Alfred Sloan used ROI in the 1920's at General Motors
I'm in the process of writing about and prepping several workshops for nonprofits about Social Media and ROI, known as "Return on Investment." ROI processes, particularly as part of the budgeting process, are familiar to many nonprofits. There's an entire book devoted to the topic: Nonprofit ROI.
Return on Investment (ROI) was created in the 1920s as a financial
measure developed by DuPont and used by Alfred Sloan to make General
Motors manageable. It is a flow chart that calculates business performance taking into
account not only whether the company had a profit, but whether that
profit was good enough relative to the assets it took to generate it.
Over those 80 years, the chart has been polished, refined and so deeply
embedded in business thinking that Wall Street views it as the only
legitimate means of measuring business performance.
What it also illustrates is that, originally, ROI was a measure of return on the total investment in the entire business. not the ROI of a marketing strategy, program, or tool or any other isolated aspect of an organization.
Should we be using an industrial measurement model in a digital age?
Many social media strategists and measurement gurus have challenged using a straight financial calculation to determine whether or not an organization should spend money on social media. They are not saying don't use numbers. They are saying that you need to measure value and that it value doesn't necessarily translate into dollars. For nonprofits, this should not be a foreign concept.
Here's a sampling:
- Lewis Green warns not to use the traditional investment financial calculations but instead measure value
- Jason Falls shares in a post about measuring engagement, "The problem with trying to determine ROI for social media is you are trying to put numeric quantities around human interactions and conversations, which are not quantifiable."
- KD Paine, Queen of Measurement, (interviewed by Jason) shares an important insight "Ultimately, the key question to ask when measuring engagement is, ‘Are we getting what we want out of the conversation?’” And, as stubborn as it sounds Mr. CEO, you don’t get money out of a conversation."
- David Armano put the ROI debate in a larger context with his article in BusinessWeek "Listen, Learn, and Adapt" and came up with a phrase, "Return on Insight"
When nonprofits look at ROI, the question is not so much about dollars invested, but "Are We Really Making A Difference?." The problem is that nonprofit end up trying to think like social scientists trying to prove causation and like lawyers calculating risk. Isn't best to focus on evaluating results? As Jason Saul notes in a recent guest post, "Most often, the real measurement inquiry is not about effectiveness (what works) or accountability (what doesn't), but about performance (what works best)." He also recommends that you formulate the right questions and use the right measures. In other words, don't measure in inches when you millimeters. To figure out what to measure, nonprofits must engage their stakeholders, research meaningful metrics and experiment with trial and error.
He is talking about outcomes based program evaluation, not evaluating your social media strategy. But is there is thread here - measurement should be practical. Marcel LeBrun's post about principles of social media measurement is urging us to think about using measurement to improve social media results.
If I could be allowed to propose a first principle of social media measurement for 2009, it would be to apply this motto: “good enough for practical purposes”. It does two things: a) forces the practitioner to start by articulating their business goal & purpose and b) drives the science of measurement toward a practical versus theoretical end. It puts measurement in its proper place as a means to an end, albeit a very important one.
Do you agree? Disagree? Think I'm full of it?