Dec 31 2009

The Case for ROI Use

Photo: John Welzenbach

When most of us think about effective ways to measure return on investment, our reasoning typically coincides with the view from the top. Or perhaps another way to phrase it is: What ROI figure must we achieve that our bosses will consider robust enough to retain
our humble services for at least another fiscal year?

I'm not really being facetious here. We're all continually in the process of being measured — we're being compared to our peers — all the time. And from a management standpoint, ROI is a key measuring stick.

Within government, ROI generates an entirely different discussion. Some believe it's the wrong standard to apply to the work agencies do. But in that regard, here's a straightforward question: Is ROI really all that different in a government context than when applied in a business context?

Still Sensible

How can an agency be held accountable for proper fiscal management when, let's say, the social services it provides or the help it lends to small and minority businesses (or the food and medicine it distributes to the needy around the world) cannot be directly pegged to a monetary return?

What would happen if any or all of these benefits were taken away? What would have happened if they'd never been initiated? Is there any way to quantitatively answer such hypothetical questions?

Clearly, in many instances, it doesn't apply. Yet that doesn't mean we've settled anything about the value of ROI in a government context. And the Office of Management and Budget apparently agrees because for the past several years it has required all agencies to submit their budgets and activities for assessment through PART: the Performance Assessment Rating Tool.

"PART requires that every federal agency must be able to demonstrate measurable results," says Anne Kelly, executive director of the Federal Consulting Group. "You talk about ROI — that is ROI. PART has made a real difference because now agencies can't just request money; they have to show what they're doing with the money — what impact their budgets are having."

The Treasury Department established the entrepreneurial Federal Consulting Group in 1987 to work with organizations across the government — as well as any state agencies that receive federal funding — to improve overall perfor-mance. And it's definitely having an impact.

"More and more agencies are having to make hard decisions: Is this or that activity paying off or making a difference?"explains Kelly. "And all of this is a good thing, it's a necessity, and it's long overdue. There is a definite emphasis on measuring and showing results, and in particular holding agencies and people accountable."

Taking Responsibility

Accountability, in fact, has become a vital component of almost all government reporting, as it has in business. The concept helps an organization properly evaluate performance, and the process of ascertaining the figures to calculate ROI requires discipline.

Even in the private sector, the real worth of ROI findings is often not directly in the area of revenue or profits but in tangible cost savings that translate into significantly enhanced revenue and profits.

ROI is universally applicable. By statute, once a year agencies must prepare and distribute financial reports — a process that coincides closely with the requirements of companies with publicly traded stock to issue audited quarterly and annual reports about their financial condition and viability.

So accountability factors are already in place, and they include legislative teeth. ROI is one of many measuring tools that can help government entities meet and even go beyond their minimum required reporting obligations.

And today's government accountability requirements don't stop there. Other legislative and executive actions mandate that federal entities must, for example, not only think strategically but also lay out quantifiable strategic goals and then report on how effectively they meet those goals.

Cost-benefit analysis is one strategic factor that figures prominently in viable ROI studies. Cost-benefit reviews are basic analytical tools that both the private and public sectors can effectively use to issue calls for further action.

What would happen if a particular agency comprehensively applied a cost-benefit analysis to its day-to-day functions in performing its mission, then took the analysis a couple of steps further by examining cost and benefit tradeoffs in its various approaches to training and other human-resources functions?

The fact is that many agencies already do apply such analyses and more in meeting their annual and other periodic reporting requirements. Many also use ROI studies to further differentiate and evaluate results.

Value Proposition

At a minimum, by formally obligating those involved in government programs to look closer at precisely what has happened as a result of actions they've taken over a certain period of time, a thorough and well-executed ROI study can have immense value. Could we do better? Are there reasonable prospects of improvement in the near-, mid- or
long-term? Can costs be significantly reduced? Can we reap better results?

The fact is that ROI initiatives — properly targeted and conducted with an unbiased professional approach — can yield significant results for government agencies and taxpayers. If nothing else, ROI results can point the way toward numerous potential improvements, cost savings and greater efficiency in specific government programs.

And that serves to underscore the perennial value of ROI in just about any organization — public or private.