As strange as it may seem, the acronyms CLO, CEO, CFO and ROI are more connected now than ever before, and they’re trending to be even more closely connected.
We’ll start with a little bit of history. The concept of return on investment began about four centuries ago in Europe as a term to show the value of capital expenditures. ROI evolved in the financial accounting literature and migrated to North America in the 1800s. According to the Harvard Business Review,by 1925 ROI had become the dominant method with which to measure results — for capital expenditures.
In those days, capital expenditures such as buildings, tools and equipment were the primary expenditures for most companies. These days, capital expenditures are only a small part of an organization’s total costs. Instead, estimates suggest about 80 to 85 percent of a company’s expenditures will be in the noncapital area, including human resources, marketing, quality and technology. The cost of people is the largest noncapital expenditure.
You can imagine the chief executive’s frustration with the accounting field, which has an extensive process for calculating the return on capital expenditures but not for noncapital. This has changed. About two decades ago, with the urging of chief executives, the concept of return on investment was pushed into the noncapital areas, managed by the chief financial officer.
Parallel with this development, the chief financial officer has become the most critical position in an organization, according to The Economist. About 15 percent of human resource functions now report to the CFO, according to Gartner Research. This is a huge shift. At the ROI Institute, it is not unusual to have someone attend our internal ROI certifications representing the CFO.
Because return on investment is a financial term, the CFO wants to ensure it is properly used to evaluate noncapital investments. Return on investment fits logically into the noncapital space and works much better than return on equity, return on assets, return on capital employed, net present value or discounted cash flow.
Enter the chief learning officer. In a 2010 Learning Investment Survey of Fortune 500 CEOs sponsored by Association for Talent Development, 74 percent of chief executives wanted to see the return on investment from learning and development. ROI is the measurement tool with the ultimate level of accountability. It is the CFO’s tool of choice and, with learning and development becoming a major noncapital expenditure, it has shifted to bring the CFO in direct contact with the chief learning officer.
We can learn something from return on investment’s creators because they suggested it as an imprecise measure and that it not be used alone in decision-making. We must take this foundational principle forward into today’s environment, and make sure there are other measures in play. The ROIMethodology collects or generates six types of outcome data: reaction, learning, application, impact, return on investment, and intangibles. This helps to ensure executives are not just focusing on return on investment.
Most programs should not be subjected to a return on investment evaluation. Just as with capital expenditures, return on investment calculations should be reserved for those programs that are very expensive, important to the organization, connected to strategy, or involving many participants. These types of programs attract executives’ attention, and today those top executives need to see return on investment.
The good news is this is being done. The 2015 “CLO Measurement and Metrics” study indicates that 22 percent of organizations are using return on investment to show CEOs the value of the learning. The same study revealed that 23 percent of CLOs are planning to use ROI in the next 12 months; another 10 percent are planning to use it in the next 12 to 24 months; and still another 17 percent are planning to use it with no timeframe.
Return on investment use will continue to grow in the future. The challenge is to be proactive in the process. Don’t wait for the request; drive it yourself. Control the agenda, and be on the offense — not the defense.Filed under: Leadership Development