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The term “ROI” just might be the most hackneyed and disgusting piece of vocabulary in the world of organizations.

I hear it on a daily basis in my work life and have watched it spread throughout the blogosphere like a bad virus.  Ask anyone to put their “metrics hat” on and they will invariably drop the word “ROI” on you,  often in a desperate attempt to build their credibility and sound more like a CFO.

There is no ill will here – I am intentionally being provocative – but there IS (and probably always will be) an enormous need to increase the level of statistical/financial competence among professionals who strive to measure impact, whether financial, social, environmental or otherwise.  We can’t simply borrow from existing concepts and measures without understanding their dirty little secrets.

So let’s talk about ROI and its dirty little secret.

ROI, or Return on Investment, is a decision measure.  By that I mean that it is supposed to give you an indication of how successful an investment decision has been/might be.  The most perfect example might be your stock or 403(b)/401(k) portfolio.  When you make the decision to funnel dollars to those accounts, you are placing a bet on the success of the fund or company whose shares you are purchasing.

So…. you invest, time passes, lots of stuff happens (with the company, economy, etc.), and then, at some point, you decide to see how well your bet paid off.  Were your right and/or lucky enough to see a positive ROI?  You subtract the original value from the present value, then divide by the original value.  TA-DA!… ROI.

Not rocket science, right? Which is probably one reason it is so well-liked as a measure.  But let’s take another look at that process.  Here it is visually.

ROI Big Black Box

One of the major and perhaps most overlooked problems with ROI is that it only cares about the green boxes – the inputs and the outputs.  This is fine if you’re an investor, since you often don’t care so much about what generates the returns as the fact that they are there.  Remember, it’s a decision measure – did your bet pay off? – that doesn’t discern skill from dumb luck.

But what about the Big Black Box?  All of the “stuff” that happens between the time the investment is made and the point in time in which you’re measuring ROI?  Doesn’t that count?  If you run an organization or care at all about a company’s internal operations and how it is generating returns, then YES, ABSOLUTELY!  It counts an enormous amount.  In fact, if you’re trying to measure social impact, unless you understand what’s going on in that Big Black Box and how it correlates with outcomes, you simply cannot say with any confidence whether what you’re doing is having an impact.  Period.

So please, please, use ROI with care.  You, your organization, and your constituents will be better off as a result.

[Esoteric aside:  I’m referring to a very specific form of ROI here.  If you report on ROI as “people served per dollar spent,” or something to that effect, know that that’s a great thing to measure as an indicator of operational efficiency or effectiveness but not true ROI.  You might be confusing people or damaging your own credibility among shareholders and donors by referring to it as such.]

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