SCRM's Dirty Little Word is Really Not so Dirty

Updated: May 18, 2010

Why ROI is a dirty word

Too many folks view ROI as something evil (or evilish) because it provides a financial insight into a corporate initiative. A common belief is that the money test creates a undue hurdle that has to be jumped before folks can get on to meaningful work of social business or other initiatives. Well, sorry, but if you can't show sufficient value for an initiative then your company should invest in ones that will generate more potential revenues or profitability.

Why ROI really is not a dirty word

There's a misunderstood piece to the valuation puzzle that folks need to understand to get beyond limiting views about ROI. First, you need to understand ROI is just one of three factors in the valuation question and not necessarily the most important. You start a valuation by performing a cash flow analysis of prospective gains and costs. Getting to a realistic forecast requires the inputs of a realistic set of defendable assumptions. These assumptions come right out of the strategic vision and definition. Using Lawrence's example in his article, it would include insight into ROC across your customer base.

Once you have the cash flows, then you consider the time-value of the money to determine the net present value (NPV). The NPV allows you to recognize it might take time for an initiative to gain traction and return a positive payout - and that time is incorporated into the valuation determination through the application of appropriate risk (a.k.a., the discount rate). The more uncertainty in your assumptions, then the higher the risk.

What this means is that the overall valuation is run hand-in-hand with the strategic vision and definition, as well as tactics. To Wim Rampen's comment (in Lawrence's article)

"[A]ny business cases should not only be measured against financial ROI, but against strategic-outcomes too."

If you perform your valuation properly, then the (financial) ROI is directly tied to the strategic outcomes. The strategic definition is the verbal expression of what you want to accomplish while the valuation is the numerical view of the strategy.

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