Archestra: Returning to Return on Investment

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May 9, 2005

Returning to Return on Investment

Not being an economist or statistician has its small virtues when talking about value. One of the best virtues is an undaunted respect for the ability to say that something is valuable without needing to qualify it other than logically. This is what I've always thought of as the difference between ratings and metrics. Both are cases of "measurement", but a metric needs a standardized rule and a rating only needs a non-standardized preference.

So who cares about this? People who like gift boxes full of ROI. They don't like ratings when what they want is metrics.

It seems to me, though, that the point of ROI metrics is still to wind up with a preference, namely, to have a certain amount of value of a certain kind, above and beyond what value you think you gave up (i.e., invested) in exchange.

This makes it easy to lean on a logical definition of ROI instead of necessarily a mathematical one. That is, where does ROI actually come from?

If there is some kind of property for which you have "ownership rights", you can treat that property as an asset. Once you give the asset a job, then you can treat it as a resource. This assignment is also the point where you can first say that you've made a specific investment.

The purpose of the resource is the next important issue. The purpose is all about what yield should be obtained from the utilization of the resource. The yield represents the type of benefit targeted.

But the yield is valuable only due to the event that it can address. The event is a type of condition that the benefit can affect. The effect that the benefit has in the occasion of its influence is the return.

For example, let's say that there is a rusty chest believed to contain important memorabilia and some expensive antiques. If someone gives me ten dollars with permission to use it, I virtually own the ten dollars (an asset). If I spend the ten dollars on a hammer, I've created a resource (the hammer). Then I use the hammer to open the rusty chest (a benefit), with the understanding that I'll be rewarded for opening the chest. The reward can be 20 dollars for getting the chest open, or ownership of the contents of the chest. The value of the contents of the chest is monetarily (we presume) either greater than the original ten dollars or not, but at this point the issue is the importance of the kind of value that the contents have for me. Would I rather have the contents, or have the ten dollars back with ten more to spare?

This simple example shows that the "ROI mechanism" is to:
- create a resource from an asset, then
- use the resource to create a benefit, and then
- offer to redeem the benefit to gain new value, and finally
- select the type of value to accept in ultimate exchange.

Logically this would always be the pattern. Circumstantially, meaning in any given instance, you may not have many choices in the amounts, types or occasions involved in the mechanism, and this might make the whole affair seem to involve fewer steps and options. For example we often automatically think of an asset as a resource because we think of assigning the asset to only one purpose (even though it could be assigned to a different one). Or we don't seem to have choices of rewards so we think of the benefit as automatically provoking a certain kind of value, which makes the benefit and the value synonymous.

Experience shows that these "abbreviations" are ideas that we choose to have instead of facts. The logical facts allow for circumstances where the number of options at any step is somewhere between zero and more than zero, but the step is still always a part of the mechanism. We might not be aware of it until someone comes into the picture with a different agenda and an ability to add or subtract options from a step. For example: you can typically do that with "efficiency measures" (subtractions) or "contracts" (additions).

People like to "maximize ROI" and they may have various reasons (or requirements) to do so. The ROI mechanism just described also shows, perhaps more importantly, that there are a number of points at which decisions might be made to adjust the effectiveness of pursuing a desired return. It also shows a mechanism that can take only minutes or might take years. The difference is in the details of executing each step, and in the progress made to align each step with its subsequent one. In the Archestra view, this is the basis of the need for what we call "ActiveROI".

The Architecture of Enterprise Strategy: an open studio of research on the link between how and why

May 9, 2005

Returning to Return on Investment

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