ROI Return on Investment

February 22, 2012

ROI=Return on Investment

How much am I paying to go to graduate school? Is the price that I am paying worth it for me? What is going to be my return on investment? What is Return on Investment? Return on Investment, or ROI is defined by Investopedia as:

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

ROI= (Gain from Investment-Cost of Investment)

Cost of Investment

Looking at this model, let me answer my first question. I am paying approximately $20,000 for graduate school. I currently have a job where I make a livable salary, but don’t have extra money for vacation and investments. Is the $20,000 worth it for me and my family? The assumption is, yes! However, how am I going to measure the investment? I don’t know how much I will gain monetarily from graduate school, however, as K. Mani Chandy, chairman of the engineering school at the California Institute of Technology, states in an article in the NY Times, my ROI is intellectual happiness and not money.

What does all this mean and will I get a positive or negative return on my investment? It is probably easier to apply the equation of Quality developed by Edwards Deming. Dr. Deming wrote that the quality of something, in my case, the IEM program at UAB, is equal to the Results of the Work Efforts/Total Costs. He focused on the work effort as being of much more importance than the cost. Quality or RETURN tends to INCREASE and the costs will fall over time. If I focus on the cost of graduate school, and not on the work or results of the work, then my quality or return will diminish. Dr. Deming’s statistical analysis is used in many corporations across the world, but not as much in the US. He is revered in Japan and unknown in the US and as a result, many products from Japan have a lower cost and higher quality than the same product produced in the US.

Quality=Results of the Work Effort

Total Costs

Looking at the topic of Return on Investment and Quality as a way to measure success or failure in a given environment, it appears the Dr. Deming’s statistical analysis will work better in the long run. Brian Rabon is teaching a class entitled Business Process Engineering…or rather, RE-Engineering. Adopting a different and somewhat unique view of ROI should benefit me in the long run. If you listen to Brian, he spends a lot of time focusing in on his quality of work. Because of that initial Results of his work efforts divided by his total costs, his quality has increased, his costs have decreased and the results are more business, 45 days of skiing set aside for 2012, more money and closer to achieving his goal of selling his business for a significant amount in a few years. If he had ONLY focused on the ROI model, he may have lost some quality and ultimately lost all of his return on his investment.

This blog is about ROI, but research has led me to focus on the Deming philosophy of quality.

Robert S. Hanson

Brian Rabon—August, 2011 and January, 2012


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