What is Your ROI? Do You Care?

Last week we talked about the importance of dropping as well as adding programs. We got a few questions about using cost-benefit analysis and cost-effectiveness studies, which we briefly mentioned. Let’s not go overboard. But let’s make reasoned and reasonable choices. Here’s an explanation.

First, a business term. ROI, or return on investment. When you put money into an endeavour, ROI helps you understand how much profit or loss your investment has earned. Return on investment is a simple ratio that defines the profit (or loss) from an investment by its cost. Because it is expressed as a percentage, you can compare the effectiveness or profitability of different investment choices.

So let’s forget that one. Well, no. We don’t have profits as a measure, but we do measure our success by the advancement or achievement of our mission. So how do we measure our ROI on our “investment” (and indeed, our programs and services are investments expecting some return or outcome).

One approach is through cost-benefit analysis and cost-effectiveness studies.

Cost-benefit analysis and cost-effectiveness analysis are methods used in decision-making to evaluate the implications of different options or interventions. While they share similarities, there are distinct differences between the two.

As a board, you want to ask some basic questions as you develop a culture of assessment. What other options were considered? Why were some rejected and this one preferred? What will be the return? How will we evaluate and when?

Cost-benefit analysis compares the costs and benefits of different options in monetary terms. It involves identifying and quantifying all relevant costs and benefits associated with each option, converting them into a common currency (usually money), and then comparing the net present value of the benefits minus the costs of each option. The aim is to determine which option provides the greatest net benefit. Cost-benefit analysis is commonly used in public policy decision-making.

Cost-effectiveness is a type of economic evaluation that compares the costs and outcomes of different options in non-monetary units. It measures the cost per unit of outcome achieved by each option. The outcome may be a health outcome, such as the number of lives saved, or a non-health outcome, such as the number of crimes prevented or the amount of pollution reduced. Cost-effectiveness analysis is used to determine which option provides the most outcome for a given amount of resources. It is commonly used in healthcare and environmental decision-making.

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Cost-benefit analysis can be applied to the arts and other social endeavors by, for example, comparing the costs and benefits of different arts-related programs or interventions in monetary terms. For example, a cost-benefit analysis could be conducted to compare the costs and benefits of a public art project in a city. The costs could include the cost of materials, installation, and maintenance, while the benefits could include increased tourism, improved property values, and increased civic pride. By comparing the net present value of the benefits minus the costs of the project, it is possible to determine whether the project provides a positive or negative return on investment. Cost-benefit analysis can help arts organizations and policymakers make informed decisions about which arts-related programs or interventions to invest in based on their economic and social impact.

Cost-effectiveness analysis can also be applied to the arts. For example, a cost-effectiveness study could be conducted to compare the costs and outcomes of two different music education programs for low-income children. The outcome could be measured in terms of the number of children who develop musical skills or the improvement in their academic performance. The costs could include the cost of the program, the cost of instruments, and the cost of instructors. By comparing the cost per unit of outcome achieved by each program, it is possible to determine which program provides the most outcome for a given amount of resources. Cost-effectiveness analysis can help arts organizations and policymakers make informed decisions about how to allocate limited resources to achieve the greatest impact.

Essentially, you want to identify the intervention or project that provides the most effective outcome at the lowest cost, the greatest "bang for the buck" in terms of achieving the desired outcome.

The main difference between cost-benefit analysis and cost-effectiveness analysis lies in the way they measure and compare outcomes. Cost-benefit analysis assesses both costs and benefits in monetary terms, allowing for direct comparison. In contrast, cost-effectiveness analysis focuses on achieving a specific outcome, typically non-monetary, and measures the cost required to attain that outcome.

Additionally, cost-benefit analysis is concerned with the overall net value or profitability of an intervention, while cost-effectiveness analysis prioritizes interventions that provide the most effective outcome for a given cost.

Both methods have strengths and weaknesses and are applied in different contexts depending on the nature of the decision or policy being evaluated.

Now, don’t go overboard and make work for staff that exceeds the return. But do insist on choices with a recommendation, not just a rubberstamp on the one and only best way. What are the cost-benefits generally? What is the cost-effectiveness?

The best board members ask questions. Here is one place to start.

What are your main “pain points” dealing with assessment?

What advice would be most helpful to you?
And we always assume that you are asking for a friend!

Get in touch. We’ll address your questions and concerns in an upcoming blog post.

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P.S. May I ask a tiny favour? Would you mind sharing this blog with one person? I would love it. You can post the links in your Facebook Groups, LinkedIn or even send an email.