Return on investment analysis: Applying a private sector approach to the public sector

Abstract

In an environment of scarce resources and rising government deficits the public not only expects but demands greater accountability for the spending of public funds. This demand has created a trend in the public sector, not only in the United States, but worldwide, towards the importation of private sector business analysis practices to improve government accountability-oriented analysis. One example is increased emphasis on return on investment (ROI) analysis in public sector organizations. Development and application of ROI analysis is challenging in the public sector since most government organizations do not generate profit necessary for calculation of ROI in the manner in which it is done in the private sector. This paper addresses previous attempts at using ROI in the public sector, identifying whether these attempts properly used ROI and what prevented their ultimate success in terms of use value. This paper argues that properly designed and conducted ROI analysis, based on methods used successfully in the private sector, can better reveal how and for what goods and services public money is spent and a means for evaluating whether it was spent well in providing goods and services. The methodology developed in this study provides a means for comparing the value derived from investment and work performed by and for government using an approach to ROI based on private sector methods.