ROI is a financial term that stands for "Return on Investment." ROI is a type of measurement that is widely used to assess the potential benefits and risks of an investment. The simplest form of ROI is calculated by dividing profits by invested capital.
ROI = Profits
ROI can be measured when the gains and the costs of an investment are known, and can be directly linked to the final quotient.
ROI is an effective and powerful tool that enables CEOs and other organization decision makers to see the potential benefits of an investment and to make sound business decisions about how to spend resources. Not only does ROI prove to upper-level management that a particular investment is beneficial for the organization, but it is also a strong selling point to potential shareholders. ROI confirms for shareholders and other stakeholders what they will gain from a particular investment. A high Return on Investment proves that the longevity of a company is being maintained through positive business decisions.
In today’s cost conscious business environment, communication professionals must demonstrate the ROI of communication, or risk having their programs cancelled. These days when every dollar needs to be justified, it is critical to prove that our communication budgets are well spent. Internal communicators are not the only ones who face the challenge of trying to quantify the impact that their work has in an organization. Every functional area of business is called to do this - HR managers are demonstrating that having progressive HR practices contributes to the bottom line, IT professionals are quantifying how their work impacts productivity, and training and development professionals are showing how their training programs are making a difference. It’s about accountability – every functional area of business is being held accountable for making bottom line contributions.
In the past, many organizations have used "soft" measurements such as employee awareness, understanding, and satisfaction to evaluate the success of their communication initiatives, programs, and channels. The current measurement trend focuses on "hard" measurements like productivity, employee turnover rates, behavioral changes, and the achievement of business goals. Hard measurements are effective because they directly link a tangible outcome to a specific communication function. For example, companies that have implemented effective internal communication strategies report higher employee retention rates than companies that do not. Both the "soft" and "hard" metrics are useful in telling a complete story about the value that the communication function brings to an organization. Linking the communication strategy and metrics to the business strategy is equally critical – the ROI of communication will only be reflected in the bottom line when a successful communication strategy and business strategy are closely aligned.
The first fundamental step is to set measurable communication objectives which are tied to relevant, corporate objectives and priorities. You can then track progress against these objectives, assess communication effectiveness and recalibrate plans as needed by using a variety of measurement tools, such as:
According to a 2003 study conducted by Watson Wyatt, organizations that effectively communicate experienced a 26 percent total return to shareholders from 1998 to 2002. The large increase in shareholder returns is due in part to effective internal communication enabling employees to be motivated, informed and engaged. With a strong communication strategy in place, employees feel connected to the company, understand the direction and business priorities, and know their role in helping to achieve business success. The bottom line: the better a company communicates, the better its return on investment. Organizations that communicate effectively dramatically outpace organizations that don’t. Communication is no longer a "soft" function, but rather one that drives business performance and is a key contributor to organizational success.
Effective communication is an essential ingredient for any organization undergoing change. Companies that implement effective post-acquisition communication reported significantly better results in areas such as
than did companies that delayed implementation for three months or more, according to a 2003 survey conducted by PricewaterhouseCoopers. Communication can also minimize damage caused by rumors, relieve employee anxiety, and build both internal and external support for change.
Intranets can be very cost-effective tools for an organization, but as with any other tool, they must be implemented effectively. Some companies, such as Cisco Systems, have developed a culture where everything can be found on the intranet. Employees complete most HR and payroll functions online, as well as a host of other functions. Some organizations, however, use their intranets as little more than outdated message boards. If you establish a culture that encourages the use of the intranet as an important communication tool where employees can always find the most up-to-date information, the resources invested in an intranet are more than returned. However, if the organization does not use the intranet to continuously update employees, then employees will look to other forms of communication to get their questions answered.
Sources: IABC Communication World, Watson Wyatt Report - Connecting Organizational Communication to Financial Performance, 2003-2004 Communication ROI Study