- The Challenge We Face
- Return on Investment and Finance Metrics Are Not Enough
- The Paradox
- Visions and Strategies, Finance Metrics, and the Execution Gap
- The Execution Gap
- The Business Investment Roadmap
- A Note of Caution
- Who Should Read This Book
- What Follows
This chapter is from the book
This chapter is from the book
This chapter is from the book
Return on Investment and Finance Metrics Are Not Enough
The hesitancy at corporations to invest in growth or greater efficien-cies is particularly curious given that many of these prospective investments pass the traditional finance metrics of return on investment (ROI) with flying colors. Put simply, following traditional finance metrics, a company should invest when the expected return from an investment is greater than the costs incurred to make that investment. From a strictly theoretical perspective, it makes sense to invest when your returns are greater than the costs of the investment. Obviously, companies should select investments that both fit within strategic objectives and provide the greatest return relative to costs, but even with these caveats, the data on capital spending and human capital clearly indicate that companies are not doing much investment of any kind, even in investments with high ROIs.
Like a child who shouts louder in response to an initial "no" answer, many vendors have raised their voices regarding ROI and other finance metrics to support the purchase of their products and services. Some companies even have ROI calculators on their Web sites. Try one—it can be fun to pretend that you are making an investment. Plug in different numbers and—surprise!—the calculator will likely give you a high ROI value. Check out sales literature, too; many companies in a wide range of industries—human resources management services, credit cards, technology products and services—claim high ROIs and short payback periods (how quickly you will get the money you invest back in returns). Several companies claim almost immediate financial returns, implying that an investment in their product or service is nearly equivalent to free cash pouring into your business. Unfortunately for vendors and people looking for work, the shouts of "high ROI" still do not work; companies just are not investing or hiring. There is an economic recession in spending for capital goods, and an economic depression in the labor market.