ROI versus VOI in the war against project costs

February 20, 2017

Are companies using the wrong metrics to prioritise their projects?

For years the preferred choice to determine whether a project is viable has been Return on Investment (ROI). ROI is a way to calculate the profitability of a project. Put simply, it is dollars out versus dollars in, and is generally used for a one-time capital spend related project. It is a hard, tangible target: a financial measure focusing on cost savings once the benefits and associated estimated costs to achieve those benefits have been identified. The maths however does not factor in any of the complexity associated with both sides of the equation.

A large ROI does not automatically mean you have a very profitable project, as in most instances it is difficult to truly track the dollars spent back to the actual income generated. This is especially the case for projects within a cost centre rather than a profit centre.

Basically, ROI is a one-dimensional decision-making metric, which is used as part of a business case to get the funding for the project or programme. However, once the funding is secured, resources brought on board and the actual project commenced, companies very rarely validate the ROI to determine if the original estimate was correct. Post-implementation review, the analysis of actual versus monetary projections is an area that is often ignored, either due to a lack of interest, resourcing or sometimes incentive.

After all, benefit realisation on a large programme, worth potentially several million dollars, can be a time-consuming, resource-intensive process – not only to track through the lifecycle of the project, but also to ensure that all financial recording is properly assessed and represents a bonafide and valid save. An additional challenge is the fact that business managers often have to define and justify project investments where a high percentage of the return is intangible.

In order to make better business decisions, the VOI, Value on Investment, model offers a more well-rounded approach by including analysis of costs versus intangible benefits. Being a so-called soft measure, and subjective, VOI reflects competitive differentiators such as employee morale, absence and safety. It then looks at how changes to these softer intangible measures can have a positive impact on the overall cost effectiveness of a project.

VOI also takes into consideration customer satisfaction, customer retention and increase in market share. IT service companies can no longer afford to focus purely on technology and their internal organisation, but instead they must consider the quality of service they are providing and focus on relationships with customers. The public perception of a company is critical to its long-term success, where intangible resources are equally important to both company success and external perceptions of company value. Justifying a project’s intangible benefits can also help companies make informed decisions about future spending.

As a metric, VOI focuses on factors that affect organisational performance – the link for example, between health and wellness programmes and a decrease in staff turnover. This in turn reduces recruitment costs and retains knowledge within the organisation, thereby improving the chances of a speedier project-delivery cycle.

In short, ROI focuses purely on benefits whereas VOI sees the features as the primary indicator. If you were a car salesman faced with a customer focused on cost, you would be likely to inform them about the possibility to save on fuel (ROI). However, if the customer was more concerned with the environment, you would tell them the car can achieve 40 miles to the gallon (VOI). Both of these facts are true, but each statement holds a different value to the receiver of the statement.

So, if you are looking at using a metric to help prioritise your projects, it is important to have a balanced set of measures, both tangible and intangible, short-term and long-term, financial and non-financial. Therefore, in most cases, the combined use of both ROI and VOI is the way forward.

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