Performance Management Shared Interest Group

I'd like to open a discussion on a topic that was already mentioned here and I believe deserves more attention: the use of ROIC (Return on Invested Capital) and similar ROI-based KPIs in the operational activities of companies.

ROI metrics have good potential for connecting financial performance with operational decisions. However based on my experience, they often face two significant challenges:

1. Complexity in Calculation:
   ROIC and similar metrics are complex to calculate, requiring precise definitions of invested capital, operating income, and cost of capital. For operational managers, this complexity can be a barrier to seeing the value of these KPIs.

2. Difficulty in Interpretation and Timeliness:
   Even when calculated accurately, ROI metrics can be difficult for management teams to interpret and relate to day-to-day operational decisions. Furthermore, these metrics often take a long time to reflect changes, unlike simpler metrics like sales volume, revenue growth or operating income. This delay can reduce their utility as a tool for driving timely improvements at the operational level.

Given these challenges, I believe there is an opportunity to explore ways to make ROI metrics more accessible and actionable for managers across all levels of an organization. For instance:

• Can we implement or design a simpler methodology that still ensures accuracy?
• What are some best practices for training managers to understand and use these metrics effectively?
• How can we integrate ROI-based KPIs into performance management frameworks (e.g. Balanced Scorecard) in a way that drives real operational impact?

I'd love to hear your thoughts, experiences, and insights on this topic. Have you encountered similar challenges in your organization? What solutions or approaches have worked for you?

Looking forward to an engaging discussion!

First of all, this kind of metric is powerful because it's comprehensive and reflects the ultimate shareholder truth: if I invest 100$, what return do I get out? In combination with the WACC (like with the Economic Value Added - EVA methodology) there is a reflection of both risk and capital structure. 

In my company we do use adapted versions of EVA and ROIC. Indeed the metric does lead to discussion from time to time. 

One way to deal with the complexity is to use the good old "DuPont Analysis", breaking down the metric in its different drivers that are more intuitive.

Also look at ROIC only annually, during the planning phase and when deciding on business cases. During the year the metric can be split up in the different relevant drivers which can be tracked more easily: EBIT/Return on sales, CAPEX and Net Working Capital

I'd like to open a discussion on a topic that was already mentioned here and I believe deserves more attention: the use of ROIC (Return on Invested Capital) and similar ROI-based KPIs in the operational activities of companies.

ROI metrics have good potential for connecting financial performance with operational decisions. However based on my experience, they often face two significant challenges:

1. Complexity in Calculation:
   ROIC and similar metrics are complex to calculate, requiring precise definitions of invested capital, operating income, and cost of capital. For operational managers, this complexity can be a barrier to seeing the value of these KPIs.

2. Difficulty in Interpretation and Timeliness:
   Even when calculated accurately, ROI metrics can be difficult for management teams to interpret and relate to day-to-day operational decisions. Furthermore, these metrics often take a long time to reflect changes, unlike simpler metrics like sales volume, revenue growth or operating income. This delay can reduce their utility as a tool for driving timely improvements at the operational level.

Given these challenges, I believe there is an opportunity to explore ways to make ROI metrics more accessible and actionable for managers across all levels of an organization. For instance:

• Can we implement or design a simpler methodology that still ensures accuracy?
• What are some best practices for training managers to understand and use these metrics effectively?
• How can we integrate ROI-based KPIs into performance management frameworks (e.g. Balanced Scorecard) in a way that drives real operational impact?

I'd love to hear your thoughts, experiences, and insights on this topic. Have you encountered similar challenges in your organization? What solutions or approaches have worked for you?

Looking forward to an engaging discussion!

I do agree with @Hessel. Despite its challenges, ROI remains a valuable performance metric for its ability to provide clear and measurable financial outcomes, guiding businesses in making data-driven decisions that align with their strategic goals.

That said, the challenges exist and finding the right balance and using it in combination with other tools is crucial for a complete performance evaluation. ROI metrics often emphasize financial results, overlooking other important aspects such as employee engagement, customer satisfaction, and innovation. It can also encourage managers to prioritize immediate financial gains over long-term goals, which may harm the organization in the long run. Also, how do we prove ROI for activities like brand awareness and competitive analysis?

First of all, this kind of metric is powerful because it's comprehensive and reflects the ultimate shareholder truth: if I invest 100$, what return do I get out? In combination with the WACC (like with the Economic Value Added - EVA methodology) there is a reflection of both risk and capital structure. 

In my company we do use adapted versions of EVA and ROIC. Indeed the metric does lead to discussion from time to time. 

One way to deal with the complexity is to use the good old "DuPont Analysis", breaking down the metric in its different drivers that are more intuitive.

Also look at ROIC only annually, during the planning phase and when deciding on business cases. During the year the metric can be split up in the different relevant drivers which can be tracked more easily: EBIT/Return on sales, CAPEX and Net Working Capital

I'd like to open a discussion on a topic that was already mentioned here and I believe deserves more attention: the use of ROIC (Return on Invested Capital) and similar ROI-based KPIs in the operational activities of companies.

ROI metrics have good potential for connecting financial performance with operational decisions. However based on my experience, they often face two significant challenges:

1. Complexity in Calculation:
   ROIC and similar metrics are complex to calculate, requiring precise definitions of invested capital, operating income, and cost of capital. For operational managers, this complexity can be a barrier to seeing the value of these KPIs.

2. Difficulty in Interpretation and Timeliness:
   Even when calculated accurately, ROI metrics can be difficult for management teams to interpret and relate to day-to-day operational decisions. Furthermore, these metrics often take a long time to reflect changes, unlike simpler metrics like sales volume, revenue growth or operating income. This delay can reduce their utility as a tool for driving timely improvements at the operational level.

Given these challenges, I believe there is an opportunity to explore ways to make ROI metrics more accessible and actionable for managers across all levels of an organization. For instance:

• Can we implement or design a simpler methodology that still ensures accuracy?
• What are some best practices for training managers to understand and use these metrics effectively?
• How can we integrate ROI-based KPIs into performance management frameworks (e.g. Balanced Scorecard) in a way that drives real operational impact?

I'd love to hear your thoughts, experiences, and insights on this topic. Have you encountered similar challenges in your organization? What solutions or approaches have worked for you?

Looking forward to an engaging discussion!

First of all, this kind of metric is powerful because it's comprehensive and reflects the ultimate shareholder truth: if I invest 100$, what return do I get out? In combination with the WACC (like with the Economic Value Added - EVA methodology) there is a reflection of both risk and capital structure. 

In my company we do use adapted versions of EVA and ROIC. Indeed the metric does lead to discussion from time to time. 

One way to deal with the complexity is to use the good old "DuPont Analysis", breaking down the metric in its different drivers that are more intuitive.

Also look at ROIC only annually, during the planning phase and when deciding on business cases. During the year the metric can be split up in the different relevant drivers which can be tracked more easily: EBIT/Return on sales, CAPEX and Net Working Capital

I'd like to open a discussion on a topic that was already mentioned here and I believe deserves more attention: the use of ROIC (Return on Invested Capital) and similar ROI-based KPIs in the operational activities of companies.

ROI metrics have good potential for connecting financial performance with operational decisions. However based on my experience, they often face two significant challenges:

1. Complexity in Calculation:
   ROIC and similar metrics are complex to calculate, requiring precise definitions of invested capital, operating income, and cost of capital. For operational managers, this complexity can be a barrier to seeing the value of these KPIs.

2. Difficulty in Interpretation and Timeliness:
   Even when calculated accurately, ROI metrics can be difficult for management teams to interpret and relate to day-to-day operational decisions. Furthermore, these metrics often take a long time to reflect changes, unlike simpler metrics like sales volume, revenue growth or operating income. This delay can reduce their utility as a tool for driving timely improvements at the operational level.

Given these challenges, I believe there is an opportunity to explore ways to make ROI metrics more accessible and actionable for managers across all levels of an organization. For instance:

• Can we implement or design a simpler methodology that still ensures accuracy?
• What are some best practices for training managers to understand and use these metrics effectively?
• How can we integrate ROI-based KPIs into performance management frameworks (e.g. Balanced Scorecard) in a way that drives real operational impact?

I'd love to hear your thoughts, experiences, and insights on this topic. Have you encountered similar challenges in your organization? What solutions or approaches have worked for you?

Looking forward to an engaging discussion!

I'd like to open a discussion on a topic that was already mentioned here and I believe deserves more attention: the use of ROIC (Return on Invested Capital) and similar ROI-based KPIs in the operational activities of companies.

ROI metrics have good potential for connecting financial performance with operational decisions. However based on my experience, they often face two significant challenges:

1. Complexity in Calculation:
   ROIC and similar metrics are complex to calculate, requiring precise definitions of invested capital, operating income, and cost of capital. For operational managers, this complexity can be a barrier to seeing the value of these KPIs.

2. Difficulty in Interpretation and Timeliness:
   Even when calculated accurately, ROI metrics can be difficult for management teams to interpret and relate to day-to-day operational decisions. Furthermore, these metrics often take a long time to reflect changes, unlike simpler metrics like sales volume, revenue growth or operating income. This delay can reduce their utility as a tool for driving timely improvements at the operational level.

Given these challenges, I believe there is an opportunity to explore ways to make ROI metrics more accessible and actionable for managers across all levels of an organization. For instance:

• Can we implement or design a simpler methodology that still ensures accuracy?
• What are some best practices for training managers to understand and use these metrics effectively?
• How can we integrate ROI-based KPIs into performance management frameworks (e.g. Balanced Scorecard) in a way that drives real operational impact?

I'd love to hear your thoughts, experiences, and insights on this topic. Have you encountered similar challenges in your organization? What solutions or approaches have worked for you?

Looking forward to an engaging discussion!

I'd like to open a discussion on a topic that was already mentioned here and I believe deserves more attention: the use of ROIC (Return on Invested Capital) and similar ROI-based KPIs in the operational activities of companies.

ROI metrics have good potential for connecting financial performance with operational decisions. However based on my experience, they often face two significant challenges:

1. Complexity in Calculation:
   ROIC and similar metrics are complex to calculate, requiring precise definitions of invested capital, operating income, and cost of capital. For operational managers, this complexity can be a barrier to seeing the value of these KPIs.

2. Difficulty in Interpretation and Timeliness:
   Even when calculated accurately, ROI metrics can be difficult for management teams to interpret and relate to day-to-day operational decisions. Furthermore, these metrics often take a long time to reflect changes, unlike simpler metrics like sales volume, revenue growth or operating income. This delay can reduce their utility as a tool for driving timely improvements at the operational level.

Given these challenges, I believe there is an opportunity to explore ways to make ROI metrics more accessible and actionable for managers across all levels of an organization. For instance:

• Can we implement or design a simpler methodology that still ensures accuracy?
• What are some best practices for training managers to understand and use these metrics effectively?
• How can we integrate ROI-based KPIs into performance management frameworks (e.g. Balanced Scorecard) in a way that drives real operational impact?

I'd love to hear your thoughts, experiences, and insights on this topic. Have you encountered similar challenges in your organization? What solutions or approaches have worked for you?

Looking forward to an engaging discussion!

ROI is a great measure if used thoughtfully.  I get concerned when only financial accounting/reporting information is considered.   Here's where problems occur:

Product 1: Manufactured by company

Sales:                 2,000,000

Material:                500,000  (just in time inventory)

Direct Labor:       500,000

Overhead:            500,000

Capital Equipment Book Value:  Fully depreciated, Originally 1,250,000

Gross Margin:      500,000

Product 2:  Manufactured by Company

Sales:                 2,000,000

Material:               500,000 (just in time inventory)

Direct Labor:       500,000

Overhead:            500,000

Capital Equipment Book Value:  $2,500,000 (Very new)

Gross Margin:      500,000

Product 3:  Purchased and Resold

Sales:                                2,000,000

Cost of Goods Sold:      1,750,000

Average Inventory:         100,000

Assume the company is primarily a manufacturer and none of these products are complementary; assume no product is at capacity.  Which one of these products has the best ROI, or the worst?  Which product would you push most with advertising and sales effort?  

What information beyond financial accounting information would you collect to make your internal decision?

I'd like to open a discussion on a topic that was already mentioned here and I believe deserves more attention: the use of ROIC (Return on Invested Capital) and similar ROI-based KPIs in the operational activities of companies.

ROI metrics have good potential for connecting financial performance with operational decisions. However based on my experience, they often face two significant challenges:

1. Complexity in Calculation:
   ROIC and similar metrics are complex to calculate, requiring precise definitions of invested capital, operating income, and cost of capital. For operational managers, this complexity can be a barrier to seeing the value of these KPIs.

2. Difficulty in Interpretation and Timeliness:
   Even when calculated accurately, ROI metrics can be difficult for management teams to interpret and relate to day-to-day operational decisions. Furthermore, these metrics often take a long time to reflect changes, unlike simpler metrics like sales volume, revenue growth or operating income. This delay can reduce their utility as a tool for driving timely improvements at the operational level.

Given these challenges, I believe there is an opportunity to explore ways to make ROI metrics more accessible and actionable for managers across all levels of an organization. For instance:

• Can we implement or design a simpler methodology that still ensures accuracy?
• What are some best practices for training managers to understand and use these metrics effectively?
• How can we integrate ROI-based KPIs into performance management frameworks (e.g. Balanced Scorecard) in a way that drives real operational impact?

I'd love to hear your thoughts, experiences, and insights on this topic. Have you encountered similar challenges in your organization? What solutions or approaches have worked for you?

Looking forward to an engaging discussion!

Circling back to this insightful post....thanks, Larry-this is a great example that really illustrates the complexities of using ROI as a metric.

In my practice, when comparing something like Example 1 (fully depreciated equipment) to Example 2 (new equipment), we've often used Gross PP&E at the asset level rather than net book value. This gives a more realistic view of the true capital employed and the return on that investment. It complicates accounting reconciliation, but I think it's the only relatively simple way to show the real ROI for internal decision-making.

Example 3 is also a great illustration-highlighting the classic make-or-buy trade-off. In that case, the decision really hinges on understanding our WACC and comparing it to the implicit cost of capital embedded in the supplier's pricing. It also ties into the company's strategic direction-how much control we want over manufacturing, the level of operational risk we're willing to carry, and how agile we want our cost structure to be.

ROI is a powerful metric-but only when viewed through the lens of both operational realities and strategic priorities.

How do others in the group handle these ROI challenges-especially when comparing capital-intensive vs. asset-light business models? Would love to hear your perspectives.

ROI is a great measure if used thoughtfully.  I get concerned when only financial accounting/reporting information is considered.   Here's where problems occur:

Product 1: Manufactured by company

Sales:                 2,000,000

Material:                500,000  (just in time inventory)

Direct Labor:       500,000

Overhead:            500,000

Capital Equipment Book Value:  Fully depreciated, Originally 1,250,000

Gross Margin:      500,000

Product 2:  Manufactured by Company

Sales:                 2,000,000

Material:               500,000 (just in time inventory)

Direct Labor:       500,000

Overhead:            500,000

Capital Equipment Book Value:  $2,500,000 (Very new)

Gross Margin:      500,000

Product 3:  Purchased and Resold

Sales:                                2,000,000

Cost of Goods Sold:      1,750,000

Average Inventory:         100,000

Assume the company is primarily a manufacturer and none of these products are complementary; assume no product is at capacity.  Which one of these products has the best ROI, or the worst?  Which product would you push most with advertising and sales effort?  

What information beyond financial accounting information would you collect to make your internal decision?

I'd like to open a discussion on a topic that was already mentioned here and I believe deserves more attention: the use of ROIC (Return on Invested Capital) and similar ROI-based KPIs in the operational activities of companies.

ROI metrics have good potential for connecting financial performance with operational decisions. However based on my experience, they often face two significant challenges:

1. Complexity in Calculation:
   ROIC and similar metrics are complex to calculate, requiring precise definitions of invested capital, operating income, and cost of capital. For operational managers, this complexity can be a barrier to seeing the value of these KPIs.

2. Difficulty in Interpretation and Timeliness:
   Even when calculated accurately, ROI metrics can be difficult for management teams to interpret and relate to day-to-day operational decisions. Furthermore, these metrics often take a long time to reflect changes, unlike simpler metrics like sales volume, revenue growth or operating income. This delay can reduce their utility as a tool for driving timely improvements at the operational level.

Given these challenges, I believe there is an opportunity to explore ways to make ROI metrics more accessible and actionable for managers across all levels of an organization. For instance:

• Can we implement or design a simpler methodology that still ensures accuracy?
• What are some best practices for training managers to understand and use these metrics effectively?
• How can we integrate ROI-based KPIs into performance management frameworks (e.g. Balanced Scorecard) in a way that drives real operational impact?

I'd love to hear your thoughts, experiences, and insights on this topic. Have you encountered similar challenges in your organization? What solutions or approaches have worked for you?

Looking forward to an engaging discussion!

Larry makes a great point about the use of accounting information only, and Mikhail, you take that a good step back by looking at gross value rather than depreciated value. 

I think though, that it should be a market value question instead of a historical question. The valuation of cash flows relevant to many of these conversations with existing owned equipment should be the "next best" use of the asset. That is, the capital being deployed should be valued for the analysis at the value of its next best use, which is often the market value, should we try to sell it or buy a similarly situated asset. 

Said another way: we should value the invested capital as if we were going to buy the capital at existing market value to get a fair estimation of the cost of the project in market terms, rather than implying a financial benefit because it is a used asset that we have depreciated.  Otherwise, it's a bit like saying there's no cost to using retained earnings in our WACC because we don't have to raise new capital. 

This is one of those areas where financial and managerial accounting diverge in a way that is often unappreciated and people look to the closest /easiest information to get rather than the right information to use for a decision. 

Circling back to this insightful post....thanks, Larry-this is a great example that really illustrates the complexities of using ROI as a metric.

In my practice, when comparing something like Example 1 (fully depreciated equipment) to Example 2 (new equipment), we've often used Gross PP&E at the asset level rather than net book value. This gives a more realistic view of the true capital employed and the return on that investment. It complicates accounting reconciliation, but I think it's the only relatively simple way to show the real ROI for internal decision-making.

Example 3 is also a great illustration-highlighting the classic make-or-buy trade-off. In that case, the decision really hinges on understanding our WACC and comparing it to the implicit cost of capital embedded in the supplier's pricing. It also ties into the company's strategic direction-how much control we want over manufacturing, the level of operational risk we're willing to carry, and how agile we want our cost structure to be.

ROI is a powerful metric-but only when viewed through the lens of both operational realities and strategic priorities.

How do others in the group handle these ROI challenges-especially when comparing capital-intensive vs. asset-light business models? Would love to hear your perspectives.

ROI is a great measure if used thoughtfully.  I get concerned when only financial accounting/reporting information is considered.   Here's where problems occur:

Product 1: Manufactured by company

Sales:                 2,000,000

Material:                500,000  (just in time inventory)

Direct Labor:       500,000

Overhead:            500,000

Capital Equipment Book Value:  Fully depreciated, Originally 1,250,000

Gross Margin:      500,000

Product 2:  Manufactured by Company

Sales:                 2,000,000

Material:               500,000 (just in time inventory)

Direct Labor:       500,000

Overhead:            500,000

Capital Equipment Book Value:  $2,500,000 (Very new)

Gross Margin:      500,000

Product 3:  Purchased and Resold

Sales:                                2,000,000

Cost of Goods Sold:      1,750,000

Average Inventory:         100,000

Assume the company is primarily a manufacturer and none of these products are complementary; assume no product is at capacity.  Which one of these products has the best ROI, or the worst?  Which product would you push most with advertising and sales effort?  

What information beyond financial accounting information would you collect to make your internal decision?

I'd like to open a discussion on a topic that was already mentioned here and I believe deserves more attention: the use of ROIC (Return on Invested Capital) and similar ROI-based KPIs in the operational activities of companies.

ROI metrics have good potential for connecting financial performance with operational decisions. However based on my experience, they often face two significant challenges:

1. Complexity in Calculation:
   ROIC and similar metrics are complex to calculate, requiring precise definitions of invested capital, operating income, and cost of capital. For operational managers, this complexity can be a barrier to seeing the value of these KPIs.

2. Difficulty in Interpretation and Timeliness:
   Even when calculated accurately, ROI metrics can be difficult for management teams to interpret and relate to day-to-day operational decisions. Furthermore, these metrics often take a long time to reflect changes, unlike simpler metrics like sales volume, revenue growth or operating income. This delay can reduce their utility as a tool for driving timely improvements at the operational level.

Given these challenges, I believe there is an opportunity to explore ways to make ROI metrics more accessible and actionable for managers across all levels of an organization. For instance:

• Can we implement or design a simpler methodology that still ensures accuracy?
• What are some best practices for training managers to understand and use these metrics effectively?
• How can we integrate ROI-based KPIs into performance management frameworks (e.g. Balanced Scorecard) in a way that drives real operational impact?

I'd love to hear your thoughts, experiences, and insights on this topic. Have you encountered similar challenges in your organization? What solutions or approaches have worked for you?

Looking forward to an engaging discussion!