How do you optimise your ROI metrics?

Let me start from what ROI is about. Even if you have not graduated from business school you probably know how to calculate Return on Investment. The concept of ROI basically shows gains left after all the respective costs were subtracted and makes a ratio out of it. When management asks for ROI it usually means how effective and efficient funds were deployed, or to make a decision about future investments.

In theory, you could calculate return on everything, if you want. In the context of R&D and Innovation Management, we are most interested in Return on Innovation. To state it more accurate, it is Return on Investment in Innovation, abbreviated by Cargill FP&A as ROI2.
I must say, this choice is intentional: quite often you come across ROI metric as so called, Return on R&D. As I said, you can calculate return on everything, but in this case the result could be misleading. Why? Because, normally, R&D (unless you completely redefine what you call R&D) is not the only “in”put to make Innovation happen, to bring it to life, to generate “out”put. So, in short, it shines a different light on ROI metric. 

What are the right metrics to track ROI?

If you look in general, the right metrics are usually those which are easy to comprehend because they truly reflect the nature of the process they measure. The main challenge with Innovation metrics like ROI is that we need to know how to apply them.
At Cargill we are embracing a concept of splitting your investment portfolio into two connected parts “Explore” and “Exploit”.
“Exploit” is a part of your business which represents business models generating returns today. “Exploit” portfolio is core engine of your business where execution is everything and failure is not an option. That is why “Exploit” Innovation metrics should be focusing on EBITDA from launched New Products and Services and Return on Employed Capital. Innovation here represents relatively mature, launched and scaled business models.

“Explore” is a playground to search for new growth engines. When looking at returns it is important to perceive it not as an individual investment per project but a portfolio investment, where you can’t pick up a winner without picking up losers. As you see, it is completely different from philosophy of “Exploit” portfolio where success of each individual investment is crucial. “Explore” Innovation project metrics look at uncertainty, risk and progress of creation of new, transformational business ideas, not at individual ROI. 

What is the human element of analytics and how does it contribute to the ROI metrics?

For sure there is a human element on it. We strive to automate calculation of metrics as much as possible but the results of it are always a subject to human interpretation.
Frankly speaking, because of that “old” finance didn’t treat innovators extremely well. A finance analyst would ask early stage Innovators for Business Cases, Commitment requests and apply all the same financial evaluation approaches to both, “Explore” and “Exploit” type of projects. For “Exlpore” portfolio it basically means knowing your returns, revenues and sales in the future, sometimes quite far in the future, for products and services which do not yet exist. Which is, let’s be honest, impossible.
Project Managers would go and “make up” the numbers to be able to get a chance to start an early-stage innovation project. Finance analysis would know that and would significantly risk-adjust ROI and other financials on such a project. Project Managers would anticipate that is coming and would increase their estimates upfront. Ridiculous, but that is what a human element of analysis does.

“New” Finance at Cargill is steadily on the way to accept the reality of uncertainty and differentiate performance metrics applicable to “Explore” portfolio. However standard ROI approach is still crucial but for “Exploit” portfolio only. Operational excellence in project selection and execution is the key to Cargill’s success. That is where from financial evaluation point of view Business Case is a “king”. 

How do you identify if your current metrics are actionable enough?

Out of experience, there are several ways to make sure any metric is actionable: trust your calculation source, set targets linked to incentives. Which department gets ROI2 targets depends on where innovation strategy is set up and executed. In our case it is the level of Business Group. In Cargill the structure of Business Group is quite a large entity. For example, in 26 billion turnover Food Ingredients and Bio Industrial (FIBI) Enterprise, we have only four Business Groups within. To be crystal clear: it is not R&D who gets those targets, it is Business Group Strategy and Innovation leadership. 


What would you like to achieve by attending the 3rd R&DControlling and Performance Management Conference?

Being able to innovate has, by all means, become a core short-term and maybe the only long-term competitive advantage left for any business in the world. There is clearly a need for us to come together as Finance professionals to develop a solid measurement and financial management foundation for innovation, not to struggle on our own. My expectation from this conference is to learn and inspire others to learn, extend Cargill’s network further, set a stage for new opportunities and successful partnerships, and, yeah, have a good cup of coffee in Barcelona. Let’s hope for good weather.