The principle of ROI or Return on Investment is pretty simple. When you invest resources in something, you have to get a return that amounts to your original investment plus a bit, or a lot. If your return amounts to less than your investment, you've lost out. You would have been better off not investing it.
ROI is a basic principle of nature. Take sustenance. If an organism such as an monkey or a bird uses up N calories of energy to gather 2xN calories of food, it's ahead of the game. It will thrive. It will put on weight, which is handy for lean times such as winter. If on the other hand it uses up 2xN calories of energy to gather N calories of food, it's in trouble. A zoologist friend of mine devised a PhD-earning system for working this stuff out precisely.
It's also a basic principle of business. The simple calculation is:
I've had several experiences of ROI with my own money over the years.
A few years ago I got chatting to an IT guy about my mail access issues. He said he could sort it out, did me a proposal and I went for it. It involved acquiring a Dell server (£800) and having him set it up (another £800). It quickly became apparent to me, in practice, that this was not only a poor solution, it was worse than the original situation. So I quickly nixed it and returned to the status quo ante. From that the £800 set-up charges were lost and I eventually donated the server to a local school.
My gain from the investment was zero. Sure, there was a little learning, and a moment of good feeling from giving the server away. But against that was the loss of time (hence money) in sorting it out. So let's be generous and call it zero. Now, using the ROI calculation, I had gain (zero) minus cost (£1600) = -£1600. Divide that by the cost (- £1600) and unless I'm much mistaken the ROI was -1. Somebody may put me straight on the detail, but I think the principle is right.
Contrast that with an Epson GQ 3500 laser printer I bought for £1,600 in 1986 or thereabouts. My previous printer took hours to print out the translations I was doing, thereby tying up the computer. The Epson printed in five minutes what the other printer needed four hours to print - literally. At the time I was probably averaging about £12.50 an hour or £100 a day. Assuming the laser printer gave me 4 hours extra working time a day - £50 - and assuming I worked 200 days a year, that would be equivalent to a gain of £10,000 a year, all other things being equal. So the ROI on the laser printer was: Gain (£10,000) minus cost (£1,600) = £8,400 divided by cost (£1600) = 5.25 or 525%.
So far so accountable, right?
Around the time as I bought the laser, I had a £1,500 "retraining allowance" to spend, and I spent it with a guy called Frank Bowyer. He was a former engineer, businessman, wrestler and I don't know what else. Quite a character. He used to come to my place once a week for a couple of hours and we talked. It was unlike any other conversations I had. All of my friends heard about these conversations and used to ask what was the latest with Frank. Some still refer to them, 25 years later. They were conversations that provided me with more value than I could quantify in any meaningful way - they're still providing value, and in that sense the value has been infinite - literally.
So if I apply the ROI calculation here, I have return (infinite) minus cost (£1500) divided by cost (£1500) = What? Is it Infinite ROI?
1 comment:
Here is another example. I am sitting in the garden, the birds are singing to me, it's a lovely May day. Out of the blue I have an idea.
Later, the idea helps someone, turns into a piece of business, inspires me .... It adds some value. ROI of sitting in the garden is infinite as the cost, the divisor, is zero.
Which goes to show that just being is valuable. It often leads to new thinking. It's odd that most people seem to have very little of it. As society speeds up, we get less and less. So let's practice the gentle art of slowing down.
Great post, thanks Stuart
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