Monday, April 2, 2012

Come, Gypsy, tell us how much we'll make

ROI models are a lot like fortune telling. Intuition, experience, and observation are the tools used to predict the future. And yet, like any forecast, an ROI (return on investment) model is subject to change.
Getting my husband to agree to anything is like getting legislation through Congress. So I presented an ROI model to Cuk when I wanted to convince him to support my PhD program.
I estimated how much the degree would cost in student loans ($4000/qtr), then I multiplied that over a conservative estimate of how long it would take (5 years). I then researched how much I could expect to earn after completing the PhD (80% more than 2006’s salary) and multiplied that over how long I would be working afterwards (30 years).
The purpose of an ROI model is to convince people that an idea’s payoff is worth the costs associated. Cuk agreed the investment was sound. I enrolled in Capella University’s curriculum for achievement of a PhD in Organizational Management in the fall of 2006.
Take a Chance
What I have learned about an ROI model since that initial attempt is that a complete model must include peripheral costs associated with potential interruptions. These are risks in the ROI model. These risks adjust figures and change the model, rendering it at best inaccurate and at worst a terrible misrepresentation of reality.
For example, the earnings piece of my PhD ROI model is affected by several factors that, in 2006, were unforeseen: 1) the economy tanked in 2008 and employers adjusted their pay grades downward because the market was flooded with talent and 2) unemployed workers flooded universities pursuing degrees, creating a highly-educated talent pool.
See the Unforeseen
Other interruptions include cultural and personal change. For example, from 2008 until 2011, in resounding chorus, workers sang, “just be glad you have a job!”
This meant that those of us fortunate enough to be working were often doing the work of multiple people. It also meant that showing value became paramount. That led to more hours worked, more projects taken on, and fewer hours spent on things as superfluous as education.
Another side effect of the so-called Great Recession was a general corporate attitude that devalued education. The work became what mattered, tuition assistance more difficult to receive, and any additional leniencies for school-related interferences with the corporate work unacceptable.
In 2006 and 2007, the pursuit of my PhD had my primary focus. Course work, readings, writing, studying occurred instead of time with friends, Fantasy Football leagues, lunch breaks, and happy hours. I even canceled my Sports Illustrated subscription.
Then we had HB.
Manage the Risks
An accurate ROI model must take into account those peripheral factors which are affected by and have an effect on the financial gain. What other processes are associated with this one? How much do those processes cost? 
Peripheral factors affect timeline, execution, and adoption. These adjustments all cost money. Perhaps a change of behavior required in the new solution results in employee turnover, adding additional, unforeseen training costs.
To get the most accurate forecast, then, an ROI model should examine these factors and place values upon them. The values should indicate the likelihood of the peripheral risk occurring. Then several iterations of the model should attempt to demonstrate the potential inaccuracy.
HB arrived in 2008, in time for me to spend maternity leave writing comprehensive exams. Then the dissertation process began. I have already explained my methods for determining where my time is being spent and if that time is supportive of my values.
Suffice it to say, after HB was born, the PhD lost some positions of priority.
Manage Your Time
The primary effect of the HB factor has been slippage in the timeline. What was forecasted for five years has stretched into six. I have a friend who spent six years’ worth of Saturdays just on his dissertation. So this timeline, while extended and extensive, is not unusual. People who pursue education later in life often find sacrifices made in one realm or another.
A secondary effect is the higher overall cost for tuition as the program has stretched over more quarters than anticipated. This was assuaged a bit by Capella’s response to reduced enrollment during the recession. Capella temporarily lowered tuition for my program. That helped.
One positive effect of the extended timeline has been a longer stay with my employer while I work on the PhD which has provided more experience than I expected in 2006. This tenure has also brought me more contacts, a better view of corporate endeavors, and financial opportunities for myself and my family that, in 2006, seemed unachievable.
And yet the model persists. The need to categorize and monetize these peripheral earnings is as strong as the need to revise and remodel the ROI prediction.
Today I am designing the process by which my team will determine ROI. This helps decide what projects to pursue. The effort has me obsessed with naming all aspects of a project and identifying the varying values associated with it.
The factors I am examining are:
·         How much does the current process cost us? (current leakage)
·         How long have we endured this cost? (previous loss)
·         How much will the solution cost? (investment)
·         How long will it take to employ the new solution? (interim leakage)
·         Once deployed, what will the loss be under the new solution? (predicted future leakage)
ROI = How much will the solution save?
I know what you’re thinking: what does all of this have to do with Lady Gaga?

2 comments:

  1. So what DOES this have to do with Lady Gaga?

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  2. This is the second post in a three-post discussion of (seemingly) unrelated ideas: Lady Gaga (last week), ROI, and Generation Flux (upcoming). The three ideas were explored in a mind map I posted on the 29th (A Birthday Juxtaposition).

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