The term ROI is probably used more in business these days than ever before, particularly in areas where it has not been discussed previously.

Originally, the concept of return on investment was used in the context of showing value from investing in capital expenditures, such as buildings, equipment, and companies. In the past two decades, it has been used in the context of showing return on investing in a variety of non-capital expenditures like human resources, technology, quality, and marketing. But the term ROI is entered into the business lexicon on a routine basis. What’s the ROI on that? is a common question. Can you show me the ROI? Can you show me the money? are often requests from executives. This will deliver a very high ROI or You can expect a very high ROI with our particular product or service are commonly heard from sales professionals. Most of these requests are brought into play without understanding the true meaning of ROI.

In reality, the return on investment is a financial term. It shows, in a single metric, the ultimate contribution of different projects, services, programs, and events. Since those of us concerned with the contribution of non-capital expenditures borrowed this formula from the financial and accounting community, we should use it appropriately. In doing so, however, a variety of myths and misunderstanding have surfaced, causing vast amounts of confusion. Here are 10 important misunderstandings about ROI as it is used to evaluate non-capital investments.

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Whenever a project or program is implemented, there is often mystery about the issue of business alignment. Everyone talks about it, management requires it, and we know that alignment must be accomplished with new projects and programs. But how is it achieved? This article describes a simple approach to achieve alignment.

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Economic down turns affect us all. Small businesses often take the greatest hit. Increases in costs, reductions in revenue, and stagnant inventory often result from a slow-down in the economy. Lay-offs, mergers and consolidations, and bankruptcies dominate the news. With all of this, along with a government administration in flux, it is no wonder small business owners and their teams are concerned about the future. In the coming years, small businesses will face many challenges -- challenges which can be addressed with the use of metrics.

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When we discuss metrics and ROI with the managers, executives, and specialists, we are often asked this question: How does this apply to small business? True, large businesses routinely focus on measurements, metrics, and ROI. There are departments, functions, and people with titles of analytics, metrics, evaluation, research, organizational effectiveness, and other labels that just do not exist in a small business. So how should a small business address ROI beyond calculating the ROI for capital investments, which they often know quite well?

The ROI Perspective

Let’s put ROI in perspective. The concept of the use of the ROI Methodology, as discussed in these columns, focuses on capturing up to six types of data that defines a success of a project, program, initiative or event:

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Both of these disciplines must be adopted for success.

In my first article for Inc last year, I wrote about "convergence." I'd like to offer another example of convergence that's taking place these days: the convergence of design and innovation. Just as most approaches to process improvement (e.g., PDCA, Six Sigma) pretty much have the same roots in the scientific method which has been around for a hundred years, so too can most methodical approaches to design be seen as pretty much covering the same bases.

Structured approaches to innovation have been popping up over the last few years as well. Innovative "buzz" started some years ago, leveraging creative techniques that have been around for decades. But it's only in the last five or so years that a new element has been added to most definitions of innovation. Some say innovation is "bringing new ideas to life," or "the act of conceiving new ideas and bringing them to market," or "commercialization of differentiating technology."

The common approaches to design have always had a flaw, though. They focus on how to "design it right the first time," but they don't address the answer to this question: design what? Design methods assume you have a design in mind. Similarly, most approaches to innovation lack an answer to the question of how to bring the creative idea to life -- or to market. So as with most things -- they start discretely and ultimately converge. Today we are seeing the convergence of innovation and design. Innovation (or creative techniques) fills the gap of "what" to design, and design methods allow us to solve the problem of "how" to bring the creative idea to life.

The most popular approach to design in business over the past ten years has become known as "designing for six sigma." There are a few different variations of design for six sigma, but they're all fundamentally the same. On the other hand, there are no widely accepted methods for innovation yet. Some have tried, but nothing has really taken hold -- until now. For the past year my firm has been applying a methodology we call, D4. The four D's in D4 are: Define, Discover, Design and Demonstrate.

We bill D4 as a new methodology, but I have to share a little secret: only the first two D's are really new. The second two are just the old Design for Six Sigma methodologies condensed into two steps instead of a more common four or five. That's because, while it seems obvious to us now, it took quite a bit of time, research and testing with clients for us to realize that we didn't need to start from scratch, but rather just needed to combine design and innovation. The result is D4, and what we've come to learn is that neither design -- nor innovation -- as others know it can really stand on their own. Convergence was inevitable . . . and now you know, too.

Examine the many ways that the perennial business term is misunderstood.

In several of our columns, we have discussed ROI and its use as a measure to show the contribution of a particular project or program. Unfortunately, the term ROI is subject to much abuse and certainly a lot of misunderstanding. In this column we will capture some of the key culprits.

How's Your ROI?

Unfortunately, many people refer to ROI as a concept of benefit. Some who ask, "What's the ROI on that project?" are not necessarily asking about financial returns but merely the benefit. When someone claims a huge ROI or suggests that you can achieve a very high ROI with a project, they're not necessarily thinking about the financial return on investment. This line of thinking can pose a problem, because the ROI concept comes from the finance and accounting professions, to which ROI means financial ROI. Using the term improperly could undermine a relationship with that key person in the organization, the chief financial officer.

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To COL-LAB-O-RATE. The American Heritage Dictionary defines collaboration as: "to work together, especially in a joint intellectual effort."

Through my research over the past few years, I have come to appreciate the power of collaboration in ways I never did before. I have been amazed to learn of some collaborative efforts of the past -- mostly by people that history has painted as great individual writers such as C.S. Lewis and J.R.R. Tolkien who years later were discovered to have worked together.

I've also come to learn -- or perhaps realize would be a better term -- that I accomplish nothing without collaboration. My study of how innovation really occurs, how we generate new ideas and how we make decisions, has convinced me that a deeper understanding of collaboration will help us all become better at just about anything that requires the use of our intellect. That's because the belief that we simply figure it out when called upon, or that we just come up with great ideas out of the blue, is a pure fallacy.

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If certain data cannot be converted to money, are they still important?

Many organizations are realizing the importance of intangible measures. Sometimes labeled soft data, intangibles can be powerful, elusive, and mysterious. Some believe they cannot be measured; others believe they cannot be converted to money. In most cases, both of these viewpoints are misguided. Intangibles are part of what drives organizations and their projects. What makes them important is the fact that they're often linked to more tangible measures.

Consider these intangible items:

* Adaptability
* Awards
* Brand awareness
* Career mindedness
* Caring
* Collaboration
* Communication
* Conflict
* Cooperation
* Corporate social responsibility
* Culture
* Customer complaints
* Customer response time
* Customer satisfaction
* Decisiveness
* Employee complaints
* Engagement
* Execution
* Image
* Innovation and creativity
* Job satisfaction
* Leadership
* Networking
* Organizational climate
* Organizational commitment
* Partnering
* Reputation
* Resilience
* Stress
* Talent
* Teamwork

These items drive projects such as leadership development, product development, marketing, promotion, certain external programs, technology, quality, and many others. They're also linked to tangibles. For example, customer satisfaction is often linked to sales growth; employee engagement can be linked to productivity; and job satisfaction can be linked to customer satisfaction.

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Business is not an either/or proposition -- a cycle of innovation and analytical operation is needed to succeed.

Is it an art or a science? I don't even have to tell you what "it" is for you to identify with the perennial debate. Leadership: art or science? Innovation: art or science? Effective time management? Compose a symphony? Write a book?

In their 2007 best seller Competing on Analytics: The New Science of Winning, Thomas Davenport and Jeanne Harris argue and explain the value of science through the analysis of data. On the flip side, Malcolm Gladwell argues in Blink that intuition, built on years of experience, can often be the best decision making tool. Which is it? The answer, of course, is both. But no one likes that answer, because it seems like a cop-out.

There is, of course, a better answer than "both." And that answer is, "it depends." It's not so much that it depends on "the situation," but rather it depends on where something is in its evolutionary process.

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Not all data is created equal -- here's how to know what kind to gather and how to use to make the most of the data process.

We live in a world where data is literally everywhere. And if it is not readily available, we can collect it easily. The challenge is collecting the right data for the purpose. For example, when you implement a program, project, or policy, success is always a goal. So, what type of data would you collect to determine if it was successful? The answer is not always readily apparent. It is best to think of data not only in different categories but actually at different levels. The concept of data levels is helpful to appreciate the relative value of the data sets. For example, if a new software package to help reduce shipping errors is implemented you want to measure success. Obviously, the first thing to check would be the errors. Are they lower? If they have not been reduced then we are left wondering why the software did not work, or if the shipping department did not use it? To address this situation appropriately, let's examine four types of data that should be considered.

The first is reaction (Level 1). As the name implies, this data set is collected by asking the individuals who are involved with the project about their reaction to it. This is not necessarily asking if they like it, but did they find it to be necessary, useful, relevant to what they are doing, or important to their own success. Employees need to see a new project as something of value to either them or the company or, ideally, both. Deciding what reaction we want dictates the type of reaction data that we capture. The process is simple. As the project is implemented, we take a brief survey. Simple questions are asked, such as, "Is it useful? Is it helpful? Can we use it? What are the problems?" and "What will keep us from using it?"

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