In the past series of blogs (Oct. 24, Nov. 7, 21), we have been suggesting a better way to characterize capital investments that will lead to maximizing value generation in a business enterprise. We identified 7 capital investments, named the Magnificent-7 (M-7), that cover both the tangible and intangible investments one can make to build value. We also noted that it is through (at least) a pairing of investments does one gain optimal return on one’s investments. Here are some Return-on-Investment (ROI) examples to make the point.
The paired investments should include a tangible one with an intangible one, since both are needed to optimize the ROI. Note the pairing includes both a people and a task type investment. We will use a simple ROI formula:
ROI = [($$ Return less $Input)/$Input] x 100 gives us % ROI.
Example of ROI Thinking:
1. Organization is taking on new work with the existing staff. Thus staff will have an increased workload and must be more efficient while assuring value generation. Assume that at the moment Task-People balance is optimal in generating revenues.
a. Projected $$Return: Assume a 10% increase in revenues from new work.
b. Proposed $Input: Assume the need for a 10% increase in efficiencies in work from existing staff.
i. Except for some financial investment, there is no increase in Task side or People side investments to support the new work. In this scenario, this effort to do more with less will create an early increased return, but is not sustainable.
ii. Without capital investment on the Task side (organizational or physical) or on the People side (human or relational), the added effort on people will result in reduced morale and increased exhaustion from keeping up the pace with its added stress. Even financial incentives for staff will not rescue this downward scenario.
iii. The existing relational and spiritual capitals will be spent and depleted as people lose energy, enthusiasm, willingness to help each other, and the incentive to keep up the increased 10% input effort.
iv. When input effort drops, the negative downturn will overcome the revenue gains from the new work.
c. ROI = % return: Soon revenue will be negatively affected and the ROI will decrease, even below the starting state.
2. Organization is investing in new technology (physical capital investment) with increase staff training (human capital investment). The business is investing in a project management software to make more efficient work performance, costs, and personnel tracking needs. This will eliminate the labor intensive manual approach. It will also reduce errors and provide virtually a just-in-time report generator. Training is being provided for the relevant staff.
a. Projected $$Return: Expect savings in time and effort to manage a project, plus savings in producing reports. There will be more time to service customers. Staff will have more energy and time to think! This leads to less errors and do-overs. In total, there will be less cost to get work done, so returns will be higher. The bonus in increased job satisfaction will fill the spiritual capital component.
b. Proposed $Input: The investment in technology with training will provide enhanced return on the investments. The investments will spur future enhancements as well.
c. ROI = % return: Given that spiritual capital is increased, one can expect that there will be a greater than 1+1=2 return. Spiritual capital speaks to the internal culture of support, personal satisfaction, and collective success that facilitates effective, efficient, and creative potential to blossom. This leads to another cycle on ROI increase!
3. Organization sees opportunity to make next-level transformational versus step-wise transitional change that increases value generation when partnering with customers. By seeking customer input (customer capital investment), a targeted, customer desired enhancement can be made. Based on customer input, physical and/or organization capital investments are made, along with human capital investments. This optimizes both Task and People side investments while aligning with customer needs! Secondarily, this transaction will add to the relational capital together with spiritual capital, by building a teaming culture (relational capital) that provides personal satisfaction (spiritual capital) to all participants.
a. Projected $$Return: Depending on the focus for measure, this scenario can produce a wide range of positive returns. Targeting efforts to the customers’ needs might be considered a ‘never-ending’ input/output wheel where business and customers continue to win!
b. Proposed $Input: The drive to invest in any of the capitals is optimized by partnering with customers. The customer needs you to provide products and services that drive value generation and you need the customer to buy your products and services.
c. ROI = % return: This optimized pairing of Task with People side capital investments framed by the customers’ needs is an ideal situation. The ROI in this circumstance will be magnitudes above what would be possible without a partnership. The changes in the value of an enterprise in this scenario would be considered transformational – a leap over the competition!
It should be obvious that choosing to increase value is not high math, but mere arithmetic. We know what we should do, but for different reasons, we do not do it. Doing more with less is not a good approach to growing a business. It is only a temporary fix. The key is to consider all the capital investments, target value generation and determine how best to maximize return through pairing some or all of them. It is that simple!
© Gregory T. Reinecke