, but in its basic form it goes like this:
([Financial gain from investment – Financial cost of investment]
/ [Financial cost of investment]) x 100
We all know that money is invested each year in building, upgrading and maintaining public roads. We want to know that it’s money well spent. It’s money well spent when the improvements to the road system create more financial benefit than it cost. For example, one of those gains is reducing the cost to drivers of traffic congestion:
“After identifying and ranking 20,375 traffic hotspots in the UK, analytics company Inrix puts the cost to drivers of time wasted in congestion at an estimated £61.8bn over 10 years.” — The Guardian
The UK government claims an ROI of 300% on road infrastructure management. But does that mean that roads are only worth developing if they have a direct financial ROI? It would be great to measure if the intangible outcomes for society, like less stress in getting to work on time, or more free time for family and recreation, are worth the investment too. But does ROO do that?
ROO doesn’t match the logic of ROI.
Notice that ROO doesn’t follow the same logic as ROI. With ROI, we are directly measuring the return we get relative to the investment needed to create that return. But with ROO, it implies we measure the return on outcome. We don’t get a return on an outcome, the outcome is the return. So ROO is not the same form of measures as ROI, and it’s also not really a sensible concept.
We get an outcome as the return from investment, too. The return in the ROI formula can be financial, but it doesn’t have to be financial. It just has to be measurable.
The need is not for another measure, like ROO, but for a way to define non-financial returns in the ROI formula.
It can still be ROI, but with a non-financial measure of the return.
I think the true intent of Baumann and Pintado’s ROO article is that we shouldn’t judge success on financial results alone. We should also value the non-financial, intangible outcomes of investments.
If you knew how much of your annual tax payment was spent on roads, and how much that money saved you from sitting in traffic or having a traffic accident, wouldn’t that give you a sense of whether it’s a worthwhile investment?
We can still measure the non-financial outcome we get, and compare that to what we paid for it. It’s not quite as easy as the dollar-for-dollar percentage that financial ROI gives us. But we all have an innate sense of whether something is worth what we paid for it. The trick is to be very clear about what those non-financial returns are, and measure them as directly as we can. (And that’s very possible, if you follow these tips to find meaningful KPIs for intangible goals.)
The question behind all these ROI measures is “was it worth it?” If we don’t lose sight of that question, then there are more ways to answer it than just financial ROI.
Does Return on Investment always have to be financial? No, but we first need the skill to meaningful measure intangible returns. [tweet this]
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