I have done finance for almost 40 years and I have done it in almost all its forms--capital raising, trading securities and funding operations. Whenever I am involved in an operating company people always ask me what ROI do we need to reach to justify an investment. In routine, repetitive investments (such as opening another retail store) I almost always have a quantatative target and it tends to be much, much higher than the cost of capital. I have seen several CFOs who use the same technique of setting very high ROI targets. If you use such a technique in routine, repetitive investments you generally get people focused on the efficiency of capital, which is a good thing. Given the high hurdle rate for ROI you also get people focused on customers and revenue. These are equally good results.
However, in other situations I never use ROI. These investments are for strategic reasons or to build comparative advantage against the competition. Until today I had never found anybody who shared this view--ignore ROI for strategic investments that build the foundation for the company future.
In a post today on company sustainability, the AVC blog shared the same view.
"ROI is not the right framework for companies to evaluate investments. ROI is for the wall street folks. They will use it to decide if they want to invest in your company. But when you make investment decisions in your company, don't use the tools that wall street uses. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business."
I always say that I specialize at the intersection of finance and strategy and almost always strategy is more important than finance!
