During the past year, it has become increasingly obvious to me that many people don’t understand Return on Investment (ROI). Looking back, I realize this was not something I learned about until a businessman explained it to me. At its simplest, return on investment is exactly what it sounds like – the amount of return that an organization receives on their investment. However, this will be viewed differently based on the type of organization an individual works for – government, non-profit, or for profit entity.
Government is the simplest to define as they have no ROI nor are they interested in ROI. This is not intended to be cynical, it’s just true. Regardless of your political affiliation, you can point to government programs that are riddled with waste. Why? Because government entities are not required to prove their programs work. We, the taxpayers, are forced to pay taxes regardless of the success of the programs we are asked to support. Deep inside, this is how we all want to work – we don’t really want management to access the value we bring to an organization, we simply want to be paid more.
Non-profit organizations are a little more focused on ROI. However, their definition is far less stringent than a for-profit organization. For the non-profit, ROI is simply the appearance of value. Since non-profit organizations receive donations from individuals and entities, they only need to convince donors that their programs work. Even if they don’t, many will still give money to support the cause even when there is no ROI. Just like broken government programs, we can all point to non-profit organizations that continue to operate even though they are having no positive impact on the mission they support.
For Profit Organizations
Finally, we have for-profit organizations. In these organizations, everything is measured based on cost and benefits. ROI is simply the value something generates beyond the cost. This is absolutely critical for corporations. If money is continually invested in ways that generate less revenue than they cost, the business will quickly go bankrupt. If you want something, present your request based on the return on investment. Feelings and preferences have no place here. Can you directly tie your request to a financial reward? If not, don’t bother asking!
Why should you care?
The type of organization you work for will determine the ROI model used. Understanding that model will help you know how to argue for a raise, get a new computer, purchase additional tools, etc. If you work for a for-profit organization, decisions will be guided by how much money the business will get back from what they spent. If you can argue that your suggestion will yield more than it costs, you will be far more likely to see your request granted. However, if you argue based on your preference or feelings, you will likely find that your request is denied. Likewise, arguing that you bring substantially more to the organization than you are paid is the single best way to argue for a raise.