Monday, May 1, 2006

Want ROI? Don’t Forget What The “I” Stands For!

While I haven’t been in the advertising industry my entire career, my background as a CPA and former CFO probably affords me an unusual amount of direct experience dealing with ROI’s, Payback Periods, Discounted Cash Flows and Economic Valued Added (EVA). During my tenure in the agency world, I’ve noticed many people talking and writing about ROI. And I have watched with both amusement and concern as our industry seems to break out into sweats, convulsions and hives whenever the topic is seriously broached.

I also have witnessed what I think is a fatal flaw with regard to ROI in our industry: the propensity of leaders (both corporate and agency) to forget what the “I” in “ROI” actually stands for. Lest anyone forget, it stands for “investment." Then why do so many move around and act as if expenditures in branding/positioning and B to B communications are really expenses?

Yeah, I know that the Financial Accounting Standards Board requires you to record these expenditures in your income statement as expenses. But if you know this, you are also no doubt aware that pharmaceutical companies, biomedical companies and start-ups in the nanotechnology industries are also required to record all of their research and development expenditures as expenses, too. It is safe to speculate that none of these companies diminish their R&D activities solely because of the FASB’s accounting and financial reporting rules. Rather, these companies “know” that R&D expenditures are their path to increased future revenues, market shares, and enterprise value for their organizations.

Safe to say that Coke “knows” this, too. Ditto for Proctor & Gamble. And Microsoft, Nike and Gatorade. In the B to B world, more and more organizations are moving similarly.

So why the change? My speculation is that for many of these companies, the shift to seeing marketing as an investment begins with a dramatic change in their narratives about the value of marketing and marketing communications. It's likely that enlightened leaders in these companies knew they could no longer look at these annual expenditures as merely operating expenses, or a drag on their earnings per share. Rather, they began seeing marketing dollars wisely spent as strategic investments in their company—investments that must be recurrently made. And, most importantly, investments that are rigorously reviewed and assessed from a “return” perspective.

I seriously welcome conversations with clients (current and prospective) which evolve into ROI discussions. Why? Because, if they truly are committed to producing a return on their communication programs, there is a pretty good likelihood that they know what the “I” stands for, and that they understand what it really means: before you can have “return," you first have to start with an “investment."

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