Roi in the Public Sector

ROI in the Public Sector

Interest in return on investment (ROI) by public sector organizations continues to grow. This interest is not isolated to large federal agencies. Myths regarding the use of ROI in government abound, prevents many agencies from developing a comprehensive approach to evaluating human resources, training, and performance improvement initiatives. The key is distinguishing what is myth versus what is reality.

Efforts have been made toward more responsible performance management and measurement in the public sector. The Chief Financial Officers Act of 1990 was enacted to improve the management practices of the federal government and to ensure the production of reliable and timely financial information for use in managing and evaluating federal programs. The government Management Reform Act of 1994 added to the Chief Financial Officers Act by requiring all federal agencies to prepare and make public annual financial reports. It also authorized the Office of Management and Budget to implement a pilot program to streamline and consolidate certain statutory financial management and performance reports into a single, annual accountability report. One piece of legislation that has had influence in enhancing accountability in government agencies is The Government and Performance and Results Act of 1993. GPRA (or the "Results Act") is the primary legislative framework through which agencies are required to set strategic goals, measure performance, and report on the degree to which goals are met. Basically it requires government agencies to develop performance plans that outline the link between strategic goals and day-to-day operations.

ROI is not the first private sector practice to be applied to public sector organizations. Total quality management (TQM), zero-based budgeting, and the balanced scorecard all had their initial beginning in the private sector and to some extent have been applied in government.

While the fundamental use of ROI comes from accounting and finance (earnings divided by investment), the process of cost-benefit analysis is grounded in welfare economics and public finance. Both account for the financial benefits of a program, project, or initiative compared to the costs. The difference in the two equations is that cost-benefit analysis results in a ratio comparing monetary benefits to the program costs (BCR); ROI results in a percentage that presents the net monetary benefits (earnings) compared to the costs (investment). For many years there has been a great divide between traditional program evaluation and evaluation coming from business. Program evaluators have long been concerned with the correctness of use of methodologies, expending whatever time necessary to ensure purity of research. Business often takes a more pragmatic view of evaluation, using appropriate research methods, however, expending only enough resources to ensure credible, valid results are reported in an acceptable timeframe within which good decisions can be made.

The absence of revenues and profits is an issue that many government organizations cannot get past when considering the use of ROI. Most ROI impact studies pay off on cost savings rather than actual profits. When considering the ROI equation, earnings divided by investment, earnings are developed in two ways: profits and direct costs savings. Profits are generated when the program is directly linked to sales and revenues. Cost savings are generated from improvements in work output and productivity, quality, time reduction, and direct costs reductions. There are far more opportunities for improvements based on productivity, quality, cost and time than on profits.

Multiple constituencies exist in public sector and private sector organizations. For example the return on investment may be developed for a training program for managers and executives and calculated in the context of the company's investment. At the same time, the ROI from the perspective of the participant is sometimes examined, particularly if participants are attending the program on their own time or will have to catch up on their work after attending the specific program. Multiple constituencies are not difficult to deal with, they just add to the complexity of the project. It is important to consider ROI from those stakeholders who have a vested interest in the outcome.

The motive for using the ROI methodology is not always to decide whether a particular service should be continued or