Friday, 22 March 2013

ROE may be more accurate than ROI

I was interested in Andrew Smith’s post on CIPR's Conversations blog (March 22) about Oliver Blanchard’s book Social Media ROI. However, both blogger and book shared same old misunderstanding of Return on Investment (ROI)'s application to PR.

Through 2011 and 2012, there was a three-nation debate about whether ROI was appropriate for public relations or not. It was carried out by PR academics and practitioners in Germany, UK and US.

[It is available on the IPR’s website (http://www.instituteforpr.org/) and academic research is online at PRism journal, (http://www.prismjournal.org/vol8_1.html).

At its heart was the contention by Prof Ansgar Zerfass (Leipzig University, Germany) and me that practitioners mis-apply ROI to their disadvantage. In 2011 we undertook a Europe-wide study of practitioners’ understanding and usage of the ROI concept.

The sample of more than 2000 responses showed wide national variations but generally, practitioners had very loose, inaccurate views of ROI’s application. These very different to classic definitions of the term as a ratio of monetary value created, divided by the costs incurred and multiplied by 100.

Where PR folks get it wrong, is that unlike a business ROI which related to capital expenditure over time, their ROI fail to account for all costs, don’t have a hard-edged financial objective and rely on estimates and not accountancy. So what their figures are not recognisable as a ‘return on the capital employed’. They are guesses which are not related to the specific financial management term.

In most cases, intangible results of public relations activity did not lead to financial outcomes. This is especially relevant in governmental and non-profit organisational communication even though there are attempts to employ "ROI" in those fields.

Our conclusion was that ROI was an inappropriate term for public relations measurement and evaluation. This conclusion was supported by the eminent PR theorist Prof James E. Grunig who wrote that he would “cease and desist” from using ROI in the public relations context.

In the US, Prof Don Stacks of Miami University contends that, rather than creating a PR-ROI, the practice should consider a Return on Expectations (ROE) measurement which could cover both financial and non-financial situations. He has published on this recently. His case is worth considering.