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Forget ROI, There’s a Better Way to Determine Investment Value

The standard cost-benefit analysis of ROI doesn’t work in all situations, especially with the technology space changing so rapidly today. It’s time to look at another formula, called value on investment (VOI).

CI Staff

Anyone involved in making business decisions is familiar with return on investment, ROI, the common financial measure used to evaluate the return on an investment.

We often use the following formula, and I understand why we use it. It’s a simple, straightforward, and objective cost-benefit analysis.

Let’s take a quick look at a corporation that is considering an investment in video conferencing technology to reduce the costs of travel. Using the standard ROI model, it’s fairly effortless to calculate.

The “gain from investment” would consist of savings from the elimination of travel (plane tickets, mileage, car rentals, hotels, meals) and the “cost of investment” would be the price of the video conferencing system along with ongoing costs such as system maintenance and bridging services. If the savings are greater than the costs over a predetermined timeframe, ROI analysis would suggest they make the investment.

VOI would agree that a video conferencing investment should be made, but the timeframe of the value realization is quicker than ROI suggests. Presenting at your local office in a comfortable environment, sleeping in your own bed and spending more time with your family rather than traveling is a work/life benefit that’s difficult to assign a cost.

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Additional “soft” value drivers include a green footprint, acceleration of strategic projects, employee demands for flexibility and increased productivity. While these benefits are difficult to define, it’s important to understand that the entire value of an investment is more complex than dollars and cents.

In the previous example, VOI showed that the technology investment had a quicker value realization than the ROI analysis. However, it’s not always so clear.

Let’s look at an example in higher education, where a university desires to create an online learning program. If the university invests $210k to develop a small professional recording studio and then enrolls seven more students at $30k/year tuition, you have a one year ROI.

But what about the subjective costs such as professors having to rewrite their lesson plans and adjust their teaching styles? How many professors will be unhappy with this change? Will the university lose some of their best and brightest instructors to competitive schools that don’t require them to participate in online learning?

Again, the total costs are hard to define as the investment is much more than just the cost of the equipment, software, and marketing. There are also numerous VOI advantages that need to be taken into account such as student desires and expectations for various learning methods, the university’s reputation as a forward thinking institution, and the school’s newfound ability to recruit top-tier students without geographic constraints.

In this case, VOI predicts the costs and returns are both higher than ROI would lead us to believe.

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Finally, there are many situations where a favorable ROI is nonexistent, but VOI would tell us to proceed with an investment. ROI would show that an investment into collaboration spaces does not provide a profitable return, yet thousands of companies focus their internal corporate strategy on collaboration, flexibility, and knowledge sharing. And that’s one of the main problems with ROI.

Organizational strategy is not represented in the calculation. CIO’s, CFO’s, and senior management must understand that intangible assets are just as financially valuable as increasing profits. The ability to attract and retain employees, increase employee goodwill, raise customer satisfaction, and improve an organization’s reputation all indirectly increases a firm’s profitability.

And let’s not forget about the intangible cost of inaction. Just ask Blockbuster and Barnes & Noble how ROI’s suggestion to stay status quo worked when Netflix and Amazon were using VOI analysis to gain a competitive advantage.