In the current climate of a down-turned economy, cost savings is king. Upper management gravitates towards cost containment because of the perceived benefit of saving immediate cash. It may indeed be necessary to maximize profits and downsize in response to economic pressures, but there is an excessive tendency to sustain a “Cost Orientation” throughout the enterprise as the prevalent status quo. Oftentimes managers select line items for cuts as an across-the-board percentage, regardless of the prohibitive impact that such random cuts will have on quality and risk avoidance. Moreover, once departments show they can absorb the hit to the budget, they tend to educate management that it can be done again and again, until some managers find themselves coming in at 4:00 am to compensate for the gaps they have created in the employee headcount! These across-the-board line item cuts can be averted for greater benefit to the organization when managers and teams within targeted departments are able to evaluate and demonstrate their value by more accurately defining their return on investment (ROI). By creating a “value orientation” of their contribution to the bottom line, cost centers can strike a more logical balance between cost savings and business impact.

Savings on Investment

One great misconception about ROI is that cost savings on the budget are considered a return on investment when in actually a Savings on Investment (SOI) is being realized. If I give you a dollar and you deliver services for $.80, the $.20 saved by investment terms is not an ROI which reflects the way true “value” is defined. The typical SOI approach impacts the organization in two basic ways: cuts to the budget and improvement of organizational processes-known as the “cost savings orientation”. The highest form of SOI activities include reliance on the discovery of mass economies of scale, hyper-efficiencies, and business processes that reduce waste and time, such as Six Sigma initiatives.

Though a necessary step for maximizing available resources, this “cost savings orientation” is a process of diminishing returns that seeks to solve short-term goals, but may misinterpret business needs that drive clients, and potentially fail to inspire break-through value for the organization. If the leader and team considers budget dollars to be a line item to fulfill or beat and the goal is to make the client happy, the emphasis is often steered away from generating greater value. The results are entirely different if the same budget dollars are considered an investment to make the client successful. An often more productive alternative to an isolated SOI mentality or “cost savings orientation” is an ROI perspective or a “value orientation” that assumes that all spending is an investment that requires a cost/benefit analysis and business case, including measurable outcomes and alignment with company strategies for success.

Return on Investment

The ROI of a project or groups of projects assumes a measurable financial return that is connected to the overall success of the organization. Through the “value orientation”, leaders and teams seek a longer-term, strategic benefit, which interviews, surveys, and focus groups will not reveal. Measuring business impact requires statistical analysis to isolate the benefit from other possible inputs to the benefit. In contrast to the pure “cost orientation”, the “value orientation” relies on greater connectivity and communication between interacting departments-a systems view that is aligned with the strategic goals of the organization. In addition, departments could realize stabilized or increasing returns as they educate management about their documented value propositions. They may experience increased creative breakthroughs as they consider strategic outcomes and gain a better understanding of the business drivers for internal clients. Measurement of ROI is much more than the typical historical look at the benefits of a current project. Using an analytics approach, through careful identification of intervention and control groups, departments can tease out additional metrics to optimize their strategies and deploy successful projects across the enterprise for even greater returns. Long considered too expensive, complicated, or even impossible, measuring business benefit is not only possible, it is fast becoming a business imperative—especially with the ever-increasing interest and demand for sustainability-related projects.