Rethinking how we measure 'return on investment'

Written by Joe McKendrick, Contributing Writer

Is the old saying, “You can’t manage what you can’t measure,” still true in today's networked enterprise?

'ROI' has been the most important acronym in business for decades. Return on investment guided management decisions all through the industrial and post-industrial eras. However, are ROI measurements still relevant in today's networked business era?

It's time to re-define the meaning of 'ROI,' say Jon Husband and Jay Cross in Chief Learning Officer. Current ROI measurements may not adequately capture the value generated via the networked enterprise.

"Life was simpler when you could measure performance by counting the number of widgets produced, shipped or sold. Given that the networked workplace and markets are here to stay, how can managers begin to adapt and refocus long-standing mental models about what and where to invest precious energy and time? An effective response to this conundrum is qualitative assessment."

That's because while traditional ROI tracks and measures tangible assets, much of the value generated in today's networked enterprises is in intangible assets -- such as brand, reputation, ideas, relationships and know-how. "These assets don’t appear on the balance sheet, but more and more often they provide a corporation’s competitive edge," say Jon and Jay. "Organizations that make decisions based solely on things that are sufficiently tangible to be counted directly might as well consult a Ouija board to set their goals. Leaving the most important sources of value out of the ROI equation is not conservative — it’s foolish."

Instead, Jon and Jay advocate a new mode of measurement, called "return on investment in interaction," or ROII. This calls for qualitative assessment that looks at the following variables:

Increase in network size: As networks grow, collective knowledge will grow.

Increase in internal network connectivity: Increased connectivity enables organizations to improve business and market intelligence, and internal cross-silo knowledge.

Increase in connection to valuable third parties: The ability to track issues discussed by external parties.

Increase in number of projects: Increased project activity "creates value as people learn to work together effectively in networks."

Metrics are important to measuring the performance of a project or program, and if anything, managers will need to pay more attention than ever before. However, value is increasingly being generated within the knowledge and the networks that are part of today's business environment. The challenge is finding ways to capture and measure these new metrics. ROII is a smart way to provide more visibility into the value these approaches are contributing to the bottom line.

This post was originally published on Smartplanet.com

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