Stockholders and executives love to see new tactics followed by bottom-line improvements. But when that happens, is it always a direct cause-and-effect? Would the same improvements happen, in a dynamic and improving marketplace, had you taken no action at all? The ROI of strategic changes in a dynamic market may not accurately reflect the return reaped as a result of the strategy if it neglects to take into account the changing market.
As the economic footing has grown more stable, many companies are finding available funds to invest in their internal processes and find ways to improve performance. This is in contrast to the fairly recent past when companies were forced to scrimp on investing in their people and processes and focus on cost-cutting efforts, even if that introduced some inefficiency.
As companies embark on these new efforts, they will likely see performance improvements, but a key question needs to be asked prior to getting in too deep: How will we measure the results of our internal improvement initiatives knowing that the external market improvements will likely drive us in a positive direction anyway? In other words, how much of the improvement will be the result of the investment versus things just getting better? You could just be throwing money at a problem that will work itself out by just doing “business as usual,” then possibly compounding that by using the inflated results to inform future decisions.
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To ensure that you know what you expect to achieve from any improvement initiatives in a dynamic market, you must carefully create the baseline to measure against and calculate expected ROI to:
Let’s look at an example
You believe that your project losses have been running too high and you believe that you can lower them through more stringent risk management activities (e.g., contracts, due diligence, inspections, risk-based pricing). Your plan is to introduce a program that mandates new contractual requirements and additional internal approvals for certain project types. You create a quick and easy ROI that says you can add these administrative steps (a 5% increase in time/cost) and losses will decline by 15%. On the surface, who would question that?
Everyone should question this. How are you going to measure whether this 5% increase in administrative cost is really the driver of the 15% decrease in losses? Is it possible that a significant improvement in the market will by itself lower losses as fewer of your customers try to pass their financial issues onto you? Could you really be adding 5% to your costs, not to mention customer annoyance, without any corresponding decrease in losses? Without establishing a baseline and truly understanding what is driving the current loss levels, you are just hypothesizing instead of analyzing.