Calculating the ROI on analyst relations

When we ran our AR Master Class in London this month, a large part of the discussion focused on putting a cash value on analyst relations. While the generic calculation for return on investment (ROI) is well known, AR managers struggle to apply these formula for a number of reasons, including the difference between revenue (“the top line”) and profit (“the bottom line”).

The reason why they struggle is this: what kind of measurement shows them whether their company should invest more in analyst relations, or less?

Businesses normally use ratios like return on investment to understand the profit that specific activities return to the business. However, many technology businesses do not use profit as the central target for their sales and marketing functions; instead, functional managers are often given goals of revenue. However, one contract could be very profitable, while others could be unprofitable. Most businesses care more about profit than they do about revenue. However, revenue is easy to measure, so many businesses use it. But this leads to the classic problem: the folly of rewarding A, while hoping for B.

Many AR managers focus on finding the connection between AR and revenue. For example, it’s good to be able to show the value of the deals that are influenced by analysts, and then within those deals to show how AR has shifted the analysts in your company’s favour.

However, some managers get into trouble when they turn this information into a ratio. If you divide the total value of the deals that AR influences by the cost of AR, then you’ll get a very large percentage, unless something seriously strange is happening with your company. However, such a ratio can provoke a hostile reaction from managers who understand finance. The deals influenced by analysts are not determined by analysts. Analysts may be the primary independent or external advisor, but they are not the only one.

Let’s work through an example. Let’s say that you’re a billion dollar company in which 40 percent of the deal value is influenced by analysts, $400m. Analysts might account for 20% of all the influence in the deals where they are involved, so analysts have perhaps $80m of influence. Of course, they won’t recommend in favour of you all the time: imagine if they recommend in your favour every other time, then analysts are sending $40m of business your way. However, how much of that is the product of analyst relations? Very few AR programmes are really able to shift analysts recommendations more than five percent in their firm’s favour from year to year. In that scenario, AR might actually be shifting $2m of business to the firm annually. If half that revenue is cost, then analyst relations is returning $1m to the business. And that means its worth spending up to $1m on AR (although many CFOs would be prefer spending a quarter of that).

Of course, $1m is still a lot of money. You’d pick it up if you saw it in the street. That’s more than AR budgets in most $1bn firms. However, many AR managers in this situation would not focus on the value they are creating, but the revenue that analysts are influencing. That would then encourage them to argue that AR is creating tens or hundreds of millions of dollars of value for their firm, and that in turn can open them up to attack if they cannot really back that up.

While AR managers have an understandable interest in looking good, unrealistic rate of return data can hide good news behind a fantasy facade.