Determining the ROI Associated with Business Initiatives
Determining the effective return on any investment (ROI) can be problematic. Whether that investment is in new physical plant designed to increase efficiency, a marketing campaign designed to drive customers to your web site, or an investment in the wellness of your employees, effectively determining the true return on an investment is requires an accurate assessment of both the inputs and the outputs of the entire investment.
In some respects, calculating the ROI is very simple. The formula requires no mathematics whatsoever -- just some very simple arithmetic:
ROI = (Gain from Investment - Cost of Investment)
Cost of Investment
Pretty simple stuff! But the devil is in the details -- most notably the details regarding what constitutes the investment and what constitutes the gain, and how you measure each of those. Let's just briefly illustrate some of those matters with an example drawn from making an investment in employee wellness.
Cost of Investment: All in all, determining the costs of the investment is relatively simple. Do your costs include or exclude:
Gain From Investment: By comparison, calculating the cost side of the equation is trivial compared to the nuances involved in calculating the gain. Specifically, what are the benefits associated with the wellness program:
The point of this exercise is to illustrate that what might seem on the face of it to be a simple, straight-forward task is often a heavily nuanced task that involves both lots of advance work considering all aspects of both the costs and the potential benefits, and also requires advanced statistical modeling to address the different issues that come into play. Call or email us to get a free consultation on the issues that are involved in addressing the ROI on your most recent initiatives.
In some respects, calculating the ROI is very simple. The formula requires no mathematics whatsoever -- just some very simple arithmetic:
ROI = (Gain from Investment - Cost of Investment)
Cost of Investment
Pretty simple stuff! But the devil is in the details -- most notably the details regarding what constitutes the investment and what constitutes the gain, and how you measure each of those. Let's just briefly illustrate some of those matters with an example drawn from making an investment in employee wellness.
Cost of Investment: All in all, determining the costs of the investment is relatively simple. Do your costs include or exclude:
- Outside vendor costs associated with implementing and operating the program(s). (These are almost certainly included.)
- How about the costs of your health consultant team who are already on contract but whose billable hours might increase as they oversee the program? (These may be included, if you can figure them out and properly allocate to program over-sight.)
- How about your internal staff time and their salary and benefits, pro-rated for their work load associated with the program? (These are probably not included but rather considered a fixed cost.)
- How about the opportunity costs incurred by not having the funds available for alternative investments? (These are almost certainly not included in the assessment of costs.)
Gain From Investment: By comparison, calculating the cost side of the equation is trivial compared to the nuances involved in calculating the gain. Specifically, what are the benefits associated with the wellness program:
- Medical costs are a big part of the equation, but assessing the gain must address issues involved in creating a proper comparison group, controlling for regression to the mean and selection bias, addressing the fact that the cost data are almost certainly non-normal (in a statistical sense), and you may not have a complete picture of your employee health expenditures simply because in some cases (e.g., HMO participants) you won't have the data. (All of this can and must be addressed, and usually involves some advanced statistical modeling.)
- Do you include productivity data as part of your benefits. Healthier employees miss fewer days and are more productive on the job. Is this benefit included, and how is it monetized? (To date this benefit has rarely been included in any comprehensive evaluations of the impact of wellness programs.)
- The impact on employee turnover is a plausible benefit, with employees perhaps less likely to abandon an employer who offers a comprehensive package of benefits. (Rarely included in an assessment.)
- Providing wellness programs often yields a public relations benefit with news stories devoted to the programs and (typically) lauding the efforts of the company in promoting employee health. (To date, this benefit has never been included in the analysis of a wellness program impact.)
The point of this exercise is to illustrate that what might seem on the face of it to be a simple, straight-forward task is often a heavily nuanced task that involves both lots of advance work considering all aspects of both the costs and the potential benefits, and also requires advanced statistical modeling to address the different issues that come into play. Call or email us to get a free consultation on the issues that are involved in addressing the ROI on your most recent initiatives.