The Haiku of Finance for 08/19/14

Cost and benefit
Determine fate of program
Fund or terminate

The Haiku of Finance for 04/26/14

Essence of finance
Calculate cost, risk, and hedge
Estimate profit

The Haiku of Finance for 04/04/14

Cost effectiveness
Measure outcome improvement
Divide by expense

HR Community Owns Training ROI Calculation

I have not thought much about the HR community ever since I completed my undergraduate major in that subject.  I washed my hands of the profession in 1995 after concluding it was not a path to high corporate achievement.  I have a newfound respect for HR right now after discovering that they can contribute to the bottom line.

Check out SHRM's ROI methodology for assessing training.  ASTD also publishes material on the ROI from learning.  The equations for ROI are pretty simple, just like many other concepts in finance.  The hard part is assembling the data measuring use cases to make "before and after" comparisons.  In other words, comparing error rates, message delays, etc. after training a workforce should show cost savings that exceed the cost of that workforce's training.

Assembling the data in pre-enterprise computing days would have required some Cheaper By The Dozen type of efficiency expert timing workers with a stopwatch and collating their misplaced records.  Enterprise computing makes it all so easy today.  Knowledge management reps can track workflows in MS SharePoint or Evernote suites.  Tally up the missing files and misdirected workflows for those post-training comparisons.  Even the training itself can be almost costless with self-directed modules requiring little downtime.

I'm glad I never worked in HR.  Executives still see it as a cost center because most HR people don't think in ROI terms.  Maybe that's why I never belonged in that field.  I changed course with an MBA in finance.  I would rather invest in faceless corporations than live human beings.  Knowing the ROI for human effort takes some of the risk out of dealing with people.

Intangible Asset ROI Needs Clear Attribution

I recently read a proposed calculation method for the ROI of a public company's intangible assets.  It advocated simple division of net income into the sum of goodwill and other intangibles to find "intangible asset ROI."  I've seen variations of this calculation elsewhere, so I wonder if it's gaining traction.  It looks easy, but my gut tells me nothing in business should be that easy.

I disagree with that method for two reasons.  First, the entire net income of a corporation is attributable to the application of all of its assets.  Calculating ROI means breaking out how much of the income from all business segments is directly attributable to intangible assets.  Using the brute-force method above will lead to wild conclusions.  Consider a fast-food conglomerate whose intangible assets consist of the brand and menu recipes.  If it acquires another chain of restaurants, the new goodwill from the acquisition will push the "intangible asset ROI" down for the year.  Faulty decision-making will follow if executives decide that intangible assets aren't delivering value.  A company with little IP but lots of plant and equipment would portray an absolutely whopping intangible asset ROI by using this method.  Furthermore, goodwill can be impaired, which would invalidate any assignation to intangible assets until the impairment is resolved.

Even companies that are presumably heavy on intangibles can't deliver value without fixed assets.  Social media companies need server farms.  Entertainment companies need video production facilities and broadcast studios.  Analysts and executives looking to unlock value need to probe financial statements to see just how much income is attributable directly to intangible assets.  Not every reporting company breaks down revenue attribution to asset categories the way they do for strategic business units.  That's why finding the ROI for intangibles is just so dog-gone intangible.