Have you ever been frustrated by prioritization decisions that focused on a single, hard benefit in the return on investment (ROI), without looking at the bigger picture? If so, you’re not alone and the comprehensive return on investment (CROI) may be what you’re looking for. Too often, executives make decisions based on a single factor – often a hard financial benefit. Critical business decisions like the traditional, anticipated return on investment ignore the human factor and organization development opportunities. Consideration of the comprehensive return on investment may yield a very different investment decision.
In my contribution to Business-Driven PMO Setup, I wrote about the importance of focusing on the Comprehensive ROI:
The complete return on investment for a project looks far beyond the cost savings, efficiency improvements or other direct benefits of the project deliverables. The servant-leader project manager recognizes that equally important are factors such as employee morale, staff development, sustainability of the solution and net impact to all stakeholders.
Unlike traditional ROI analysis, the Comprehensive ROI encompasses the full benefit.
Traditional ROI (Return On Investment)
Traditional ROI is calculated as follows: ((Profit – Investment) / Investment) and is therefore expressed as a percentage. For example, if you’re project nets a $500 increase in revenue and cost you $450 to complete, the ROI for your project is ($500-$450)/$450 or 11%. However, in focusing solely on the hard benefits, such as increased income, this calculation does not accurately reflect the Comprehensive Return On Investment. Traditional ROI does not capture the benefits from the effort of a project or investment.
Comprehensive Return On Investment (CROI)
A comprehensive return on investment assessment (CROI) includes the benefits from the effort when calculating the final percentage. For example, did the project team develop new skills during the design and development phases? If so, what would those skill have cost you to develop in the team, were it not for the project? What about employee engagement? Is your human resources team likely to document less turnover or decreased total costs through an appropriate investment and budget? On the other hand, if you choose not to invest properly for the project budget, are you accounting for the anticipated turnover, burnout and associated costs in your ROI?
A Comprehensive Return On Investment Example
Let’s look at an example of how reflecting the Comprehensive Return On Investment could impact your decision. You can follow along in this example with the attached spreadsheet (Excel 97-2003 or Excel 2007 format) and template. Pretend you are the project manager for an effort that requires the following investment:
|Project Assets||$ 10,000.00|
|Total Investment||$ 13,500.00|
The anticipated benefit is:
|Increased Revenue||$ 15,000.00|
Therefore the net profit (Increased Revenue – Total Investment) would be:
Based on these numbers, your traditional Return On Investment would be:
$1,500 / $13,500 = 11%
Now, as a better educated, servant leader, you expand on this traditional ROI analysis. Instead of stopping at the hard benefits of the final deliverable, you recognize the additional benefits from the effort, such as:
- Project Manager Development: The skills developed by 3 different project managers during their efforts on this investment were equivalent to a $1,500 training course, each. As a result, you add in this benefit, valued at $4,500.
- Intern Leadership Experience: An intern on the project would gain exposure to other leaders in the organization and develop skills equivalent to a $1,500 leadership development course.
- Employee Engagement: In speaking with your human resources department, they also estimate a reduction in the hours they spend with employees on the project, because of increased engagement. So you add a $320 benefit.
- Productivity Improvements: You estimate 300 employees, saving 15 minutes, do to productivity improvements realized from the project. Assuming $80 / hour average rate, you add a $6,000 benefit.
You add these benefits from the effort of the project and investment to your original profit:
- Original Profit from Traditional ROI: $1,500
- Additional benefits from comprehensive ROI assessment: ($4,500 + $1,500 + $320 + $ 6,000) = $12,320
- Your comprehensive benefit is therefore: $12,320 + $1,500 = $13,820
The resulting, Comprehensive ROI is ($13,820 / $13,500) = 102% – a big difference from the 11% traditional ROI.
Understanding the Real Value
Too often, leaders will use a low ROI as an excuse not to take a risk. That’s not to say every negative ROI forecast that produces a positive CROI should be executed. However, a shift from a slightly positive ROI to a much more positive CROI may be a great case to pursue and convince otherwise hesitant executives. Regardless of the result, it is your role, as a servant to the organization, to ensure leadership is equipped with valid and comprehensive data when making decisions. The use of a comprehensive return on investment in addition to the traditional ROI analysis will ensure you are providing this full picture.
Question: Have you seen a traditional ROI assessment kill a great opportunity? Have you used a comprehensive ROI before to convince key decision makers?