FRIDAY JOKE: Return On Investment (ROI)
Return on Investment – Don’t Be Fooled!
I’m always looking for ways to calculate the return on the investment of a good root cause analysis. That’s why I thought one website was extremely interesting (and also qualifies as the Friday Joke).
The website claimed an “average” investigation saved between $11,000 and $75,000.
The website claimed to produce an average return on investment of 4,900% when using a particular root cause analysis tool.
Wow! I had to know more…
I dug through the depths of the website. On a distant page, I found the method they used to calculate “return-on-investment.”
First, they put a price on the cost of the incident. For this example, let’s say the incident cost $100,000 in damage and $100,000 in lost production. A total cost of $200,000.
Next, they found the cost of the time used to do the investigation and the cost of the corrective actions. For this example, let’s say that five people spent 4 hours, and the value of their time was $100 per hour each. Thus their investigation cost $2,000. And let’s say that the cost of the corrective action they invented was $3,000. Thus, the total investigation/corrective action “investment” is $5,000.
Now how did they calculate the ROI? Simple. They divided the cost of the accident by the cost of the investigation.
For this example, the equation is: $200,000 ÷ $5,000 = 4,000%.
A 4,000% ROI seems pretty good, but it’s less than the “average” they quote.
Examination of the Bad Example of ROI
Let’s look at these numbers more closely.
What is the “return” they are taking credit for?
The return in their equation is the COST of the incident.
How can a “COST” be a RETURN?
That’s a question that I can’t answer.
The only way this would make sense is if you assumed that the same incident would happen again and in a fairly short period of time without your corrective action.
The equation makes the “assumption” that the future saving will occur because you did an investigation, and the saving will be the same as the cost of the accident you investigated.
Here’s the double-talk that really appears on the website:
“Problems force us to spend money, and as such are like forced
investments. But we get to decide whether or not we earn a return.
As long as people remain imperfect, we are going to encounter
problems with the systems we create – there is no way around it.
So we are left with a choice. We can choose to systematically identify and
eliminate causes of problems with the ****** method. Or we can continue
doing what we’ve always done and hope the problem doesn’t happen again.“
Ah, yes … The old “false choice” argument. There are more than two choices available – but only let the reader choose between implementing their product or having a future failure. Thus, unless the reader is really stupid and wants to fail, there is no choice but to buy the product!
Even with this “logic,” there is still a big problem with their calculations.
The bigger the incident cost (in $$$$) and the less you spend to investigate and fix it, the bigger the ROI.
So if we could make a mistake that cost $1,000,000 and we only spent $10 investigating and fixing it, we could get a 10,000,000% ROI!
The effectiveness of the corrective actions isn’t accounted for in their calculations. The effectiveness is assumed. They don’t mention how one would verify effectiveness or how long one would have to wait before taking credit for the magical, unproven savings.
By these calculations, to maximize your ROI, you just need to frequently have major accidents or costly problems and spend very little time and effort investigating and fixing them. This would even guarantee greater “savings” – on future costly incidents!
With this logic, you can save your company right into bankruptcy!
Questions You Need To Ask
By now, you have probably decided … this makes NO SENSE! That’s why we made it the Friday Joke!
What should you do if you are presented with this crafty, deceiving argument? Here is my suggestion … If somebody touts a system that seems to produce magical results with easy, simple investigations, DO’NT BE FOOLED. Ask these questions:
- Ask to see their math.
- Find out the scientific basis for their claims.
- Dig into their “simple” answer. Does it do anything that you haven’t already tried?
- Ask how their system guides investigators to answers beyond their current knowledge.
- Ask if they have expert systems built into their investigation process.
- Ask how their system helps investigators develop corrective actions.
- As what human performance or equipment reliability best practices are built into their system.
When they don’t have good answers to these questions, say, “Thanks, but No Thanks.“
You will have just avoided a mistake that could cost you your job when people don’t fix problems because the system being sold is based on faulty logic.
Remember, if they can’t even calculate a simple ROI correctly, how will they ever create an advanced root cause analysis system to help you solve your problems.
How Should You Calculate ROI?
Here is the serious part of this article.
How should you calculate return on investment? Here’s a simple method…
- Calculate the cost of the problem (or multiple issues if this is a repetitive problem).
- Find the root causes and fix them to prevent future incidents.
- Implement the corrective actions and verify the corrective action’s effectiveness.
- Verify that the problem (or repetitive problems) doesn’t reoccur for some significant period of time. (See the book, Performance Measures and Trending for Safety, Quality, and Business Management, to see how to calculate the period of time.)
- Then divide the savings from preventing future incidents by the cost of the investigation and the corrective actions.
Instead of basing your ROI on assumptions, your ROI will be based on proven facts.
See the link below for a real-life example of a site that achieved a 4,000% ROI in just two years when they used the TapRooT® Root Cause Analysis System to solve a particularly difficult production issue.
4,000% ROI Using TapRooT® to Improve Process Reliability
To find out more about TapRooT® Root Cause Analysis Training, CLICK HERE.
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