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August 3, 2005

ROI: The Echinacea of Change

The trial results are in. The University of Virginia most recently confirmed what has been repeatedly determined in earlier testing: that the most popular non-pharmaceutical remedy for the common cold simply doesn't have any scientifically evident positive effect.

Key commentators on the new results pointed out on NPR that because of the way colds work, there's no difference between the way a cold subsides with echinacea versus without -- and it won't subside any sooner. So, why do people take it anyway?

Clearly, some "benefit" is being obtained. It's just not the particular benefit that people use to "officially" justify their use. For the most part, people actually take echinacea because:

1. it's important to them to take action -- specifically, to do something therapeutic that they control themselves but that must therefore be low-risk;

2. their judgement of credibility about what to do is largely driven by the credibility that they attribute to people ("act-ors") who they personally know or identify with -- which includes friends who use the stuff;

3. and here's the zinger: they hear about people using it, so often that they have become suspicious of what it would mean to not try it.

What we know about the sum of these influences is that people will likely keep taking echinacea as long as it does not become inconvenient and does not prove to hurt them. OR... until something else comes along that fits those three conditions even better than does echinacea. (Likely, however, it will take equally successful "viral marketing" of the upstart challenger, to actually alter their preference.)

Of course, it's great when that cold you had finally goes away; and when it's over, it is easy to attribute the relief to whatever you were taking during the malady.

And right there is the lesson for business. In business, when confronting change, the top self-therapy has been "ROI", although over and over again it turns out that as a medicinal it has little to no impact on surviving a business change. The change commences, and progresses how it progreses, ROI or not. In the culture of a very high percentage of sustainable businesses, accepting and executing a controversial proposal is like catching a cold.

Why? Because, we treat it that way. Excepting when we already know we are being hurt by current conditions, we naturally resist change. But what testing proves is that ROI is frequently an attractive "additive" to change, like echinacea is to a cold, not because it "cures" the stressful situation but because it cures the anxiety about the situation.

This might not be such a bad thing, though. One could argue that feeling better about having a problem helps other parts of the recovery mechanism to be more effective. The biological benefit of lower distress is that valuable energy is not diverted from the mechanisms that prove to be directly critical to improvement. This is what the approval process is all about in business: stress reduction. And ROI's role is to improve approval.

So what's the harm? Well, as the famous saying suggests, give some people a hammer and they think all problems look like nails. If the use of ROI crowds out the use of what is really needed to solve the problem, then the real problem is not being solved.

The danger in mis-use of ROI is in applying it as if it was a measure of performance to distinguish competing opportunities. To show why this is true:
- begin with a definition of what "opportunity" means
- describe the difference between what life is expected to be like if the opportunity is realized versus not
- rate the probability that executing towards the opportunity is any harder than executing towards a different and no less interesting alternative

What comes out of that is:
- a direct consideration of how competency and scope relate to each other, and...
- a direct awareness that the viability of the opportunity only exists within those terms. These are not formulated by ROI.

For managers, the punchline here is that ROI should not be used to describe why it is important to do one proposal versus another. Instead, ROI should be used only to provide incentive to parties who might support proposals that need to be executed. As incentive, ROI can be a "success factor" -- but the actual value of doing the proposal is determined by how important it is to achieve the changed circumstances targeted by the proposal -- that is the true value of the proposal's objective.

With competing proposals, Choice A may have lower ROI than Choice B, but Choice B may still be more important! Said somewhat loosely for dramatic effect, it is Value, not ROI, that solves the problem. The challenge is to determine how to measure and represent value; stopping at ROI misses the point.

But what about that viral marketing for the newcomer? Look no further than Performance Management.

Posted by Malcolm Ryder at August 3, 2005 7:50 AM

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