Any business, regardless of its size or industry, can benefit greatly from the ability to calculate return on investment. Return on investment (ROI) is a key performance indicator that businesses frequently use to determine the profitability of an expenditure. It’s especially useful for tracking progress over time and removing uncertainty from future business decisions. ROI is used in business analytics and serves as a benchmark for developing future strategies. This allows organisations to determine which tactics are effective and any operational areas that can be improved. Numerous key advantages can assist an organisation in understanding why measuring and analysing ROI can benefit their business and provide a competitive advantage.
In a recent roundtable hosted by Future Processing, Daria Polonczyk, Head of Analysis & Design at Future Processing, Rowan Jackson, Co-Founder and Chairman at Promising Outcomes, and Eric Moe, Chief Operating Officer of Whitefoord LLP participated in a discussion that explored the reasons why measuring ROI has become increasingly important and how businesses can shift their team’s mindset to focus on this key performance indicator.
Why Does ROI Matter for All Businesses?
One of the most obvious advantages of measuring ROI is that a company can learn where they should be spending their money. If an organisation discovers that one aspect of its operations isn’t performing or yielding the desired results, IT executives can consider redistributing funds to a better-performing strategy. This ensures that a company’s spending is optimised, and that money is not being allocated to underperforming activities. When a company starts analysing its ROI, management will be able to set realistic goals based on analytics to see where things can be improved over time. Instead of focusing on the short term, brands can start thinking about the long term and setting and defining goals for the coming year. This enables a business to improve its overall investment strategy and increase brand awareness.
Tracking the return on investment of employees will help a company better understand who to hire and whom to let go. It is useful to understand whether certain employees are increasing or decreasing a company’s profitability. Similarly, this approach can help determine a department’s profitability and highlight opportunities for growth. Finally, it enables a company to modify its strategy based on how its customers behave. Measuring ROI assists brands in determining when to pivot their efforts and the overall impact of their investment strategies. Understanding the value of ROI is essential for business success now and in the future.
How Can Businesses Adopt an ROI Mindset?
While the importance of calculating ROI is obvious in almost every business case, it is less clear where to begin. Before becoming overly fixated on complex models and calculations, it’s best to adopt an ROI mindset. While ROI often gets labelled as a financial measurement that doesn’t look at the total cost to the organisation, it is important to apply findings to help prioritise tasks, compare expected outcomes to actual results, draw conclusions and learn for the next project.
The first step toward understanding ROI is determining what data is being collected. Conducting a data audit across the organisation will identify where information sources are located, how to access them, what questions each source can answer, and which gaps still need to be filled. After the data audit is completed, each initiative that has been completed or is in the works will be visible. This is only half of the equation; the other half is connecting the information gathered with actual results to establish a baseline for future improvements.
Communication is one of the most important aspects of an ROI mindset. It is best to involve teams in determining key goals at the start of a project. In addition, organisations need to ensure that objectives are clearly defined so that everyone in the organisation understands them. Many people in an organisation will be unfamiliar with ROI, and many of them may not be used to digesting ROI. Bringing them along for the journey by setting up training to get them up to speed on any new terminology, while incorporating ROI into future initiatives.
Finally, organisations need to ensure that stakeholders who receive ROI reports are familiar with the inputs used and how results are calculated. Creating an ROI culture increases engagement throughout the decision-making process, making it easier for those involved to see the impact of initiatives. Executives must summarise the team’s activities and link those to quantifiable, financial outcomes at the end of a venture. When projects are completed, they must report back to the team on their success and how it compares to previous initiatives.
Learning from the past
Measuring ROI is critical because it informs organisations about the effectiveness of their ventures. It uses hard numbers to quantify the effectiveness of each campaign and provides businesses with information to help them measure the efficacy of ongoing projects, and the success of a venture on completion, as well as to justify future undertakings. It encourages team accountability because everyone is responsible for delivering results. Furthermore, organisations can calculate project accuracy by comparing the predicted ROI at the start of an endeavour to the actual ROI at the end.
The primary function of ROI is to aid in decision-making, especially since changes to a project early on are much simpler and less expensive. The simplest of all ROI measures are those based on the customers’ desired outcomes and how well the organisation performs against them. These outcomes are the customers’ expectations of an ideal experience, and they are easily measured. Once measurement completed is it is easy to assess the ROI.
ROI calculations are not meant to be exact methods of measurement but rather means of approximation. More accurate projections are always beneficial, but some error is to be expected with ROI. Understanding the ROI of any project aids in the identification of profitable business practices. Many businesses use ROI to determine which strategies will yield the highest return based on previous successes. When an organisation places an increased focus on ROI, it becomes not only a measure of past success but also an estimate for the future.
Daria Polończyk is Head of Analysis & Design at Future Processing and is in charge of managing a department of over 70 Business Analysts and User Experience Designers. She is responsible for developing business strategy while meeting high-level operational goals of her division. Daria has a technical background, but has always been drawn by the people and business aspects of the IT world and decided to move towards business analysis and UX.