Are you measuring your business with the right management equation?

Written by Heather Clancy, Contributor

I supposed you could call one of my specialty areas of business coverage the channels of distribution used by high-tech vendors to get their products into the hands of their customers. The very entities that worshippers of the successful direct-selling company Dell have sought to disintermediate at pretty much every turn of the economy, and that that same company now is wooing the same fervor as its counterparts in the computer hardware business.

One of the darkest periods of Hewlett-Packard's past, as an example, was when Carly Fiorina joined the company and began tampering with the very relationships that had given the giant computer company its competitive edge, all because she believed the "numbers" (on paper at least) suggested that it would be cheaper for HP to sell direct. Fortunately, one of the things that current-CEO Mark Hurd addressed when he took over was repairing those same relationships.

The simple fact is, all the financial calculations suggesting that selling a product without a dealer or distributor or reseller or whatever you want to call them fail to take into account plenty of intangibles. Such as the established customer relationships that those sales channels bring to the table, which affects marketing costs; or years of sales expertise in specific vertical markets; and so on.

This is all in the way of saying that things aren't always what they appear, especially when it comes to consider things like when an investment is too much, or too little.

It's also while I highly recommend reading a great article that I just found on the Marketing Profs site, aptly titled "The Pursuit of ROI: Will It Lead You to Rags or to Riches?"

The author's thesis is pretty simple: The current economy is pretty much nothing that most of us have ever seen before. Therefore, it would be pretty silly for business executives to use the same metrics for considering return on investment or measuring performance of marketing campaigns and other initiatives. That's because there is one big variable missing from the equation, and that is risk.

The essay cites several anecdotes where what's on paper isn't necessarily the best strategy, and it provides several suggestions for helping avoid the mistakes suggested by these examples. They are:

  1. Remember to adjust your ROI considerations for risk when assessing a new marketing initiative or measuring its performance.
  2. Don't let senior management dictate a generic required rate of return for marketing activities. Different activities will carry different risks and should therefore carry different ROI.
  3. Companies should begin measuring the impact of risk with an eye to creating new models of measurements for the future.
  4. Ownership structure (whether or not a company is public vs. private) will have a profound impact on the risk part of the equation.

The crux is this: Smart managers will reconsider the risk and ROI associated with investment they're making to stimulate growth, especially in this bizarre economic climate. Aside from this article, you might want to check out other material from the author, Sharan Jagpal, who is a professor of marketing at Rutgers Business School. His latest book is "Fusion for Profit: How Marketing and Finance Can Work Together to Creat Value."

This post was originally published on Smartplanet.com

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