Over the past several months I have been looking into what ROI means for the Public Sector. The term gets thrown around quite a bit and government programs are all-too-often “judged” based on their ROI, but what does ROI really mean in this context? Is it even appropriate to use the term? I say “NO”!
ROI falls into one of the four standard financial ratio classes: Profitability ratios. It is very clearly defined as ROI = (Profit/Investment)*100. But what happens to this formula when we start adding qualitative data? You get an ROI based on conjecture and fuzzy math. Let me give you an example (a ridiculous one at that):
| “Jeff goes to Atlanta on a business trip to attend a conference. He gets a $50/day per diem. All-in-all, let’s say Jeff’s travelcost $1000. During this trip he decided to get an ice cream cone at a local vendor. On his way out, he see’s a little girl running in traffic. Jeff, being the good guy he is, runs into traffic and rescues the little girl. For a $1000 investment in travel, Jeff’s organization just saved the local government $10,000 in emergency rescue services! So, the ROI for Jeff’s trip was 900%!!!” |
This certainly sounds ridiculous, but in effect, this is what we do when we 1) add a guess ($10k) an equation and 2) take facts out-of-scope. Jeff didn’t go to Atlanta to save a little girl, and the city of Atlanta isn’t left with a $9000 surplus! The best we can say was that Jeff’s good upbringing resulted in a one-time COST AVOIDANCE for the city of Atlanta (still based on a guesstimate).
The term Cost Avoidance is something we should all become familiar with! If a government organization develops software that saves money, this is called cost avoidance, NOT ROI. (DHS is one organization which is beginning to stress “Cost Avoidance” over “ROI”, and likely for this reason.) If the government sells the product to another government at a profit, we can start calling it ROI.
What’s the point, you ask? When an organization develops training software for the soldier (for example), how can one put a price on the combined health, material, and training implications for the soldier? If we can’t put a value on that, it’s not a number! We can estimate it, but it would take a conscious effort to do so (something which rarely happens). And even if that can be defined, wheres the Profit? Until money is returned to the tax payer, can there really be a profit?
My suggestion is to look at problems like this as an estimated avoidance of costs. Break down the avoidance in as many discrete areas as you can (e.g. healths cost avoidance, acquisition cost avoidance, etc…). Sure, some non-peer-reviewed books claim that Cost Avoidance is a form of ROI, but ROI is a mathematical equation, not just a title! This is why government programs have SUCH a difficult time calculating what they refer to as “ROI”: Because the equation simply won’t work!