MEASURING ROI --- AN OVERVIEW

The approaches for measuring ROI for incentive programs and meetings are both varied and as different as night and day. Some are basic (perhaps too much so) and others complex. Yet, each has merit and some are more applicable in one situation than another. What follows is a brief overview of some of these approaches. First, a disclaimer: this is not an instruction guide for measuring ROI --- it is merely a synopsis of different approaches.

Prerequisites for ROI Measurement

The elements common to all approaches for measuring ROI are the obvious ones, beginning with identifying the program objectives.

Then, a measurement strategy has to be determined. This may simply mean that hard numbers will be evaluated: projected sales vs. actual sales, bottom line impact of a program, etc. The strategy may also deal with less tangible factors: the increase in knowledge resulting from a training meeting, improvements in morale among a targeted audience, or the like. Whatever the approach, the measurement device must relate directly to the program’s objective.

Finally, there has to be an agreed upon method of measuring performance against the objectives.

A. The Basic Approach to ROI Measurement

The simplest and most common measurement is to simply compare performance against the objective set for the program.

For example, a company expects to achieve $50 million in sales without an incentive program. However, an incentive program is introduced with the expectation that it will generate a 15% increase in sales --- an additional $7.5 million --- for a total of $57.5 million in sales.

$50 million base sales x 15% increase = $7.5 million in incremental sales.

If this company enjoys a 30% gross margin on sales, their incremental profit would be $2,250,000.

$7.5 million in incremental sales x 30% gross margin = $2,250,000 incremental profit.

If the cost of the incentive program equals 20% of the incremental sales, that means the cost of the program would be $1.5 million.

$7.5 million in incremental sales x 20% as the cost of the program =
$1.5 million actual cost of the incentive program.

Reduce the incremental profit by the cost of the program for a net incremental profit of $750,000. That would be considered the ROI under this approach.

$2,250,000 incremental profit - $1,500,000 cost of program = $750,000 net incremental profit.

This is a good basic approach to ROI measurement but it falls short in not considering other factors that might have impacted the sales increase. Similarly, it really doesn’t recognize any extraneous costs that might have been incurred as a result of implementing the program. Even so, this approach might be all that is required to accomplish measurement in certain situations.

B. Measuring the ROI of Sales Incentive Programs --- SITE Foundation

Srinith Gopalakrishna (University of Missouri-Columbia) conducted this study for the SITE Foundation. Gopalakrishna recognizes the weakness of the Basic Approach and states, “No matter how one defines ROI, the central premise to measuring it is the concept of causality. Causality has to do with demonstrating the return on investment (ROI) of a sales incentive program in such a way as to prove that it had a direct positive impact on the desired outcomes --- and that other factors were not responsible. Causality thus links the program as the primary cause.”

He says that measuring ROI requires us to consider factors outside the program that have impact on the results and to measure factors such as accounts receivable activity, inventory turnover, etc. His research paper describes various approaches to ROI measurement and provides examples of their application to an incentive program.

(See www.sitefoundation.org, Research, Measuring the ROI of Sales Incentive Programs)

C. Determining the Return on Investment of Incentive Travel Programs --- SITE Foundation

Researchers from Ryerson University in Toronto are at the opposite end of the spectrum from the Basic Approach in this study. They present a complex approach with templates for implementing their procedures.

It begins with the construction of an Attribute Evaluation Tool to decide which elements of a program to evaluate. The planner can then determine the attributes that are critical to achieving specific goals by:

1) reviewing the attributes,
2) reviewing corporate goals,
3) identifying potential program goals,
4) dividing potential attributes into short-term or long-term goals,
5) and prioritizing the short-term goals.

Using the Program ROI Measures template, the procedure is completed by:

6) creating a Program Measures list,
7) identifying specific pre-program objectives in real terms,
8) calculating the results vs. company goals,
9) calculating the Program Impact,
10) and calculating the ROI.

This process is complicated and is meant for those with a serious interest in measuring the results of their program.

(See www.sitefoundation.org, Research, Determining the Return on Investment of Incentive Travel Programs.)

D. Incentives, Motivation and Workplace Performance: Research & Best Practices --- SITE Foundation

The researchers who collaborated on this study have developed the eight-step Performance Improvement by Incentives (PIBI) Model. It is designed to stipulate the human issues related to performance, provide step-by-step implementation procedures, and allow planners to fine tune the system if and when it is not accomplishing its goals. The steps they outline are:

1) assessment of the shortfall between goals and performance,
2) program selection,
3) work value --- the meaning, rewards, communication, and support to foster a sense of value,
4) establishment of training and communication,
5) support from the organization,
6) emotional appeal to involve participants,
7) measurement of active choice, commitment, and mental effort,
8) and analysis and feedback.

This study also outlines the conditions under which incentive programs work best identifying inadequate performance due to deficiencies in motivation as the best environment for an incentive program. Additionally, the performance objective must be quantifiable, achievable and not in conflict with everyday organizational goals.

(See www.sitefoundation.org, Research, Incentives, Motivation & Workplace Performance.)

E. The Business Group

Bob Dawson, CITE, of The Business Group has developed a comprehensive ROI-based approach that, unlike traditional incentive programs, does not focus on one or two objectives but, instead, evaluates the performance of the entire company. Incentives are used, as needed, to stimulate activity in various functions within the company. In that respect, it is unique. Its approach is to evaluate and involve every aspect of a business. It considers the impact of an incentive program on every department, not just the one to which the program is targeted.

If, for example, increased sales cause accounts receivable to increase in age, that impact is deemed to be a cost of the incentive program. Similarly, if the collections department has increased costs in order to collect past due accounts, that too is considered a cost of the program.

Another unique aspect of this approach is that it requires an on-going relationship with the client. It cannot readily be accomplished in a short period like incentive programs with one or two specific objectives. This approach has only one objective --- to improve bottom line results by examining and adjusting performance throughout the company.

(See www.businessgroupinc.com.)

F. The Phillips Model

Measuring the ROI from meetings and similar programs can be very challenging in that their objectives are frequently intangible. Dr. Jack Phillips, founder of the ROI Institute, has formulated a model that has definite application within our industry --- particularly in that connection. The article, The New ROI: Too Tough to Tackle?, tells us that this model looks at what was learned at a meeting and later applied on the job. It quantifies the results into dollars and cents. Once that’s done, measuring ROI is simply a case of dividing benefits by program costs.

This model considers six factors:

1. Reaction, satisfaction, and planned action: How was the meeting received and what will happen as a result?
2. Learning: What did they learn from it and will it change their perceptions?
3. Application implementation: How will they apply what they learned to their jobs?
4. Business impact: How will implementation affect the organization?
5. ROI: What is the monetary value of that impact?
6. Intangibles: If the impact cannot be converted to a monetary value, what are the intangible benefits?

Analyzing each of these points and determining their value in the most tangible terms --- translating them to dollar measurables --- achieves ROI measurement.

(See The New ROI: Too Tough To Tackle? by Dave Kovaleski in Corporate Meetings & Incentives, February 2005, www. cmi.meetingsnet.com.)

G. ROI Measurement of Intangible Objectives

ROI measurement is not limited to incentive programs and meetings. Obviously, every business investment warrants such analysis. The metrics used to measure other applications can be useful in evaluating the results of activities in our industry.

Marcia Connor, in an article that appears on Learnativity.com, deals with measuring the ROI of learning programs. At first glance, her formula appears similar to the basic approach described above but, when applied, is far more complete.

Total Benefits – Total Costs = xxx X 100 = ROI
Total Costs

Total Benefits are defined as savings or anything else that adds to the bottom line. Similarly, Total Costs includes all costs related to the program. It is more inclusive than the Basic Approach. If it were applied to an incentive program one would have to include costs beyond those that are directly associated with the program. They would have to look at the “hidden” costs that result from it. For example, if additional production hours were required to meet the demand for more product generated by the incentive program, the cost of those labor-hours would be included in total costs. This more comprehensive approach underscores the need for a system to readily gather all related data for measurement.

Ed Jones also identifies areas of savings generated by a program even if they are not immediately obvious. In Finding the ROI Payoff he is quoted as saying that he “…counts dollars in three categories: the ability to generate revenue; the ability to decrease costs; and ‘the one that no one suspects’, the value of promotion.” That “value of promotion” might be the value that comes from promoting a meeting. Otherwise, expenditures would have been incurred for advertising, public relations, or the like.

These examples underscore the need and the possibility for establishing measurement strategies for meetings and other events whose outcomes are not readily quantifiable.

(See How Do I Measure Return on Investment (ROI) for My Learning Program? by Marcia L. Conner, April 5, 2002, www.learnativity.com.)

(See Finding the ROI Payoff by Jon VanZile, Corporate & Incentive Travel, April 2000, www.corporate-inc-travel.com.)

Summary

As you can see the approaches to measuring return on investment are vastly varied. Using these approaches requires different degrees of knowledge and understanding. Some programs deserve the closest scrutiny to be proven effective but others don’t warrant a full-blown approach to measuring ROI. The desire to reduce results to some quantifiable measure is often elusive at best. In reality, the success of some programs should be evaluated in intangible ways --- reaction from attendees, focus groups, questionnaires, testing, etc. Knowing when to measure ROI as opposed to focusing on measuring the soft results is often driven by the corporate environment.

The one indisputable fact about all programs is that if they are worthy of implementation, they deserve measurement to insure that the program goals have been accomplished.

fourCE.org develops strategies for companies to reap maximum benefits from incentive marketing programs. We work with both users and suppliers of incentive programs to enhance their success through implementation of customized management and marketing solutions.